In a unanimous decision, the Pennsylvania Commonwealth Court held that the three-year time limitation for filing refund claims for corporate taxes begins on the date a corporation’s tax return is filed, not the original return due date.1 If this decision becomes final, it will reverse the longstanding position of the Pennsylvania Department of Revenue (the “Department”) that the three-year time limitation for a calendar tax year begins on the “return due date” (April 15 for calendar year filers), rather than on the date a taxpayer files its corporate tax return (usually on “extension” on or before October 15 of the year following the tax year).
The issue: does “actual payment of the tax” occur on the “return due date” or on the date the taxpayer files a return Pennsylvania’s three-year time limitation for filing tax refund claims begins with the “actual payment of the tax.”2Most corporate taxpayers are required to remit quarterly estimated payments. Upon filing a tax return, taxpayers may apply those payments to the reported tax liability. Thus, the sole issue before the court was whether “actual payment of the tax” occurred on the “due date” for the taxpayer’s return (as the Commonwealth argued), or on the date the taxpayer filed its return. (In this case, the taxpayer, Mission Funding Alpha (“MFA”), filed its 2007 tax return September 19, 2008 and filed its refund petition September 16, 2011.)
The Court’s Decision Reed Smith’s State Tax lawyers convinced the en banc court that “payment of the tax” can only occur when the final tax liability for the taxpayer is “known” – an event that can only happen at the time the taxpayer files its return. Thus, the court held that MFA’s September 16, 2011 refund petition (filed three days before the three-year anniversary of filing its return) was timely.
The court further reasoned that “‘actual payment’ means the delivering of money in the acceptance and performance of an obligation, rather than the mere depositing of money on account for potential future use.”3 As a consequence, the court dismissed the Commonwealth’s argument that estimated payments (monies put on deposit to toll interest and penalties) made prior to the return due date were payments of tax. Because estimated payments were not “payments of tax,” the court determined that the return due date could not be the date on which the time limitation begins. This decision, if it becomes final, will force a significant change to the Department’s policy and will have the effect of extending the time limitation for filing refund claims for most corporate taxpayers.