Manufacturers won’t have to pay back taxes from exemption
State revenue officials have decided they will not make manufacturers pay about $1 billion in back taxes, avoiding an industry backlash.
Since 1885, companies with manufacturing facilities in Pennsylvania have been able to take advantage of a tax exemption from the capital stock and franchise tax. The exemption was intended to lure manufacturers to the state. In the mid-1980s, Pittsburgh-based manufacturer PPG Industries Inc. challenged the law. It filed suit against the state because some of its manufacturing facilities were located outside of Pennsylvania, and it didn’t want to pay taxes on them.
To counter the complaint, the state expanded the exemption in 1999 to include manufacturing companies that do business in Pennsylvania but that do not have manufacturing facilities here. But that did not stop PPG’s case from going through the court system.
Last November, the Pennsylvania Supreme Court ruled that the state’s tax-exemption policy discriminated against out-of-state companies and violated the interstate commerce clause of the U.S. Constitution.
That ruling forced the state to do one of three things: collect about $1 billion in back taxes from companies, refund wrongfully collected taxes, or do a little of both. Collecting the tax would mean that manufacturers would get hit with a retroactive tax during slow economic times. Refunds would come as the state sees a $1.2 billion revenue shortfall.
At the end of April, state officials decided to collect the back taxes. However, the state said it would exempt virtually everyone from paying the taxes as long as the companies agree by July 1 to drop appeals asking for the exemption.
The state Department of Revenue settled on a revenue neutral policy to avoid backlash from the manufacturing industry and potential legal challenges.
Department officials are sending out assessment notices to two types of taxpayers: Those who have filed appeals and those who have unsettled tax bills before the 1999 policy change. Those who have filed appeals will be told to drop the appeal or pay back taxes for the two tax years preceding the state’s policy change. Those who have unsettled bills will be told to pay the tax, unless they agree to not file an appeal for the exemption. Meanwhile, PPG is still negotiating a tax settlement with the state said Jeff Worden, a spokesman for PPG.
The tax exemption will become a moot point once the state competes its phaseout of the capital stock and franchise tax. Under former Gov. Ridge’s plan, the tax will be repealed by 2009.