PA Appeal Systems Changes Update

It has now been over a year since Pennsylvania’s General Assembly enacted major changes to Pennsylvania’s tax appeals process, and roughly five months since the new structure for the Board of Finance and Revenue was implemented.  At this point in time, do these changes seem to have worked improvements in Pennsylvania’s appeals process or have they yet to bear fruit?

Independent Board Members
One of the major changes to the Board of Finance and Revenue  (the “Board”) (second administrative appeal level) was to remove the Secretary of Revenue and five other senior government officials and replace them with two Gubernatorial appointees and one designee of the State Treasurer.  As discussed in our July 2013 newsletter, certain tax credentials were required by the statute.  Even so, you never know whether political appointees are going to merely meet the minimum requirements or have truly significant experience.  In this case, we can say the Governor and State Treasurer have done an excellent job of selecting experienced, qualified members for the Board.

Jacqueline Cook, the designee of the State Treasurer and Chair of the Board, is an experienced attorney who sat on the “old” Board as the designee for four State Treasurers and served several years as Secretary of the “old” Board.  She has participated in the adjudication of tens of thousands of Pennsylvania tax cases.

Dave Kraus, one of the Governor’s appointees, moved over to the Board from his previous position as Chief Counsel of the Department of Revenue (the “Department”).  Prior to serving in that position, Mr. Kraus was in private practice for twentyifive years and was well known for his representation of taxpayers in Pennsylvania tax matters.

Scott Shearer, the other appointee of the Governor, also was engaged in private practice for many years, representing taxpayers in Pennsylvania tax matters.  Early in his career, he served as a Deputy Attorney General.  Mr. Shearer was active in the Pennsylvania Bar and the PA Chamber’s tax committee, among many other professional affiliations.

One could hardly have asked for a better qualified or well-rounded group of board members to launch the reconstituted Board.

Complexity of Process
One of the concerns we had about the new Board was that new procedures could detract from the historical informality and accessibility of the process.  We remain somewhat concerned that the process has become more complicated and more expensive for taxpayers and their representatives.

The new rules precluding ex parte communications with Board members and Board staff, which we generally agree are basic to a transparent and fair process, have had the unintended consequence of making it more difficult to schedule pre-hearing conferences with staff to review evidence and discuss issues.  Initially, the staff would only schedule a conference or a call if someone from  the Revenue Department Chief Counsel’s Office was available to participate.  The Department did not seem to anticipate the additional work involved under the new system and at times could not, or would not, participate.  The Department is still adjusting to the additional workload.  At least the new Interim Operating Rules recently adopted by the Board provide for the possibility of a participation waiver by the Department, which could allow meetings to go forward on routine matters without the Department’s participation.

The new Interim Operating Rules are not all positive from the point of view of a private practitioner.  The rules require supporting documents to be submitted within sixty days of the filing of a petition with the Board.  It is not uncommon for a practitioner to be brought into a case at the last minute before an appeal has to be filed.  Requiring documentation to be pulled together and submitted within sixty days, when the Board has six months to render a decision, and the decision deadline can be extended for another six months, seems unnecessary.

Similarly, the requirement under the Interim Operating Rules that any offer in compromise be initiated within thirty days from the filing of the appeal seems unnecessary.

Hopefully, the Board will be reasonable in granting extensions of these documentation and compromise deadlines, or will simply ignore them as they realize they are unnecessary.  The practitioner community presumably will comment accordingly when the Interim Operating Rules are proposed for adoption as official regulations.

Compromises
With the reconstitution of the Board of Finance and Revenue and prior changes made at the Department of Revenue’s Board of Appeals, a taxpayer theoretically may pursue a compromise concurrently with the pursuit of their appeals at the first two administrative levels of tax appeal in Pennsylvania.  A number of compromises have been entered into at both levels – some of them by clients with our representation. 

We are concerned, however, that sometimes when a compromise has been proposed at the Board of Appeals on terms which were known to have been applied to the same issue in prior cases, the Department has felt that the taxpayer should take a “haircut” on the relief on the purported basis that the taxpayer would save money by not having to file further appeals and eventually negotiate with the Office of Attorney General.  The Department seems to have forgotten that the government saves money too from not having to handle the further appeals.  And, the “haircut” they seem to expect is well in excess of the actual cost of further appeal.  This certainly undermines the effectiveness of what could otherwise be a beneficial feature of the Pennsylvania tax appeals process.

It is not yet clear to us whether the Department believes a “haircut” routinely should be expected for compromises after appeal to the second level, the Board of Finance and Revenue.

Transparency
Board of Finance and Revenue hearings are now being advertised in advance, listings of cases scheduled to be heard are being posted on the Board’s website and votes are being cast in public meetings.

