[author: James L. Fritz]
The General Assembly and Governor Corbett have approved a state budget for 2012-13 which restrains state spending while preserving the scheduled phase-out of the Capital Stock and Franchise Taxes, moving to Single Sales Factor apportionment of the Corporate Net Income Tax, preserving the vendors’ allowance for Sales Tax collection, adopting a $1.65 billion credit to promote development of businesses in the Marcellus Shale Gas area and making a significant number of other substantive and procedural changes.
Capital Stock & Franchise Phase-out
Notwithstanding many interested parties - including local schools, county commissioners and social service groups - seeking to avoid cuts or obtain increases, the General Assembly and Governor preserved the scheduled phase-out of Pennsylvania's onerous Capital Stock and Franchise Taxes. The tax rate was reduced to 1.89 mills on January 1, 2012, and will be reduced to 0.89 mills on January 1, 2013, with full elimination on January 1, 2014. The benefit to the business community for FY 2012-13 is just under $300 million.
Single Sales Factor
For taxable years beginning after December 31, 2012, business income will be apportioned using a single sales factor. Currently, the sales factor is weighted 90% while the property and payroll factors are weighted 5% each. The change will save businesses $12 million in FY 2012-13.
Sales Tax Vendor Discount
The Corbett administration and certain elements in the Legislature attempted to cap the 1% vendor’s discount at $250 per month. Strong lobbying by the Pennsylvania Retailers Association and other business organizations demonstrated that this would saddle vendors with tens of millions of dollars of costs for collecting Pennsylvania’s tax. Support from certain leaders and many rank-and-file legislators successfully preserved the vendors’ compensation at 1% of tax collected, with no cap. Even this is not sufficient to cover the costs of administering the collection of the complicated tax.
Marcellus Shale Manufacturing Credit
To help entice the location of an ethane cracking plant in Pennsylvania, the Legislature has approved Governor Corbett's proposed "Resource Manufacturing Tax Credit" equal to $0.05 per gallon of ethane purchased from January 2, 2017 to December 31, 2042, for use in manufacturing ethylene. To qualify, a taxpayer must make a capital investment of at least $1 billion and create at least 2,500 construction-phase jobs. Credits may offset up to 20% of a qualified taxpayer's tax liabilities in the year for which credit is claimed. Credit may not be carried back or forward and may not be used to obtain a refund. Unused credits may be transferred to the owner of a pass-through entity. Unused credits also may be sold or assigned. Sales to upstream or downstream companies are favored. A purchaser or assignee must use the credit in the calendar year in which purchased or assigned; up to 50% of a qualified tax liability may be offset by purchased or assigned credits.
Other Substantive and Procedural Changes
Sales Tax - Prepayment Alternative. Last year the General Assembly enacted a requirement for larger monthly filers to "prepay" an estimated half of their monthly sales tax liabilities (Act 26 of 2011). The prepayment has been due on the 20th of the month and has been equal to 50% of the tax remitted for the same month in the prior year. This has caused cash flow issues for companies which have experienced significant declines in tax collections compared to the prior year. To help alleviate this problem, the General Assembly has enacted an alternative for use by certain vendors in calculating the prepayment amount - 50% of the tax ultimately due for the current month. For returns due after September 30, 2012, this will apply to companies whose tax liability in the third quarter of the prior year was at least $25,000 and less than $100,000. Companies whose third quarter tax was $100,000 or more must continue to pay based on the same month in the prior year.
Sales Tax – Wrapping and Packaging Services. The wrapping supply exemption provision has been amended to clarify that wrapping and packaging services will not be taxable if the property wrapped or packaged will be resold by the purchaser of the services.
Sales Tax – Processing of Eggs. The “collection, sorting, inspecting and packaging of eggs” has been added to the definition of “Processing.” Effective immediately, machinery, equipment and other tangible personal property used directly and predominantly in such activities will be excluded from PA sales and use tax.
