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Benefits not lost in Pennsylvania OZ relocation

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On June 23, 2020, the Pennsylvania Commonwealth Court held that the Commonwealth’s Keystone Opportunity Zone (KOZ) Act does not prohibit businesses that have previously received KOZ tax benefits within a now-expired KOZ from receiving those tax benefits again by relocating to a currently active KOZ.1 Ruling en banc, the Court concluded that the plain language of the KOZ Act did not impose a “one and done” rule whereby qualified businesses may only receive KOZ benefits once. Furthermore, contrary to the argument of the Department of Community and Economic Development (DCED), the Court concluded that permitting businesses to requalify for tax benefits in another KOZ is consistent with the legislative intent of the KOZ Act and does not yield an absurd result.

Background Under the 1998 KOZ Act, qualifying businesses that locate within a designated KOZ – a term encompassing Keystone Opportunity Zones, Keystone Opportunity Expansion Zones (KOEZ), and Keystone Opportunity Improvement Zones (KOIZ) – receive exemptions from, credits against, or abatements of, most Pennsylvania state and local taxes.2 The KOZ program was intended to encourage business development and employment within certain distressed areas. It represents a key strategy for state and local economic development.

Dechert LLP (Dechert), an international law firm headquartered in Philadelphia, leased space in an office complex within a Philadelphia KOZ from 2004 until the KOZ expired in 2018. Thus, Dechert had received about fifteen years of KOZ tax benefits. Shortly after the KOZ expired, Dechert planned to end its lease and lease space in a new office complex under construction by the same landlord in a different, active KOZ relatively close to the office it was leasing. In April 2019, before its lease expired, Dechert requested a letter ruling from DCED, the government agency administering the KOZ program, about the availability of KOZ tax benefits if the law firm should move from the expired KOZ to the active KOZ.

In a letter to Dechert dated July 11, 2019, DCED stated that its interpretation of the KOZ Act precluded a business from receiving full tax benefits in an active KOZ if that business had previously received those benefits in an expired KOZ. DCED explained that receiving benefits in a new KOZ was contrary to the intent of the KOZ program, which was “designed to encourage businesses to locate in economically distressed communities; to become economic anchors of the communities; and to re-enter the state and local tax rolls at the end of the KOZ term.” DCED argued that allowing full benefits in a new KOZ would “result in a mass exodus from one zone to another in an attempt to retain tax exemptions, and thus frustrate the purpose of the statute.” Therefore, DCED concluded that Dechert was not eligible for tax benefits in a new KOZ.

Consequently, Dechert filed a declaratory judgment action in Pennsylvania Commonwealth Court challenging DCED’s interpretation of the KOZ Act. The Court stayed several similar actions filed by other businesses that intended to move from the expired KOZ to the active KOZ and had their applications for tax exemptions denied by DCED on the same grounds.

The Commonwealth Court’s decision The part of the KOZ Act relating to “Relocation” states that any business relocating from outside a KOZ into a KOZ cannot receive any KOZ benefits unless that business meets one of three criteria for economic development: (1) it increases full-time employment by at least 20%; (2) it makes a capital investment in KOZ property; or (3) it enters into a lease for property in the KOZ for its active term.3 The statute does not address the specific situation of how to treat a business seeking to relocate from an expired KOZ into an active KOZ – a practice that the DCED pejoratively refers to as “zone hopping.”

According to DCED, the omission of language addressing relocation from expired to active KOZs, together with the legislative intent of “providing temporary tax relief,” established that the KOZ Act prohibited businesses from obtaining tax benefits when they move from one KOZ to another. Notwithstanding the admitted importance of the issue, DCED had never promulgated regulations, issued policy statements, or provided other guidance documents regarding such a relocation restriction.

The Commonwealth Court disagreed with DCED. The Court concluded that the plain language of the statute permitted businesses to relocate from an expired to an active KOZ and to qualify for new tax benefits. DCED argued, however, that the absence of a provision specifically addressing the relocation from one KOZ to another rendered the statute ambiguous, and that deference was therefore due to DCED’s interpretation of the statute. Under the DCED’s interpretation, allowing tax benefits to follow businesses moving from one KOZ to another is prohibited because it is inconsistent with the legislative intent and because it allows an absurd result, specifically, that the locality of the new KOZ would be subsidizing business relocations out of a KOZ into which hundreds of millions of dollars of tax credits had been invested. In short, DCED was asking the Court “to disregard the statute’s plain meaning in favor of its proffered construction of the statute’s silence as a prohibition.”

