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Legislative Update

Week Ending March 31, 2006

• Week in Review
• Political News & Notes
• Property Tax Relief
• S Corp Election Bill Clears Committee
• Democratic Policy Committee Discusses Business Tax Cuts
• PA 41 Updates Available on Web Site
• Revenue Adopts Canteen Statement of Policy
• PICPA Briefs Congresswoman on AMT
• Military Personnel Exempt from CPE Requirements
• IRS Establishes E-mail Box to Report Phony E-mails

• Be A Voice for Your Profession

Week in Review

The committee assigned with the task of finding an equitable property tax relief plan that can garner 102 votes in the House, 26 in the Senate, and the signature of the governor official met for the first time this week. While no decisions were made, the group plans to meet again next week.

The state Revenue Department released March revenue figures on Friday. Fiscal year-to-date revenue collections remain above estimate. General Fund revenues have exceeded initial estimates by $505.4 million through the first nine months of the current fiscal year.

Political News & Notes

Former State Rep. Passes. Longtime state Representative Fred Trello, a Democrat from Coraopolis, passed away recently. He served in the state House for 28 years before he retired in 2002. Before being elected in 1974, Trello served as a member of the Coraopolis Borough Council.

Two More Early Retirements. State Rep. Linda Bebko-Jones, an Erie Democrat, and Rep. Michael Diven, a Democrat-turned-Republican from around Pittsburgh, withdrew Tuesday as candidates for re-election. Bebko-Jones was first elected in 1992. Diven may run as a write-in candidate. His decision left attorney Chelsea Wagner, a Democrat, unopposed in the House race. Twenty-nine members of the House and three senators are not seeking reelection this year.

It's Early But Swann is Up in Poll. A new IssuesPA/Pew poll shows one in three Pennsylvanians are undecided on who they'll vote for in the 2006 gubernatorial campaign. Among those polled, 29 percent were likely to vote for incumbent Gov. Ed Rendell and 35 percent were likely to vote for Republican nominee Lynn Swann. That leaves 34 percent of voters categorized as swing voters who are open to voting for either candidate.

Good News for Rep. State Rep. Matt Good will be on the May primary ballot after all as a result of Commonwealth Court Judge Dan Pelligrini's ruling in the Erie legislator's favor. Good's opponent, David Dows, had filed challenges to over 169 signatures on Good's nominating petitions.

Property Tax Relief

On Monday, March 27, a committee of legislators - three from each chamber - met for the first time to try and work out a compromise in the heated debate over property tax relief. Chairman of the conference committee Rep. Lynn Herman convened the meeting and was joined by fellow conferees Rep. David Steil, Sen. David Brightbill, Sen. Robert Mellow, and Sen. Ted Erickson. Rep. Mike Veon, the sixth member of the conference committee, did not attend but left his vote with Sen. Mellow - a clear indication of where he stands on the issue.

In order for any property tax relief plan to be approved by the committee, two members of each chamber must be in agreement.

Although such a consensus was not reached on Monday, the committee will reconvene April 3 to consider Special Session House Bill 39 - legislation that, once amended and passed in the Senate, was turned down by the House earlier this month.

In direct response to the Senate-amended House Bill 39, House Finance Committee Chairman Rep. Dennis Leh and Commonwealth Caucus Chairman Rep. Sam Rohrer announced that they would be reintroducing the Commonwealth Caucus Plan for Pennsylvania's Future - amended to address many of the key issues brought up in the fall special session.

Among these would be exempting utilities, fresh meats and vegetables, and certain business to business transactions from the proposed 5 percent sales tax. The business to business exemptions would include legal services, engineering services, research services, computer services, and accounting services. PICPA presented testimony before the Special Session on Legislation Committee to express our concern regarding the inclusion of accounting services in the expansion of the sales tax base.

Although the Governor has not demonstrated consistent support for either chamber's proposal, he has urged the Legislature to get a property tax relief bill to his desk as soon as possible.

S Corp Election Bill Clears Committee

At its meeting this week, the Senate Finance Committee considered legislation sponsored by Sen. Pat Browne, CPA, and supported by the PICPA, which would favorably amend the law governing subchapter S corporations in Pennsylvania.

Under this bill, Senate Bill 1139, a corporation that elects subchapter S corporate status for federal tax purposes automatically would be treated as an S corporation on the state level, unless it elects not to be. Currently, Pennsylvania is one of only a few states to not have this provision, leading to many corporations inadvertently failing to elect subchapter S corporate status at the state level.

This initial election would require the consent of 100 percent of the shareholders and cannot be revoked for 5 years, unless the corporation becomes a qualified subchapter S subsidiary.

In addition, Senate Bill 1139 amends the state Tax Reform Code by adopting the Internal Revenue Code of 1986, as amended in January 1, 2005, aligning Pennsylvania with the federal American Jobs Creation Act of 2004 by increasing the maximum number of eligible subchapter S corporation shareholders from 75 to 100.

PICPA succeeded in its efforts to lobby on behalf of Senate Bill 1139. The legislation was passed by a vote of 9 - 2 as amended by the Finance Committee, where, upon first consideration, the Senate re-referred it to the Senate Appropriations Committee. 

