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Legislative Update

Week Ending May 5, 2006

• Week in Review
• Political News & Notes
• UC Meeting A Good Start
• Property Tax Relief Stalls in House
• Graham Package Bill Clears Senate Committee
• Committee Approves Bills Giving Counties Annual Report Extension
• PICPA’s S Corp Bill Clears Another Hurdle
• Fiscal Year-to-Date Collections Strong
• Local Government to use Online Reverse Auctions
• IRS Releases Draft Instructions for Schedules M-3
• Register for Eastern Pa Working Together Conference

Week in Review

Property tax relief came and went in the span of less than 48 hours this week. On Monday, the Conference Committee-with Gov. Rendell's support-voted unanimously for a compromise proposal. The Senate approved the report the following day 40 to 9. But, on Wednesday, after more than 6 hours behind closed doors, House Republicans announced that they were postponing a vote until sometime after the May 16 Primary Election... if at all.   

April's general fund revenue collections were $83-million more than had been forecasted. The $3.2-billion in April bring the year-to-date total to $21.6-billion-$588.4-million above the Administration's estimates. Revenue Sec. Greg Fajt also reported that Pennsylvania Lottery year-to-date sales are more than $400-million ahead of last year.

Gov. Rendell signed two bills reforming eminent domain into law on May 4. The US Supreme Court last year ruled to approved the right of New London, Connecticut to seize private property and hand it over to other persons for economic development. The Court said that states were free to ban the practice, which Pennsylvania now does.

Political News & Notes

Newest House Democratic Takes Office. On May 2, state Rep. Shawn Flaherty was sworn into office. Rep. Flaherty, an attorney, won a special election April 11 to fill the unexpired term of former Rep. Jeff Habay through Nov. 30. He earned his bachelor's degree from Carnegie Mellon University in 1982 and law degree from Duquesne University School of Law in 1985. The House is now at its full compliment of 203 members-109 Republicans and 94 Democrats. 

Santorum Closing on Casey. In the latest Keystone Poll survey, U.S. Sen. Rick Santorum is gaining on his opponent Democrat Bob Casey. In February, the Keystone Poll had Casey leading Santorum in the US Senate race by 15 points (51 to 36). But the new Keystone Poll has Casey ahead by only 6 points (47-41). According to the same Poll, Gov. Rendell has an expanded lead in his campaign for re-election over Republican Lynn Swann. Rendell checked in with the support of 49 percent of the survey respondents while Swann had dropped to 35 percent.

UC Meeting A Good Start

As we reported in last week's Legislative Update, the PICPA met with senior officials at the Department of Labor and Industry on May 3 to discuss the Department's recent pronouncement regarding unemployment compensation. The meeting was very positive, offering the chance for a good exchange of information.

The Department agrees with the PICPA that not all "remuneration" or distributions received by the members of a Limited Liability Company or Restricted Professional Company are subject to the UC tax. Members of an LLC or RPC that is taxed as a corporation for federal purposes who receive wages as compensation that are reported on W-2s in return for services to the corporation are specifically covered and subject to the UC tax.  

The source of the confusion is the Spring 2006 "UC Issues Update," in which the Department's Unemployment Compensation Tax Services Offices writes, "all remuneration received by the members of an LLC and RPC for services performed is considered covered wages under the reporting provisions of the PA UC Law." Since the PICPA first made an inquiry regarding this article, the newsletter no longer appears on the Department's Web site

The PICPA wishes to acknowledge and thank the Department for its quick response to our inquiry. We wish to also thank our 3 CPA legislators-Sen. Pat Browne, Rep. John Maher and Rep. Gordon Denlinger-for their assistance.   

Property Tax Relief Stalls in House

The legislature attempted once again this week to reach a compromise plan to reform property tax in Pennsylvania in the form of Special Session House Bill 39. Over the course of three days, the legislation was the source of much contention and held the attention of audiences across the state.

Monday - the Committee comes to agreement...
The Conference Committee delegated with the task of crafting a proposal incorporating the conflicting propositions offered by the four legislative caucuses, met Monday to present to the public and sign their final proposal. The committee report, which greatly resembled the original Senate offering, included provisions to:

• more than double the size of the Property Tax and Rent Rebate (PTRR) Program, increasing payments by $200 million and adding more than 400,000 new participants;
• provide property tax reductions in 2007 if local voters approve increases in school district earned income taxes (EIT) or authorize the school district to levy a personal income tax (PIT);
• make the back-end referendum spending controls mandatory for school districts, allow additional referenda to authorize further property tax reductions beginning in 2009 and prohibit the 111 school districts that opted-in to Act 72 of 2004 from levying the 0.1% earned income tax; and
• repeal Act 72.

