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Legislative Update

Week Ending February 24, 2006

• Week in Review
• Political News & Notes
• New Tax Collection Efforts Coming
• CPA Bill Subject of Hearing
• Rendell Urges On Property Tax Conferees
• Calif. Amends Practice Privilege Requirements
• Proof of Credit Requirement Changed
• Governor to Veto Voter Bill
• IRS Streamlines Business Taxpayers Time Extension
• Governor Rendell Signs Bills

Week in Review

The House Appropriations Committee kicked off its first full slate of budget hearings this week. House members heard about the Rendell administration's plans to go after businesses and individuals who use the Internet and don't pay the state sales tax. The Department of Revenue is ramping up efforts to collect the state's 6% sales and use tax from online purchases from tax-free states, and on large Internet cigarette purchases.

Calling the bill an unnecessary burden that will result in some Pennsylvania residents losing their right to vote, Gov. Rendell this week vetoed House Bill 1318. The Governor said he is concerned that the legislation would disenfranchise people living in nursing homes, a displaced family or the state's poorest, who may not have any government-issued identification.

Political News & Notes

Change of Heart. After announcing his retirement last week, Berks County state Rep. Dennis Leh has changed his mind and now says he is running for re-election this year. Leh, first elected in 1986, is Chairman of the State House Finance Committee.

April 11 Special Election Candidates Selected. Republican Mike Dolan will face Democrat Shawn Flaherty in an April 11 Special Election for the Allegheny County state House seat once held by Jeff Habay, who resigned Feb. 8. The winner will hold the House seat through the end of this year. The two will face off again in the May 16 Primary for a full two-year term beginning in January 2007.

New Tax Collection Efforts Coming

Appearing before the House Appropriations Committee this week, Secretary Greg Fajt outlined a series of new tax compliance initiatives that are expected to increase fiscal year 2006-07 revenue collections by more than $40 million. Gov. Rendell proposed a $25.4 billion budget on Feb. 8, which is under review by both the House and Senate.

Sec. Fajt outlined the Department's increased efforts in the areas of use tax compliance, cigarette tax compliance, "voluntary" disclosure of abusive tax shelters, and monitoring Department of State professional licensing renewals for applicants who have delinquent state tax accounts. The secretary also cited reports that estimate about $228 million go uncollected on an annual basis.

The $4.6 million the Department is requesting for revenue enforcement will be used to hire 59 new staff and for office costs, according to Sec. Fajt.

Sec. Fajt noted that there have been "lower-level" departmental discussions on statewide tax collection. Fajt said the Department could collect a PIT increase on a statewide level, but he does not believe seniors will support an increase of that tax. He offered that the Department could collect the EIT but it would need additional staff to do so. He added that there would have to be one set rate across the state with no changes during the year.

The average time it now takes the Department to settle a subchapter S tax return is down to 11 months from a high of 16 months, according to the secretary. The Department is working with the Attorney General to complete the difficult returns first. Sec. Fajt also noted that the Department is working with the PICPA on legislation that would streamline the state election process with the federal.

Speaking to the notion that 73% of businesses are not paying the CNI tax, Fajt stated that Pennsylvania's business tax system is broken and closing the "Delaware tax loophole" would level the playing field. Under Gov. Rendell's business tax reform proposals, 80% of businesses will pay the same or less taxes, while 20% will pay more, said Fajt.

According to the IRS, 45% of businesses in Pennsylvania operate at a net loss, acknowledged Fajt.

Sec. Fajt appears before the Senate Appropriations Committee on Feb. 28.

CPA Bill Subject of Hearing

The House Professional Licensure Committee has scheduled a public hearing Feb. 28 on Senate Bill 251, legislation amending the state CPA Law. The bill, sponsored by the late Sen. Robert Thompson, addresses several issues, most importantly the areas of improved enforcement of the CPA Law and CPA education requirements to meet the substantial equivalency mandate.

Beginning in 2010, persons seeking a CPA certificate or seeking to take the CPA examination would be required to have at least 150 college credits. Senate Bill 251 also provides that, beginning 2010, only one year of experience is necessary. This change aligns the experience and education requirements beginning in 2010. Current law provides that candidates for the CPA certification must have one or two years experience depending on the number of college credits completed.

Senate Bill 251 increases the ownership percentage for an accounting practice for non-licensed persons to 49%. This provision is consistent with the Uniform Accountancy Act. Non-licensed persons may own up to a 33% interest in an accounting firm under current law.

Rendell Urges On Property Tax Conferees

Pointing out how close Pennsylvania seniors and others are to receiving property tax relief, Gov. Rendell this week urged the House and Senate leadership to ensure passage of a final property tax relief package on the first day that each chamber returns to Harrisburg in March.

Legislation passed by the Senate earlier this month ensures that homeowners in every school district can receive their share of the $1 billion in funding for tax relief from gaming, and raises the income cap for Pennsylvania's successful Property Tax and Rent Rebate program from $15,000 under current law to $25,000 - effective this year. Some members of the House have proposed raising the cap even higher.