Disagreeing with this approach, the Court determined that statutory silence about a discrete issue is not synonymous with ambiguity. Because there was no ambiguity in the plain language of the statute, no deference was due to DCED’s construction of that provision to impose a relocation limitation.

In any event, the Court concluded that allowing tax benefits to a business relocating from an expired to an active KOZ was consistent with the legislative intent of the KOZ Act and did not lead to an absurd result. Business flight from expired KOZs to locations outside of the state is a genuine concern because, as the Court highlighted, nothing in the KOZ Act anchors businesses to a KOZ after it expires. Indeed, no post-expiration restrictions were enacted even though one state representative had asserted that a penalty was necessary to keep businesses from leaving an expired KOZ. In light of these facts, the Court stated, “[T]he ultimate goal of raising economic vitality of distressed areas is met when a resident of an expired Zone chooses to relocate to an active Zone as opposed to leaving the Commonwealth altogether, and taking the jobs and associated benefits and fund sources with it.” For these reasons, the Court invalidated DCED’s prohibition on requalification for tax benefits in a new KOZ.

Commentary In this decision, the Court rebukes an administrative agency for importing its own policy determinations into a plain, unambiguous statute. DCED’s attempt to read statutory “silence” about a discrete issue as a prohibition is not uncommon. For instance, last year in Robert Half International Inc., the California Office of Tax Appeals invalidated an audit by the California Franchise Tax Board, based on the Board’s erroneous conclusion that, because the state’s apportionment statute is silent on the treatment of excise taxes assessed on services, all excise taxes on services (such as VAT) must be excluded from a taxpayer’s gross receipts for sales factor purposes.4

As the Court pointed out in this case, although the purpose of DCED’s interpretation was directed towards the understandable goal of keeping businesses from moving out of depressed areas once the tax benefits ended, its interpretation might frustrate that purpose when considering the statute from a different perspective. This is why courts attempt to refrain from looking beyond a statute’s plain language to discern legislative intent and assume that the statute as drafted best reflects the legislature’s carefully considered policy determinations. If the court’s interpretation has undesirable consequences, the legislature may redraft the statute to better accomplish its aims. In fact, the KOZ Act has been amended several times since its enactment, giving the Pennsylvania legislature ample opportunity to impose changes it deemed necessary.

The KOZ program is unique and represents one of the leading tax incentives for spurring economic development in the Commonwealth. Consequently, the importance of this decision and any legislative response to it cannot be overestimated. For now, this decision confirms for businesses that have chosen to take advantage of the KOZ program that they may continue to receive those tax benefits if they relocate to another KOZ, and if they meet the other eligibility requirements. Like Dechert, there were over 800 qualified KOZ businesses whose benefits expired in 2017-2020. Approximately 75% of these businesses were located in Philadelphia. All of these businesses may potentially requalify for tax benefits in a new KOZ if they met the other eligibility requirements of the KOZ Act and should carefully consider whether it might be beneficial to relocate. Furthermore, new or out-of-state businesses that were never located in a KOZ may be more motivated to relocate into one knowing that they are able to continue the tax savings by relocating into another KOZ at a later date. At this time, it is unclear whether DCED will appeal the decision or seek legislative changes consistent with its policy determinations.



1 Dechert LLP v. Pennsylvania Department of Community and Economic Development, No. 442 M.D. 2019, Pennsylvania Commonwealth Court, June 23, 2020.
2 73 PA. STAT. §§ 820.101-820.1308.
3 73 PA. STAT. § 820.307(b).
4 In re Robert Half International Inc. and Subs., No. 18011756, California Office of Tax Appeals, Oct. 3, 2019. For further discussion of the Robert Half decision, see GT SALT Alert: California OTA Holds Sales Factor Includes Foreign Excise Taxes Assessed on Services Performed by Worldwide Unitary Affiliates.



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