Sales Tax – Volunteer Firefighters’ Organizations. Volunteer Firefighters’ Relief Associations are now specifically recognized under the exemption for charitable organizations. Once issued to a Volunteer Firefighters’ Relief Association or to a Volunteer Firefighters’ Organization, exempt status will not expire unless and until the activities of the Organization or Association change so that the requirements for an “institution of purely public charity” are no longer met.
Corporate Tax Report Extensions. For taxable years beginning on or after January 1, 2013, Pennsylvania will automatically extend the PA due date where a federal extension is granted.
Corporate Net Income Tax – Reports of Federal Changes. For taxable years beginning on or after January 1, 2013, the deadline for submitting reports of federal changes will be six months after the change becomes final. The deadline is currently 30 days from finality.
Personal Income Tax – 1099 Misc. Requirements. Effective immediately, persons who make payments of PA-source nonemployee compensation or payments under an oil and gas lease to a resident or nonresident individual, an entity treated as a partnership for tax purposes or a single-member limited liability company, and are required to submit a 1099-Misc. to the IRS, shall file a copy with the PA Dept. of Revenue and provide a copy to the payee by the federal filing deadline. Willful failure to comply will be subject to a $50 penalty for each violation.
Personal Income Tax - Returns of Deceased. Effective for tax years beginning on or after January 1, 2013, the final return of a deceased individual may be filed by a “personal representative” other than an executor or administrator. A surviving spouse may file jointly with the deceased spouse for the year of death or may file a separate return for the deceased spouse; however, an after-appointed fiduciary for the deceased may file a superseding return. A joint return may be filed where both spouses die during the same year.
Personal Income Tax – Estimated Tax Penalty. The special tax provisions for poverty must now be taken into account in determining penalties for underpayment of estimated taxes.
Realty Transfer Tax – Family Exemption. Transfers between a stepparent and his or her stepchild or the spouse of the stepchild are now covered by the exemption.
Realty Transfer Tax - Acquired Real Estate Companies. For transactions occurring after December 31, 2012, a transfer for purposes of determining whether a “Real Estate Company” has been “acquired” (triggering tax) will be deemed to include the provision of a legally-binding commitment to make the transfer, enforceable at a later date.
Realty Transfer Tax – Family Farm Exemption. Retroactive to July 1, 2010, the exemptions for transfers to family-owned corporations and partnerships have been combined into a “Family Farm Business” exemption. The statute has been clarified to indicate that the business may be conducted as a general partnership or limited liability partnership as well as a corporation or limited partnership. Transfers may be made by family members or another family farm business. The current 75% asset and ownership tests, as well as other conditions, continue to apply. Transfers of ownership interests within the family also are exempted, as are transfers of assets between family farm businesses under at least 50% common ownership.
Cigarette Tax - Wholesaler Definition. Owners of 3 or more retail outlets (formerly 5) will be considered "wholesalers."
Inheritance Tax - Family Farm Exemption. Exemption now applies to transfers of agricultural real estate between members of the same family, provided the property continues to be used for agricultural business for seven years.
Inheritance Tax - Other Agricultural Transfers. Exemption also applies to the transfer of an agricultural commodity, agricultural conservation easement, agricultural reserve, agricultural use property or a forest reserve to lineal descendants or siblings.
R & D Tax Credit. The Research and Development Tax Credit annual limitation has been increased from $40 million to $55 million, with $11 million designated for small business.
Job Creation Tax Credit. Credit for hiring an unemployed individual will be $2,500 instead of $1,000. The small business job creation requirement is reduced to '10% within three years.' The term for creation of new jobs will be 1, 2 or 3 years - as determined by DCED.
Educational Improvement Tax Credit. The annual cap on EITC credits is increased from $75 million to $100 million. Surplus lines insurance companies are now eligible for credit. The per-business annual credit cap is increased from $300,000 to $400,000 for FY 2012-13, and to $750,000 for subsequent years. The cap on credits for contributions to pre-kindergarten scholarship organizations is increased from $150,000 to $200,000. The delayed application date for pass-through entities is removed.
