Insights Blog

28 Jan, 2016

Pennsylvania Franchise Tax Refund Limitation Period Triggered by Actual Payment of Tax

Posted by Andy McComas and Dan Larson on Jan 28, 2016 12:54:21 PM

Franchise Tax

PA franchise tax due date limitation period

In Mission Funding Alpha v. Commonwealth, the Pennsylvania Commonwealth Court held that the three-year limitation period for filing a franchise tax refund begins on the date the taxpayer actually pays the tax, and not the date on which the franchise tax return is due.

At issue was the proper interpretation of Pa. Stat. Ann. § 10003.1(a), which provides that for the purposes of the refund limitation period for a taxpayer who has actually paid tax, “a petition for refund must be made to the department within three years of actual payment of the tax, interest or penalty.”

During the 2007 tax year, the taxpayer remitted quarterly estimated payments to its 2007 franchise tax account. Without seeking an extension, the taxpayer filed its Corporate Tax Report (PA RCT-101) on September 18, 2008, reporting its total franchise tax liability for the 2007 tax year. Just shy of three years later, on September 16, 2011, the taxpayer filed a petition for refund of its franchise tax. However, the board of appeals denied the refund and stated that the petition was not timely filed because the three-year limitation period for refund claims began to run on April 15, 2008, the date the return was due.

The court noted that neither the term “payment” nor “actual” was defined in the refund statute and therefore must be “accorded their common and approved usage.” Based upon the dictionary definition of these two terms, the court concluded that “the common and approved usage of the phrase ‘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.”

Applying this definition, the court held that the taxpayer’s refund claim was filed within the three-year limitation period: “because it is clear that a corporate taxpayer’s annual report filing date is the date on which the corporation states and accepts to pay its tax liability, we hold that ‘actual payment of the tax’ cannot occur until the annual report is filed.” The court further noted that had the legislature “intended for refund petitions to be filed within three years of April 15th following the applicable tax year . . . it would have expressly stated the same."

GMG Insight – The decision puts the Pennsylvania refund statute on an evenhanded basis with the assessment statute: three years from date of filing (for originally filed returns).

In addition, the phrase “actual payment of tax” is found in the refund statute for amended filings made outside the normal three year window (i.e. due to federal changes) set forth in Pa. Stat. Ann. § 10003.1(d):

In the case of amounts paid as a result of an assessment, determination, settlement, a petition for refund must be filed with the department within six months of the actual payment of tax.

Therefore, in the context of an amended return reporting federal changes (outside the normal three-year period), the refund statute would be open for six months from the filing date (vs. the date of a deposit payment or the due date of the return, if the return was filed late). Taxpayers should note, however, that the limitation period for the state to issue assessments on RAR filings is three years from the date of filing or the date of settlement (Pa. Stat. Ann. § 7407(b)). As a result, the three-year assessment statute is not on an evenhanded basis with the six month refund statute.  


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