Governor’s Budget Proposal Maintains Capital Stock/Franchise Tax Phase-out But Asks Retailers to Pay More


Governor Corbett has proposed a Pennsylvania 2012-13 budget that would hold spending flat overall while dealing with pension cost increases and other mandates.  The business community, in general, would fare well because the Governor proposes to maintain the phase-out schedule for the Capital Stock and Franchise Taxes.  However, larger retail vendors would take it on the chin because the Governor would essentially eliminate the 1% discount they currently receive for collecting sales taxes on behalf of the Commonwealth.

Sales Tax Discount Cap

As proposed by the Governor, a retail vendor’s sales tax discount would be capped at $250 per month ($3,000/year).  Thus, retailers making up to $5,000,000 of taxable sales per year would essentially continue to receive their full collection compensation ($5,000,000 x 6% = $300,000 tax x 1% = $3,000).  However, larger retailers making sales many times that amount would receive only $3,000/year, regardless of the fact that their costs are much greater.  Capping the discount would save the Commonwealth $41.3 million/year.  Although the Governor has pledged not to increase taxes, the Secretary of Revenue has indicated that the administration views the discount as a “fee” paid by the Commonwealth and doesn’t believe it is receiving value for the compensation paid.  The retailers probably would like to see how the Department calculates the value of retailer efforts to determine taxability; administer exemption claims; collect, account for and remit the tax; and, deal with the Department’s audits!

Capital Stock/Franchise Phase-Out

The Capital Stock and Franchise Tax rate was reduced to 1.89 mills on January 1, 2012 and is already scheduled to be reduced to 0.89 mills on January 1, 2013, with full elimination in January 2014.  The business community views this as an onerous tax because it is collected even when companies lose money and is imposed on top of perhaps the highest Corporate Net Income Tax in the country.  Apparently the Governor agrees and sees the maintenance of the phase-out as a major factor in encouraging businesses to invest in Pennsylvania.  We will see over the next few months whether the Legislature also will maintain the phase-out schedule, or will push it back as has been done before in order to maintain revenues for state-funded programs.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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