Educational Opportunity Scholarship Tax Credit. In addition to expanding the EITC, a new credit has been established for businesses contributing to organizations awarding scholarships to students residing in some of the Commonwealth's most poorly performing public schools, to allow the student to attend participating public or non-public schools. The limitations on business contribution and business application procedures are similar to those under the EITC. A total of $50 million in credits may be granted annually.
Film Production Tax Credit. The annual cap on credit awards is set at $60,000,000. A purchaser or assignee of credits may carry forward unused credits purchased in 2010, to taxable years 2011 and 2012. Credits may now be used against the Bank Shares and Insurance Premiums Taxes. Awards of credits may include parts of the award amounts available in subsequent fiscal years. An additional 5% credit (above the current 25% cap) may be awarded if certain "qualified production facility" requirements are met. Under certain circumstances, the Department may waive the 60% requirement for PA production expenses.
Neighborhood Assistance Tax Credits. Preference will be given to applications by businesses contributing food or money to charitable food programs.
Historic Preservation Incentive Tax Credit. Effective July 1, 2013, taxpayers may apply for credits of up to 25% of the costs of restoring a qualified historic commercial building. Aggregate credit awards will be limited to $3 million per year and the maximum per taxpayer will be $500,000. Credits may be carried forward for up to 7 years. There will be no carry back or refund of credits, but unused credits may be transferred to the owners by a pass-through entity or may be sold or assigned for use in the year of sale or assignment.
Community-Based Services Tax Credit. Effective July 1, 2013, businesses contributing to providers of community-based services to individuals with intellectual disabilities or mental illness may apply for credit up to 50% of their contributions (75% if 2-year commitment). The maximum credit per business per year will be $100,000. Total credit awards will not exceed $3 million per year.
Changes to Tax Appeals Process
Assessments No Longer Mailed Certified. Effective immediately, the Department of Revenue is no longer required to use certified mail when issuing assessments. This appears to be driven by cost considerations as the use of certified mail originally was the Department’s idea. The business community opposed this change.
Adjustments Not Immediately Impacting Tax. There has been no immediate opportunity to contest a Revenue Department adjustment that does not change the current tax. The tax code now authorizes the inclusion of such an issue in a petition for reassessment. The statute specifically recognizes that such issues may include:
Recalculation of corporate net income tax net loss as adjusted by the Department.
Recalculation of "average net income" for capital stock or franchise tax purposes as adjusted by the Department.
Recalculation of personal income tax basis as adjusted by the Department.
A taxpayer still retains the option of challenging such adjustments in a subsequent year when the Department's adjustment has a tax impact.
Authority for Compromise. Although the Department implemented a compromise process several months ago for cases before the Department's Board of Appeals, there has been some question about the legal authority for such compromises. The statute now clarifies that the Secretary of Revenue may compromise any civil matter before the Department in an administrative appeal. The compromise may be based on doubt as to liability and the "promotion of effective tax administration."
Refund Limitations Extended. Two refund statutes of limitations which have caused much confusion in the tax community over the past several years have been extended. First, if an audit does not grant credit for tax paid within the audit period, the taxpayer may now file a refund petition by the later of 3-years from the date of payment or six months from the mailing date of the audit assessment, determination or settlement. Second, as to tax paid as a result of an assessment, determination or settlement, a refund petition may now be filed within six months of the date of payment (formerly six months from assessment date).
Administrative Bank Attachment
The Department of Revenue has been authorized to attach accounts subject to tax liens totaling at least $1,000. This includes accounts of business entities, individuals operating as sole proprietors, shareholders, members and partners of pass-through entities and corporate officers or other responsible individuals who have been individually assessed and liened. Accounts may not be attached if access is restricted due to pledge as security, the financial institution has a present right to exercise a right of setoff, another party is an owner on the account or the obligor otherwise lacks an unconditional right of access. Attachment also does not apply to funds or property deposited after attachment. The financial institution may assess a reasonable administrative fee in connection with the attachment. After the financial institution confirms the amount attached, the Department must give notice to the account holder. The attachment may then be challenged within ten days by filing a motion with the county court of common pleas. Among the reasons for challenge is a request for spousal relief from joint liability.