Democratic Policy Committee Discusses Business Tax Cuts

On Wednesday, March 29, the House Democratic Policy Committee (HDPC) held a public hearing in Lafayette Hill to explore business tax cuts in Pennsylvania. The hearing highlighted testimony from Eileen McNulty, executive deputy secretary in the Department of Revenue.

The purpose of the hearing was to allow the Policy Committee an opportunity to hear the gamut of business tax reduction proposals that have been recommended in recent years - particularly in the face of looming budget negotiations. Additional legislation will be introduced as a result of this hearing.

McNulty began by referencing a recent Tax Foundation study, in which Pennsylvania was ranked 16^th nationally in terms of business tax climates. She suggested the cause for this was rooted in the state's low PIT rate, which benefits not only individuals but "pass through" companies like S Corporations and LLCs. McNulty then lauded the Governor's business tax reform plan, citing it as proof positive of his continued efforts on behalf of the business community. This plan includes reducing the CNI Tax rate from 9.99 percent to 7.90 percent, removing the cap on net operating loss (NOL) deductions and implementing a 100 percent sales factor for CNI Tax apportionment. These tax cuts would be paid for by implementing a combined reporting system for corporate taxes.

PA 41 Updates Available on Web Site  

As we first reported in the March 17 Legislative Update, the Department of Revenue has updated its Web site with the PA-41 Detailed Instructions for 2005.

The updated instructions begin on the bottom of Page 25 and continue through the top of page 26, and include revisions for the PA Estate or Trust Schedule RK-1 and PA NRK-1. The instructions now incorporate when to include the Estate or Trust Schedule RK-1 and NRK-1 with the PA-41 return and when to provide the Estate or Trust Schedule RK-1 and NRK-1 to each beneficiary dependent upon the residency status of the beneficiary(ies). 

Revenue Adopts Canteen Statement of Policy

The Department of Revenue adopted a statement of policy to clarify the scope and application of Canteen Corp. v. Commonwealth, 818 A.2d 594 (Pa. Cmwlth. 2003) to the Corporate Net Income Tax. The Canteen decision will not be applied to taxable years beginning after December 31, 1998, and taxable income generated as a result of a section 338 election will be treated as business income.

Questions regarding this statement of policy should be directed to the Department of Revenue, Office of Chief Counsel, Dept. 281061, Harrisburg, PA 17128-1061.

PICPA Briefs Congresswoman on AMT

Congresswoman Melissa Hart, a member of the tax writing U.S. House and Ways Committee, sat down this week with members of PICPA's Pittsburgh Chapter and the Federal Tax Committee to discuss the Alternative Minimum Tax.

The group discussed real life examples of how the tax is starting to affect middle class taxpayers and its growing impact in the future on unsuspecting taxpayers. Recommendations to fix the problem were also discussed. "A Creeping Disaster", an article written by Federal Tax Committee members Terence K. Heaney and Kenneth J. Chin, was provided to Congresswoman Hart.

Military Personnel Exempt from CPE Requirements

Legislation is making its way through the General Assembly that would allow for the temporary suspension of continuing education requirements in the event that an individual is deployed for military duty.

House Bill 2296, which is currently pending in the Senate Appropriations Committee, would provide soldiers a one year moratorium upon release from active duty to apply and pay any applicable license renewal fees, thus ensuring that licensed professionals are able to retain their status while in active service. The bill would apply to those licensed by the Department of Labor and Industry, Department of Education, Department of State, Insurance Department and Department of Banking.

House Bill 2296 has the added concession of providing for a 50% tuition credit at all state-owned colleges or universities or approved trade schools for children and unmarried surviving spouses of deceased soldiers

The bill passed the House Dec. 14, 2005.

IRS Establishes E-mail Box to Report Phony E-mails

The Internal Revenue Service this week announced that it has established an electronic mailbox for taxpayers to send information about suspicious e-mails they receive which claim to come from the IRS. Taxpayers should send the information to: phishing@irs.gov.

The IRS's new mail box allows taxpayers to send copies of possibly fraudulent e-mails involving misuse of the IRS name and logo to the IRS for investigation. Instructions on how to properly submit one of these communications to the IRS may be found on their Web site. Following these instructions helps ensure that the bogus e-mails relayed by taxpayers retain critical elements found in the original e-mail. The IRS can use the information, URLs and links in the bogus e-mails to trace the hosting Web sites and alert authorities to help shut down these fraudulent sites.

However, due to the volume the new mailbox is expected to receive, the IRS will not be able to acknowledge receipt or reply to taxpayers who submit their bogus e-mails. The phishing@irs.gov mailbox is only for suspicious e-mails and not for general taxpayer contact or inquiries.

Be A Voice for Your Profession

The PICPA's 6^th Annual Day on the Hill legislative program is set for Tuesday, June 6, 2006 in Harrisburg. The theme for the day is "A View from the Inside." Join your fellow CPAs from across the state as they learn more about the legislative process and current issues of interest to the profession.

Leaders of the four caucuses have been invited as featured presenters to discuss their caucus's legislative initiatives.