The committee expressed their appreciation of the work put into creating the plan and their hope that - as the legislation represented the convergence of ideas from a bicameral, bipartisan committee - HB 39 would pass quickly through the General Assembly.

Tuesday - the Senate accepts the proposal...
As anticipated, it took the Senate less than an hour the next day to vote in favor of HB 39, 40 ayes to 9 nays. Commentary the following day varied from acclaim for the legislature for moving forward the effort to effect property tax reform, to claims that the proposal was not broad enough to truly benefit Pennsylvanians, to accusations that the adoption of the plan was an attempt to garner votes in the upcoming primary elections.

And, although some doubt remained as to whether the House would agree to the report, Gov. Ed Rendell emphasized that the bill had his approval, and promised that he would sign the proposal into law.

Wednesday - a surprise from the House...
Having passed the Senate, the bill moved swiftly to the House of Representatives, where it was expected that members would cast their votes before the end of the day. Late that evening, however, HB 39 had yet to be addressed, and the session broke for a meeting of the Republican Caucus. In an unprecedented move, House Majority Leader Sam Smith announced that the members would not be returning to the floor to begin debate over property tax relief. Instead, the caucus would be assembling for a news conference to make an announcement to the press.

With a score of House Republican Caucus members standing on the steps of the Capitol rotunda behind him, Rep. Smith pronounced that he was postponing a vote on HB 39. He explained that, after extensive discussions within the caucus throughout the day, he did not believe that the bill had the requisite 102 votes to pass.

Rep. Smith clarified that he was not wholly rejecting the conference committee report, and suggested that the House would take up and build upon the bill when it returns in June, following the May 16 primary election. "...We can do more, we can do better," he stately plainly, and the press conference concluded with applause from the surrounding caucus members.

The response from the House Democrats and governor was a mixture of outrage and frustration. House Minority Whip Mike Veon condemned the act, stating that it was ridiculous to not pass this "first step" in property tax reform and then continue to work toward expanding it to a broader base of Pennsylvanians. Gov. Rendell insisted that, according to his sources with in the House, there was adequate support for the bill.

Graham Package Bill Clears Senate Committee

On May 3, the Senate Finance Committee reported out a bill that will address last year's Commonwealth Court decision to subject all prewritten or "canned" computer software to sales and use tax.

Senate Bill 1134 will amend the Tax Reform Code by codifying definitions related to computer software and its delivery, and by creating an exclusion from tax for prewritten software and digital products that are delivered electronically. The bill would also exclude from tax the renewal of licenses to use computer software.

Graham Packaging Company, L.P. v. Commonwealth overturned a long-standing Department of Revenue policy that held canned computer software transferred to a purchaser by electronic means not to be subject to sales and use tax. 

The Committee also approved Senate Bill 1113, sponsored by Sen. Pat Browne, CPA. The bill would amend the Tax Reform Code by making applicable the requirements of Internal Revenue Code Sec. 1033 with respect to involuntary conversions of property. 

Both bills now go to the Senate Appropriations Committee for a fiscal note. 

Committee Approves Bills Giving Counties Annual Report Extension

The Senate Local Government Committee met Wednesday to consider, among other bills, House Bills 2185 and 2186, both of which amend The County Code to extend the date by which a county must submit its annual financial report to the Department of Community and Economic Development (DCED).

The County Code currently requires a county controller to complete the audit, settlement and adjustment of a county officer's accounts at the end of the fiscal year. The code further requires counties to submit to the DCED its annual report of all receipts and expenditures of the preceding year and a full statement of the financial condition of the county by April 1.

HB 2185 extends this date from April 1 to July 1 for counties of the first, third, fourth, fifth, sixth, seventh and eighth classes. The bill also changes the date that counties must submit to the court of common pleas an annual report of all receipts and expenditures of the preceding year, and a full statement of the financial condition of the county, from the month of May to the month of July. HB 2186 simply offers the same extensions to counties of the second and second A classes.

Both bills were unanimously reported out of committee, and will now be voted on in the Senate. As both HB 2185 and 2186 were unanimously passed in the House, it is anticipated that they will receive little opposition.

PICPA's S Corp Bill Clears Another Hurdle

Senate Bill 1139, legislation introduced by Sen. Pat Browne, CPA, at the request of the PICPA, cleared another hurdle this week as it was unanimously approved by the Senate Appropriations Committee. The bill has now been placed on the Senate Calendar for a vote by the full chamber.

Under Senate Bill 1139, a corporation that elects subchapter S corporate tax status for federal tax purposes would automatically be treated as an S corporation for PA tax purposes unless 100 percent of the shareholders elect not to be taxes as a PA S corporation. A qualified subchapter S subsidiary owned by a PA S corporation shall be treated as a PA S corporation whether or not an election has been made with respect to the subsidiary. These changes are for the most part accomplished by modifying the definition of "Pennsylvania S Corporation" and by adding the definition of "Small Corporation".