At the writing of this article, the Board had posted decisions rendered in May and June on its website.  The decisions are posted under broad categories and are searchable by keyword. 

While we continue to have some concerns that the decision database will quickly become overloaded with decisions of minimal significance, such as decisions dismissing untimely appeals and addressing only abatement of penalties, the actions of the Board certainly have become much more transparent than at any point in the past.  The only board actions which do not appear to have been posted are decisions confirming compromises agreed to between the Department of Revenue and the taxpayer, and then adopted by the Board.

Following are short summaries of some of the decisions currently found in the Board’s decision database.

CORPORATE TAXES

• Corporate Net Income Tax refund petition filed to preserve issues outside the basis of assessment was dismissed because no tax had been paid for the year in question.
• Telephone Gross Receipts Tax was sustained with respect to revenues from wire maintenance fees, customer premise equipment and Universal Service Fund pass-throughs on the basis that the services “were related to the transmission of messages.”
• Request for allowance of additional net loss deduction was denied because the requested amount exceeded the statutory cap and the Board cannot grant constitutional relief.
• Dismissal of a Corporate Net Income Tax petition as untimely was upheld even though apparently filed within three years of payment made within the extended reporting due date because it was filed more than three years from original tax due date.  An amended return filed within the three-year statute of limitations could not be treated as a timely refund petition.

SALES & USE TAX

• Inasmuch as amusement rides are tangible personal property (rather than real estate) repairs to the rides are subject to sales and use tax.
• “Casing running tools and equipment” and “trailered blender equipment” used in drilling in the Marcellus Shale qualify for the sales tax mining exclusion.
• PJM Interconnection’s “dispatch” activities qualify for sales tax public utility exclusion but other activities do not.
• Investment management company selling mutual funds and other investment products is not a “financial institution” entitled to sales and use tax exemption for “financial institution security equipment.”
• Taxpayer does not qualify for the sales and use tax “in-house printing” exemption where the facility predominantly produces customer statements which are individualized and not substantially similar.
• Although sales to the Commonwealth and to its political subdivisions and instrumentalities are exempt from PA sales tax, sales to Maryland or its political subdivisions and instrumentalities are not exempt.
• Sales & Use Tax Mining exclusion applies to foundation materials for pipe used to transport natural gas from wells to the processing station and within the processing station.  Compressor buildings are not eligible for exclusion.
• Prepared food provided to casino patrons in exchange for reward points, awarded for spending at the casino, is subject to sales and use tax.

RESPONSIBLE PARTY

• Taxpayer was properly held to be responsible for trust fund taxes (Sales Tax and withheld Personal Income Taxes) where he was president and general partner of a limited liability company which serves as the general partner of the limited partnership which failed to remit the taxes.
• Secretary/treasurer/shareholder was properly treated as responsible for his company’s sales tax not remitted for periods prior to company buyout of his interest; he was not responsible for periods after the buyout.
• Co-owner with check-signing authority was responsible for unfiled employer withholding and sales taxes notwithstanding her assertion that boyfriend/co-owner actually operated business.

FUEL TAXES

• Motor Carrier Road Tax assessment was properly imposed where taxpayer’s records were incomplete.

PERSONAL INCOME TAXES

• For Personal Income Tax Purposes, a change of domicile from Pennsylvania to Florida was not recognized where the taxpayer maintained a homestead exemption on his house in Pennsylvania and spent more time in PA than any other state during the tax year.
• The Department of Revenue “inappropriately refused to refund Petitioner’s 2011 overpayment by improperly using it to offset an assessed amount on his 2008 tax account” while Petitioner was still within the ninety-day period to appeal the Board of Appeals’ decision on his 2008 Personal Income Tax assessment to the Board of Finance and Revenue.
• Evidence established that Taxpayer was domiciled in Switzerland notwithstanding use of parents’ PA address for receipt of various documents.  Taxpayer was not subject to PA tax on nonemployee compensation from a PA corporation because taxpayer was a nonresident of PA and performed the services outside PA.
• Husband and wife failed to establish a change of domicile to Florida where they continued to maintain a homestead exemption in PA and spent substantial time in PA.  The 183-day rule did not apply since they were domiciled in PA.
• Taxpayer established change of domicile to Florida for PIT purposes where, among other factors, he spent seven months of year in Florida, and his doctors, voting registration, drivers license and vehicle registration were in Florida.  He continued to receive a PA homestead exemption due to error by the county tax office.
• Taxpayer was properly assessed on compensation paid when taxpayer was a minor child.  Penalty was abated because failure to file was father’s responsibility.

REALTY TRANSFER TAX

• Deed reversing prior transfer of fifty percent interest in real estate was not an exempt “corrective deed” in the absence of a court order finding cause to cancel the initial transfer.

We note that we do not agree with all of the Board’s conclusions.