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Legislative Update

Week Ending Oct. 13, 2006

• EMS, LLP/LLC Fee Bills on Tap
• Revenue Issues Clarification on Sub S Election
• Collections Provide Modest Surplus
• NJ Court Deals Blow to Business
• FASB Proposes New Guidance for Non-Profits

EMS, LLP/LLC Fee Bills on Tap 

In what could be the final voting session before the Nov. 7 elections, lawmakers return to Harrisburg for three days starting Monday, Oct. 16. The House is tentatively scheduled to be in voting session the week of Oct. 23, but that could be cancelled as members would rather be back in their districts campaigning.

One issue the General Assembly could take action on before the election recess is Senate Bill 157, a bill amending the Emergency and Municipal Services Tax Act of 2004. The bill is currently pending in the Senate. An omnibus amendment has been drafted by the House, the Senate, and the Department of Community and Economic Development to address a host of administrative and implementation issues that arose after the law was enacted. (To read PICPA’s testimony on fixing the EMS, click here.)

On Tuesday, Oct. 17, the House Commerce Committee is tentatively scheduled to consider legislation that would eliminate the annual registration fee for limited liability partnerships (LLPs) and limited liability companies (LLCs). House Bill 2251 currently has 30 co-sponsors.

The 1994 legislation authorizing the creation of LLCs and LLPs included language to offset the fact that these entities would not pay the capital stock tax, which had a minimum fee at the time of $300. Today, the annual registration fee is nearly $400 per member. The minimum payment for the capital stock tax was eliminated in 2000.

Revenue Issues Clarification on Sub S Election 

The Department of Revenue has clarified information relative to electing subchapter S corporations status. Under Act 67 of 2006, all federal subchapter S corporations are PA S corporations. Act 67 also includes a provision for federal subchapter S corporations to make an election to NOT be taxed as a PA S corporation. To make this election, form REV-976 (Election Not to be Taxes as a PA S Corporation) is required.

Any federal Subchapter S corporation that does not make this election, and which is a Subchapter S corporation in another state that has a PA resident shareholder, will be taxed as a PA S corporation and is required to file PA Corporate Tax Report and PA 20S/PA 65 (PA S Corporation/Partnership Information Return.)

They are not required to file the RCT-101, as previously reported in Tax Update #121. In addition, each shareholder will be subject to PA Personal Income Tax on each shareholder's pro rata share of the S corporation income, whether distributed or not, according to Revenue.

Collections Provide Modest Surplus

With receipts from the Sales Tax, Personal Income Tax, and the Corporate Taxes all exceeding monthly estimates, General Fund revenue collections in Sept. produced a surplus of $76.5 million, or 3.2 percent higher than anticipated. The revenue surplus through the first quarter of fiscal year 2006-07 now stands at $55.7 million, roughly 1 percent above estimate.

Year to date General Fund collections of $5.784 billion are $255 million, or 4.6 percent greater than last year's figures for the same time period. Additionally, the first three months of last year had produced only a $30.1 million revenue surplus. The following information has been prepared by the Department of Revenue to provide further details on revenue collections in September:

Sales Tax receipts totaled $706.8 million for September, which was $12 million above estimate. Sales Tax collections year-to-date total $2.2 billion, which met the estimate.

Personal Income Tax (PIT) revenue in September was $939.8 million, which was $35 million above estimate. This brings year-to-date PIT collections to $2.2 billion, which is $28.9 million, or 1.3 percent, above estimate.

September Corporation Tax revenue of $573.2 million was $28.2 million above estimate. Year-to-date Corporate Tax collections total $725.4 million, which is $49.4 million, or 7.3 percent, above estimate.

Other General Fund revenue figures for the month included $59.6 million in Inheritance Tax, which was $3 million below estimate. This brings the year-to-date total to $181.1 million, which is $14.6 million below estimate.

Realty Transfer Tax was $52.3 million for September, bringing the total to $164.3 million for the year, which is $3.6 million less than anticipated.

Other General Fund revenue including the Cigarette, Malt Beverage and Liquor Tax totaled $124.6 million for the month, or $5.3 million above estimate, and brings the year-to-date total to $319.5 million, which is $4.9 million below estimate.

NJ Court Deals Business a Blow

The New Jersey Supreme Court has held that the state may constitutionally subject a foreign corporation to the Corporation Business Tax notwithstanding the taxpayer’s lack of physical presence in New Jersey.

The issue before the Court in Lanco, Inc .v Director, Division of Taxation was whether New Jersey could subject a foreign corporation to the Corporation Business Tax when the corporation lacks physical presence in the state but derives income through a licensing agreement with a company conducting retail operations there.

In citing the U.S. Supreme Court’s decision in Quill Corp. v. North Dakota, the New Jersey Court held that a “better interpretation of Quill is the one adopted by those states that limit the Supreme Court’s holding to sales and use taxes. That interpretation reflects the language of Quill. In Quill, the Court did not attempt to equate the substantial-nexus requirement with a universal physical-presence requirement… We do not believe that the Supreme Court intended to create a universal physical presence requirement for state taxation under the Commerce Clause.”

FASB Proposes New Guidance for Non-Profits

In an effort to meet the reporting needs of the nonprofit community, the Financial Accounting Standards Board (FASB) issued two proposals Oct. 9 to improve the accounting and disclosures for mergers and acquisitions (M&A) by nonprofit organizations.

Specifically, the proposals would eliminate the pooling-of-interests method of accounting by nonprofits, in which assets acquired and liabilities assumed are recorded at "carryover" amounts recorded on the books of acquired organizations. The proposal also includes accounting guidance for those intangible assets after a merger or acquisition.

According to FASB estimates, the total asset base of the U.S. nonprofit sector would make it the 6th largest economy in the world. Similar studies show the number of nonprofits reporting financial results in the U.S. alone grew by 68 percent between 1993 and 2003, representing approximately 9 percent of the gross domestic product (GDP).