Pennsylvania Department Of Revenue Issues Notice On New Receipts Factor Apportionment Rules For Bank Shares Tax

by Pepper Hamilton LLP

Immediate Action Required by May 14, 2014 for Any Bank ‘Doing Business’ in Pennsylvania

On April 14, 2014 the Pennsylvania Department of Revenue issued Notice 2014-1 (the Notice). The Notice requires those taxpayers having elected Method 1 with receipts from investment assets and activities to use Method 2. These taxpayers have 30 days from the date of the Notice to recalculate the tax due in accordance with the Notice and make any additional payments due as a result. All financial institutions with any activity in Pennsylvania should carefully consider the Notice. For example, if a financial institution owns a note secured by a mortgage or lien on Pennsylvania real estate or personal property, it should consider the applicability of the Pennsylvania bank shares tax.


The Commonwealth of Pennsylvania enacted on July 9, 2013 Act 52, which changes the way that banks and trust companies subject to the Pennsylvania bank shares tax calculate and remit the tax due. The bank shares tax is technically a property tax imposed upon the value of the shares of the institution subject to the tax. For tax years 2014 and thereafter, the taxable amount of the shares is based upon the book value of total bank equity capital at the end of the preceding calendar year as reflected in the call report filed with its prudential regulator(s).

1. Nexus

Until Act 52, the bank shares tax was imposed only on banks that had a physical presence in Pennsylvania. Effective January 1, 2014, Pennsylvania law imposes the bank shares tax on all banks that are “doing business” in Pennsylvania, without regard to whether such banks have capital stock or offices or branches in Pennsylvania. Under Act 52, a bank is subject to the bank shares tax if it generates $100,000 or more of gross receipts that are apportionable to Pennsylvania and satisfies any of the following conditions:

  • The bank has an office or branch in Pennsylvania.
  • Its employees, representative, independent contractors, or agents conduct business activities on its behalf in Pennsylvania.
  • Any person solicits business on the bank’s behalf in Pennsylvania through person-to-person contact, mail, telephone, or electronic means, or advertising that is produced, published, or distributed in Pennsylvania.
  • The bank holds a security interest, mortgage, or lien in real or personal property located in Pennsylvania.
  • Any basis exists under Pennsylvania law or the U.S. Constitution to apportion the bank’s receipts to Pennsylvania.

It is likely that a bank will not be considered to be doing business in Pennsylvania merely because the bank uses independent professionals to perform services for it in Pennsylvania if such services are not significantly associated with creating a market in Pennsylvania, or the bank uses financial intermediaries in Pennsylvania to process or transfer checks, credit card receivables, commercial paper, or other similar items.

Act 52 significantly expands what activity is sufficient to create taxable nexus, and expands the bank shares tax, to the boundaries of U.S. constitutional law. Financial institutions having any connection with Pennsylvania must review their activities to confirm compliance.

2. Apportionment

Multistate institutions subject to the bank shares tax are entitled to apportion the value of the shares subject to the Pennsylvania tax in order to ensure that the tax fairly represents the institution’s activities in Pennsylvania. Prior to 2014, the value of the shares was multiplied by a fraction, which was the average of the Pennsylvania property, receipts, and deposits factors, in order to arrive at a calculation of Pennsylvania taxable value. Each factor is, in and of itself, a fraction. By way of example, the payroll factor was calculated by dividing Pennsylvania payroll of the bank or trust company by the total payroll of the bank or trust company. This apportioned value was then multiplied by the tax rate in order to arrive at the tax due.

Act 52 of 2013 changed the apportionment language of 72 Pa. Stat. Ann. § 7701.4, eliminating both the deposits factor and the payroll factor from the calculation. The bank shares tax, subsequent to this change, is apportioned solely by use of the receipts factor for tax years beginning January 1, 2014 and beyond.

The revised receipts factor calculation provided taxpayers a one-time election for a methodology by which to include receipts from investment assets and activities and trading assets and activities in the numerator of the Pennsylvania apportionment factor. The election, once made, could not be changed in subsequent years unless the Department of Revenue granted permission to make such a change. The first method (Method 1) required the amount to be included in the numerator of the apportionment factor by multiplying the “… total amount of receipts from trading assets and activities under clause (A) by a fraction …” the numerator of which is the total amount of all other receipts attributable to Pennsylvania and the denominator of which is the total amount of all other receipts. 72 Pa. Stat. Ann. § 7701.4(3)(xiii)(B)(i). Alternatively, the second method (Method 2) dictates that the numerator be determined by multiplying the “… total amount of receipts under clause (A) by a fraction …” the numerator of which is the average value of the receipts-generating assets properly assigned to a regular place of business in the Commonwealth and the denominator is the average value of all such assets. 72 Pa. Stat. Ann. § 7701.4(3)(xiii)(B)(ii). The “… total amount of receipts under clause (A) …” included receipts from both investment assets and activities and trading assets and activities.

The italicized language from the foregoing paragraph created some ambiguity between the two methodologies. Under the first method, institutions with any degree of investment receipts that would be sourced to Pennsylvania under the new rules could exclude them from the apportionment factor, since the language only applies to trading assets and activities.

Pepper Points

  • Through the issuance of the Notice, the Department of Revenue has essentially eliminated an election that the legislature intended for the taxpayers. In addition the Department of Revenue has acted in advance of the conclusion of the study mandated by the lawmakers to take into account the impact of macro factors upon Act 52’s consequence upon the Commonwealth and the banking industry. During the legislative process, an understanding was reached between the stakeholders and lawmakers, that the goal was revenue neutrality. The mandated study requires the following factors to be reviewed:
  1. comparable tax burdens in other states
  2. the new capital rules imposed by the prudential regulators
  3. the Pennsylvania Supreme Court’s decision in Lebanon Valley Farmers Bank v. Commonwealth 83 A.3d 107 (Pennsylvania Supreme Court 2013), 2013 Pa Lexis 3248, and
  4. an appropriate methodology to allocate and apportion the tax base where the entire business of the taxpayer is not conducted in Pennsylvania.
  • Taxpayers with tax liabilities materially altered as a result of this interpretation by the Department of Revenue should consult with their tax advisors. Please note that banks are no longer required to first pay any tax assessments before petitioning for a reassessment. Alternatively, it may be advisable, for example, to comply with the terms of the Notice, but subsequently file an amended return asserting rights to use Method 1 in accordance with the language in the statute, taking the position that it is not the Department of Revenue’s role to rewrite the statute. The statute of limitations on refund claims is extended from two to three years. It should also be noted that the tax appeal process may now be positively implicated by the establishment of an independent Board of Finance and Review chaired by the state treasurer with two commissioners appointed by the governor with the advice and consent of the Senate.


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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