Based on a new income cap of $30,000 a year, once the $1 billion from gaming is added, school property taxes can be completely eliminated for 32% of senior citizens statewide who earn up to that amount, according to the Governor.

The total number of senior citizens receiving property tax rebates under the state Property Tax and Rent Rebate program would increase from 178,000 to 633,000 across the Commonwealth, and nearly 200,000 of these senior citizen homeowners would pay no school property taxes at all once gaming revenue is realized.

In 27 of Pennsylvania's 67 counties, more than 40% of the eligible seniors will pay no property taxes when the gaming and the expanded property tax rebate grants are combined. In 48 counties - the overwhelming majority of counties - property tax bills could be eliminated for 30% or more of seniors who participate in the Property Tax and Rent Rebate program.

Calif. Amends Practice Privilege Requirements

Following intense advocacy from numerous state CPA societies, including the PICPA, the California Board of Accountancy (CBA) has agreed to ease recent cumbersome practice privilege requirements in California.

At a meeting this week, the CBA, in recognition of the unintended consequences of its practice privilege implementation, took several actions that are designed to provide relief to out-of-state CPAs, who have experienced difficulty complying with California's new law.

While the practice privilege program is still in place, amendments will be made to urgency legislation that is already in progress to make temporary--through Jan. 1, 2011--changes to California law that will allow out-of-state CPAs to provide tax services to California clients without a practice privilege if the CPA does not: solicit California clients, physically enter California and/or imply that they are registered with or licensed by the CBA.

Unregistered individuals and firms that are providing services will be subject to the CBA's authority.

We will provide additional information as events continue to unfold. The California Board of Accountancy is to be congratulated for responding quickly to resolve this urgent issue.

Proof of Credit Requirement Changed

Effective immediately, the Department of Revenue no longer requires a taxpayer to file with a Pennsylvania tax return a ''signed'' copy of a tax return with other states to claim a credit for taxes paid to another state.

The signature requirement is a major inconvenience to taxpayers and tax practitioners, PICPA wrote to the Department last October. The PICPA, however, urged the Department to take additional steps to eliminate the need to attach a return altogether. For example, with e-filed returns it appears that a paper copy of the other state return will still be required, thereby negating the incentive for e-filing state returns. According to PICPA's research, only Pennsylvania and Arkansas require taxpayers to submit a copy of the other state's return when an e-filed return claims a credit for taxes paid to other states.

The PICPA will continue to work with the Department on this and other administrative concerns.

Governor Vetoes Voter Bill

Calling the bill an unnecessary burden that will result in some Pennsylvania residents losing their right to vote, Gov. Rendell this week vetoed House Bill 1318 on the grounds that the bill violates the Fifth Amendment of the U.S. Constitution.

The Governor said he is concerned that the legislation will disenfranchise people living in nursing homes, a displaced family or the state's poorest, who may not have any government-issued identification.

Under House Bill 1318, every voter would be required to show some form of identification at every election such as a valid driver's license; a US passport; a student, employee or government ID; a county voter registration card; a firearm permit; a current utility bill or current pay statement; or a paycheck or government check. For those unable to obtain a photo identification, the Pa. Department of Transportation would be required to issue non-driver identification free of charge.

IRS Streamlines Business Taxpayers Time Extension

All business taxpayers who previously filed extension Forms 8800, 8736, 7004 and 2758 will now only need to file the revised Form 7004, "Application for Automatic 6-Month Extension of Time to File Certain Business Income Tax, Information, and Other Returns," to request an automatic extension of time to file. The revised Form 7004 grants taxpayers an automatic six-month extension without the need to file intervening forms.

For the 2005 filing season, business taxpayers must file Form 7004 by the due date of the return in order to receive an automatic six-month extension of time to file. The extension period is calculated from the due date of the return.

Governor Rendell Signs Bills

The following bills were signed into law this week by Gov. Rendell.

House Bill 459 permits a municipality to negotiate a claim and permits an agreement to extinguish all existing liens against the property in exchange for full or partial satisfaction of its claims upon future sale of the property by the municipality.

This bill is effective in 60 days.

House Bill 599 renews the Volunteer Fire Company and the Volunteer Ambulance Service Grant Program. The bill, which extends the program for another year, becomes effective immediately.

Senate Bill 509 gives significant priority in estate asset distribution to reimbursement of services provided under medical assistance to the deceased within six months of the deceased's death. It also slightly raises the priority that state claims and claims of political subdivisions will have in a decedent's asset distribution.

The bill becomes effective immediately and will apply prospectively only.

Senate Bill 640 permits a municipality to negotiate a claim, and permits an agreement to extinguish all existing liens against the property in exchange for full or partial satisfaction of its claims upon future sale of the property by the municipality. It provides that an owner who donates property under this section shall not be personally liable for the amount of claims for taxes exempted or extinguished as a result of the donation.

The bill becomes effective in 60 days.