The maximum number of eligible subchapter S corporation shareholders would also be increased from 75 to 100 under this legislation by conforming to the applicable provisions of the federal American Jobs Creation Act of 2004.

Under existing law, the Tax Reform Code requires a separate S corporation election for Pennsylvania tax purposes. Corporations that have made an S corporation election for federal purposes are often penalized, failing to make the necessary election for Pennsylvania tax purposes, and are prohibited from making such an election retroactively under state law.

The bill, if enacted, shall take effect immediately and shall be applicable to taxable years beginning after Dec. 31, 2005.

Fiscal Year-to-date Collections Strong 

Secretary of Revenue Greg Fajt on May 1 reported that the state collected $3.2 billion in General Fund revenue in April, $83 million, or 2.7 percent, more than anticipated. Fiscal year-to-date General Fund collections total $21.6 billion, which is $588.4 million, or 2.8 percent, above estimate.

Fajt said Gov. Rendell's original 2006-07-budget proposal in February 2006 anticipated that 2005-06 revenues would exceed the July 2005 official estimate by $364 million. That money has already been allocated in the Governor's proposed budget. Higher than expected revenue collections in recent months have, therefore, generated $224 million in new revenue that may be available for appropriation during the upcoming 2006-07 budget negotiations.

Sales Tax receipts totaled $723.3 million for April, which was $21.9 million above estimate. Sales Tax collections year-to-date total $6.9 billion, which is $40.3 million above estimate, or 0.6 percent more than anticipated.

Personal Income Tax (PIT) revenue in April was $1.5 billion, which was $61.8 million above estimate. This brings year-to-date PIT collections to $7.9 billion, which is $201.1 million or 2.6 percent above estimate.

April Corporation Tax revenue of $644.7 million was $13.7 million above estimate. Year-to-date Corporation Tax collections total $4.5 billion, which is $300.2 million or 7.2 percent above estimate.

Other General Fund revenue figures for the month included $53 million in Inheritance Tax, which was $4.6 million below estimate, bringing the year-to-date total to $606.6 million, which is $6.4 million above estimate.

Realty Transfer Tax was $36.9 million for April, bringing the total to $453.6 million for the year, which is $49.3 million more than anticipated.

Other General Fund revenue including the Cigarette, Malt Beverage and Liquor Tax totaled $215.4 million for the month, $11 million below estimate, bringing the year-to-date total to $1.2 billion, which is $8.9 million below estimate.

In addition to the General Fund collections, the Motor License Fund received $206.9 million for the month, $5.9 million above estimate. Fiscal year-to-date collections for the fund total $1.9 billion, which is $21.5 million or 1.1 percent above estimate.

Fajt also reported that the Pennsylvania Lottery continues to set new sales records. Fiscal year-to-date Lottery sales total $2.534 billion. When compared to the same period last year, year-to-date sales are up $400.4 million or 18.8 percent.

Local Governments to Use Online Reverse Auctions

The state House on May 1 passed a bill that could help local governments lower their costs by using an online bidding process known as reverse auctioning to secure bids for certain government supplies and services.

Under House Bill 2441, local governments and school districts would be allowed to use a competitive electronic auction bidding process, or online reverse auction, to secure bids for supplies and services. Reverse auctions allow bidders to view the lowest current bid. Bidders can then submit additional proposals with lower cost estimates in an attempt to acquire the government contract.

Local governments must establish that they possess the technical capability to maintain bid confidentiality throughout the electronic bidding process. The bill specifies that the online reverse auction process cannot be used to acquire bids for construction work or professional design services. Those bids would be processed through the current bidding process.

The bill will now be sent to the Senate for consideration.

IRS Releases Draft Instructions for Schedules M-3

The IRS has released updated draft instructions for Schedules M-3 for the 2006 tax year and an updated draft of the new Form 8916 that will be filed by certain insurance-related corporations to reconcile taxable income. The draft instructions, dated April 25, 2006, are for Schedules M-3 that are filed with Forms 1120, 1120-L, 1120-PC, 1120S and 1065, and Form 8916.

Register for Eastern Pa Working Together Conference

Registration forms are now available for the eastern Pennsylvania "Working Together Conference" scheduled for Wednesday, May 24, 2006, at Philadelphia University. Registrations must be mailed by May 19, 2006.

The Working Together Conference is a joint effort of Pennsylvania's practitioner organizations, the IRS and the Pennsylvania Department of Revenue to provide a forum for discussion of topical issues in tax administration. Representatives from the IRS Taxpayer Advocate Office will be available throughout the day for consultation and to assist in case resolution.