Fireworks Vendors Light Fuse on Pennsylvania Tax Act

From Daily Tax Report: State

March 6, 2018

By Leslie A. Pappas

A fireworks lawsuit is threatening to blow up the tax landscape in Pennsylvania.

In a petition filed with the state’s Commonwealth Court, a coalition of fireworks retailers argue that Act 43 of 2017, passed last year as part of the state’s budget, should be struck down as unconstitutional.

The case has tax professionals in the Keystone State paying attention, because several new tax provisions could be thrown out if Act 43 is overturned—including online marketplace reporting requirements and changes to the state’s net operating loss (NOL) provisions. Legal scholars told Bloomberg Tax that such a worst case scenario is unlikely, but tax professionals are still worried because so much is at stake.

“That is all stuff that is really big for taxpayers,” Kenneth R. Levine, a partner with Reed Smith LLP and a member of the firm’s State Tax Group, told Bloomberg Tax.

Pennsylvania is expected to respond to the petition by March 7, the attorney for the fireworks companies, Kevin J. McKeon of Hawke, McKeon & Sniscak LLP in Harrisburg, Pa., told Bloomberg Tax in an email. The governor’s office and Department of Revenue didn’t respond to requests for a copy of its responsive pleading.

No Single Subject

Act 43 was part of a revenue package that Gov. Tom Wolf (D) signed in October 2017 to balance the state’s budget—four months after lawmakers passed a $32 billion spending plan without revenue to support it.

One of five bills in the package, Act 43 made a number of changes to the state’s tax code, including:

On top of the tax provisions, Act 43 also incorporated provisions on bond issuance and fireworks regulations—with the latter violating state constitutional requirements that laws should be about one thing, the fireworks companies argue.

What began “as a two-page, one-subject amendment to the Tax Reform Code of 1971 designed to capture tax revenue from sales by ‘remote sellers’ such as Amazon” ended as “a forty-four page statute with multiple disparate subjects,” including the repeal and re-enactment of the former Fireworks Law, according to the petition.

‘Nuclear’ Litigation

The lawsuit has potential to wipe out the whole of Act 43 if the Commonwealth Court agrees that the law violates the Pennsylvania Constitution’s single-subject rule, which says that “no bill shall be passed containing more than one subject,” Levine and Kyle O. Sollie, a partner at Reed Smith, wrote in an alert. When courts find a violation of the single-subject rule, “they can invalidate the entire legislation.”

Taxpayers affected by changes under Act 43 should know that “there is this big nuclear litigation out there that could call it all into question,” Levine told Bloomberg Tax.

The petitioners are Phantom Fireworks Showrooms LLC, a brick-and-mortar fireworks retailer based in North East, Pa., with seven stores in Pennsylvania, and several companies that do business as Sky King Fireworks with stores in Easton, Erie, Morrisville, Tioga, and New Freedom, Pa.

Much of the petition focuses on changes that allow fireworks sales from temporary pop-up tents—decried by retailers with permanent facilities as creating unfair competition. Among several arguments, the companies claim the act unconstitutionally delegates regulation of fireworks to the National Fire Protection Association, a private nonprofit based in Massachusetts.

Legislative Fix?

The Pennsylvania Chamber of Business and Industry, the Pennsylvania Institute of CPAs (PICPA), and local chapters of the Tax Executives Institute Inc. are all talking about the case and the impact it might have on taxpayers, members of the groups told Bloomberg Tax.

However, the petitioners’ single-subject argument particularly has caught the attention of professionals and legal scholars.

The court will need to examine “the reliance a multitude of taxpayers have on the other tax provisions which are in effect,” Sam Denisco, vice president of government affairs for the Pennsylvania Chamber of Business and Industry, told Bloomberg Tax in an email, “or in other words does invalidating the whole act cause more harm than good?”

It’s unclear how the courts will decide the case, because the claim that Act 43 has multiple subjects could be made for so many other bills that the General Assembly passes, Peter N. Calcara, vice president of government relations for the Pennsylvania Institute of CPAs, told Bloomberg Tax. This is especially true for bills related to the state budget, he said.

“This is how the budget process works,” Calcara said. “If you had to do one tax bill for each item, it would be a nightmare.”

Pennsylvania lawmakers could fix the alleged constitutional problems in Act 43 by enacting separate laws for each of the provisions and applying them retroactively, Wendi L. Kotzen and Christopher A. Jones of Ballard Spahr LLP’s Tax Group wrote in an alert. If the General Assembly decides on a legislative fix, it would have until the end of 2020 to make changes, Kotzen told Bloomberg Tax.

Some worry that a replacement of Act 43 could be worse.

“My biggest fear would be Pennsylvania rectifying the issues and, for example, deciding to eliminate all NOLs and place the state in an even tougher position to attract and retain business here,” Jason C. Skrinak, a CPA and SALT Practice Leader for the Tax Services Group at RKL LLP in Harrisburg, told Bloomberg Tax in an email.

‘A Lenient View’

The fireworks companies may have a tough time convincing the court that Act 43 violates the single-subject rule, Michael D. Gilbert, a law professor at the University of Virginia’s School of Law, told Bloomberg Tax.

“My suspicion is that they’re going to lose,” said Gilbert, who has written a number of papers on how courts decide single-subject cases.

Most state constitutions have a version of the single-subject rule, which is intended to prevent riders, vote trading and logrolling, Gilbert said. Yet a single-subject violation is hard to pin down because subjects can be broadly defined. While a bill about the death penalty and spotted owls clearly has two subjects, in most cases “there’s no way to say how granular or abstract you should be,” Gilbert said.

“In general, courts take a lenient view of the rule,” Gilbert said, “and that’s especially true for budget bills.”

Pennsylvania Case Law

Historically in Pennsylvania, the state’s highest court “has allowed the legislature a lot of leeway” in single-subject cases, according to Bruce Ledewitz, a law professor at Duquesne University School of Law and co-director of the law school’s Pennsylvania Constitution website.

When there is a clear violation, however, the Pennsylvania Supreme Court has invalidated entire statutes based on the single-subject rule and, in fact, has ruled that severing off pieces of a law isn’t an option, Ledewitz told Bloomberg Tax.

In Commonwealth v. Neiman, the Pennsylvania Supreme Court held: “When an act of the legislature violates the single subject rule, all of its provisions are equally repugnant to the constitution, and, thus, equally void; so there is no basis to distinguish among the act’s various sections to decide which of them offend the constitution to a greater or lesser degree.”

“That means that if the plaintiffs are right about Act 43, all of its provisions will be struck,” Ledewitz said. However, just because they’re making the argument doesn’t mean they’ll win their case, he added.

Some of the other arguments in the petition—for example, that the act unlawfully delegates regulation of fireworks to a private entity—could be more persuasive to the court than the single-subject argument, Ledewitz said.

“But, if that’s the case, it doesn’t necessarily mean that the whole statute would be thrown out,” he said. “The courts could sever things like that.”

The case is Phantom Fireworks Showrooms LLC v. Wolf , Pa. Commw. Ct., No. 21-MD-2018, responsive pleading due 3/7/18 .

To contact the reporter on this story: Leslie A. Pappas in Philadelphia at

To contact the editor responsible for this story: Ryan C. Tuck at

For More Information

Text of the petition is at

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