The Commonwealth Court of Pennsylvania has sided with the state’s revenue department, affirming a corporate income tax assessment against Dow Chemical Company for the 2013 tax year. The ruling hinges on a crucial distinction: whether the landmark Supreme Court decision invalidating prior tax limitations should apply retroactively to a company that hadn’t yet paid the disputed tax.
The court determined that Dow’s attempt to distinguish its situation from previous cases—by arguing it was contesting an *assessment* rather than seeking a *refund* of taxes already paid—was unavailing. The court held that the Supreme Court’s recent ruling in *Alcatel III* settles the issue of retroactivity for all cases involving the challenged tax deduction, regardless of the procedural stage.
The Heart of the Dispute: Net Loss Carryover Caps
The core of this decade-long tax saga involves Pennsylvania’s Corporate Net Income Tax (CNIT) and its Net Loss Carryover (NLC) deduction. When a corporation has losses in a given year, it can use those losses to offset future taxable income. However, Pennsylvania law historically imposed a “cap” on how much of those carried-over losses a company could deduct in any single year—specifically, the greater of $3 million or 20% of the apportioned taxable income.
Dow Chemical, facing a 9.99% CNIT rate for 2013, had significant accumulated net losses dating back to 1998. Before accounting for the NLC deduction, Dow’s taxable income apportioned to Pennsylvania was about $18.3 million. Had Dow followed the statutory cap, it would have faced a substantial tax bill. Instead, Dow took an “uncapped NLC deduction,” wiping out its 2013 liability entirely, claiming it did so in anticipation of favorable rulings in related litigation (the *Nextel* cases).
The Department of Revenue disagreed, reassessing Dow’s liability. The Department limited Dow’s NLC deduction to $3.67 million (20% of its pre-deduction income), resulting in an assessed tax liability of $1.47 million. Dow appealed this assessment.
Following the Supreme Court’s Lead: *Alcatel III* Controls
Dow’s primary argument rested on a procedural difference. In the seminal cases that challenged the NLC cap—*Nextel II* and *Alcatel III*—the corporations had already paid the tax under the capped limits and were seeking refunds. Dow argued that since it had not yet paid the tax, the Commonwealth would suffer no financial harm by allowing the uncapped deduction now, thus avoiding the need to repay “budgeted and spent” revenue.
However, the Commonwealth Court, in an opinion written by Senior Judge Leadbetter, firmly rejected this distinction. The court emphasized that the Pennsylvania Supreme Court’s decision in *Alcatel III* (2025) settled the retroactivity question for the NLC deduction statute across the board.
The *Alcatel III* court found that the original ruling invalidating the cap (*Nextel II*, 2017) established a “new principle of law” and that, under the three-part *Chevron* test used for retroactivity analysis, *Nextel II* should apply *prospectively only*.
“Simply put, *Alcatel III* definitively decided the issue of retroactivity across the board, and it therefore controls regardless of the procedural posture of a taxpayer’s appeal,” the opinion stated. The court found Dow’s attempt to differentiate between refund cases and assessment cases to be an unavailing effort at “wordsmithing.”
The Remedy Remains Consistent
The court noted that because *Nextel II* applies only prospectively, the NLC deduction provision—with its cap—was constitutional for the 2013 tax year when Dow filed its return. Therefore, the Department’s assessment, which applied the statutory 20% limit, was valid.
Furthermore, the court highlighted that Dow had actually asked the Board to pause its reassessment appeal pending the final outcome of the *Nextel* litigation, essentially betting on a retroactive ruling that ultimately did not materialize in Dow’s favor.
The court concluded that Dow was seeking retroactive relief—to strike the 2014 assessment entirely so it would owe zero tax for 2013. This relief, the court reiterated, has been repeatedly rejected by the Supreme Court in favor of a remedy that only strikes the unconstitutional flat cap while preserving the percentage limitation.
In affirming the Board of Finance and Revenue, the court sent a clear message: the precedent set in *Alcatel III* regarding the prospective application of the *Nextel II* ruling on the NLC deduction is binding, irrespective of whether the taxpayer has already remitted the disputed funds to the state.