On its face, the Pennsylvania Commonwealth Court’s June 5, 2020, holding in D&R Sports Inc. v. Commonwealth, is straightforward: “Because Taxpayer did not challenge the specificity of [the applicable statute of limitations] before the board or in its petition for review, but raised it for the first time in its brief to this Court, that issue is waived.” Slip Op. at 4. This holding, however, has broader ramifications and could impact the outcome of at least one case currently pending before the court. The holding also reminds taxpayers of the necessity of raising and preserving issues at the Board of Appeals (BOA) or Board of Finance & Revenue (BF&R).
The case could directly impact the outcome of Synthes USA HQ, Inc. v. Commonwealth, 108 F.R. 2016, which was argued before the court on June 11, 2020. In that argument, the court commented that D&R Sports could impact way in which it decides Synthes.
To appreciate how D&R Sports directly impacts Synthes it is necessary to understand the substantive issue in Synthes and the political dynamics of the DOR and Office of Attorney General (OAG) asserting conflicting interpretations of the statute at issue in Synthes. The Attorney General is a separate elected official from the Governor. The DOR, however, is under the jurisdiction of the Governor. Also, the Governor has under his jurisdiction the Office of General Counsel (OGC). So, it’s sort of like OGC is the Governor’s (and DOR’s) in-house counsel and the OAG is their outside law firm.
Putting aside the political dynamics of the DOR and OAG asserting conflicting interpretations of Subparagraph 17, it is also possible that the court could choose to decide the delineation of authority of the OAG (a separate elected official) and Office of General Counsel (which, like the DOR, is under the jurisdiction of the governor, who is another separate elected official) under the Commonwealth Attorneys Act(71 Pennsylvania Statute Section732-101 et seq.). Such a ruling, which would likely have far-reaching political ramifications, could also avoid addressing both the procedural and substantive tax issues before the court.
Synthes raises the substantive tax issue of how to interpret Pennsylvania’s Corporate Net Income Tax (CNIT) sourcing statute (72 Pa. Stat. Section 7401(3)2.(a)(17), “Subparagraph 17”), which uses verbatim the UDITPA Section 17 ‘costs of performance’ sourcing language for sales other than sales of tangible property. Synthes is seeking a refund of CNIT based on the interpretation of Subparagraph 17 the Department of Revenue (DOR) is asserting in New Cingular Wireless LLC v. Commonwealth, 16 F.R. 2016. But, the OAG is arguing that Synthes is not entitled to a refund and that the DOR’s interpretation of Subparagraph 17 is incorrect. As a result, the DOR has filed and argued an application to intervene in Synthes.
With that background, here’s how D&R Sports becomes relevant to Synthes. During the Synthes oral argument, it became apparent that neither the OAG nor the DOR had challenged (at either the BOA, BF&R, or in a petition for review) the DOR’s interpretation of Subparagraph 17. Nor had either the OAG or the DOR filed a counterclaim in Synthes. Further, the OAG and Synthes stipulated that Synthes had provided sufficient evidence to support its refund claim. Therefore, if Synthes’s interpretation of Subparagraph 17 (which aligns with the DOR’s) is sustained (or, if the OAG’s interpretation, is not properly before the court) its refund should be granted. The court, therefore, could apply the D&R Sports to rule that the Commonwealth (interestingly, in the Synthes oral argument the court asked whether the Commonwealth was the DOR, the OAG or both) has waived its right to raise the interpretation of Subparagraph 17. If this were the case, Synthes would prevail and the substantive issue of how to interpret Subparagraph 17 would be left for another day.
These cases make certain that Pennsylvania litigation is fraught with uncertainty. They demonstrate that, once in the throes of litigation, courts may be presented with—or raise sua sponte—unanticipated facts, issues and circumstances. These unexpected events could, in turn, cause a court to decide issues that may not previously have been considered. Unforeseen circumstances make it more difficult to prudently analyze the direction in which litigation will head, which exacerbates the attendant uncertainty. While far from being certain, it is hoped that the Commonwealth Court will provide definitive guidance for at least some of the procedural, intergovernmental responsibilities or tax substantive issues currently before it. Then, taxpayers and government may explore the uncertainty to which that guidance leads.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Michael Semes is of counsel with BakerHostetler in Philadelphia and part of the firm’s state and local tax group. He is also Professor of Practice at the Villanova University Charles Widger School of Law in the Graduate Tax Program.