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Legislative Update

Week Ending June 15, 2007

• Tax Reform Code Bill Clears First Major Hurdle in House
• Browne’s EMS Tax Reform Headed to Governor
• Court Rules County Assessment System Unconstitutional
• House Passes Bill Extending County Auditing Deadline
• Panel Endorses Lifting Tax on “Goodwill” Tax Credits for REAP
• Volunteer Fire and Ambulance Grants Extender Bill Clears Senate
• Bill Would Require VoIP providers to Forward 911 Fees to State
• Alternative Health Care Reforms Proposed
• Reform Panel Recommends Cost-Cutting Measure for Legislature
• New Insurance Commissioner, Banking Secretary Nominated
• Treasury Grants Request for Transitional Relief

Tax Reform Code Bill Clears First Major Hurdle in House

House Democrats this week gave Gov. Ed Rendell his most significant legislative victory of this budget season when a state House committee approved a major corporate tax reform proposal.  

After nearly three hours of deliberations, the House Finance Committee on Wednesday reported Chairman Rep. David Levdansky's House Bill 1186, a bill amending the state Tax Reform Code, largely along party lines 15-14. The legislation follows the recommendations made by the Governor's Business Tax Reform Commission in 2004 by: 

• reducing the Corporate Net Income (CNI) tax rate from 9.99 percent to 7.99 percent;
• eliminating the cap on Net Operation Losses;
• implement a single sales factor for CNI tax apportionment; and
• requiring mandatory combined reporting.

In a letter to Chairman Levdansky prior to the committee vote, PICPA expressed concern with the bill’s unitary taxation reporting provisions. Pennsylvania is currently a separate company reporting state. PICPA noted that while unitary reporting is a valid apportionment methodology—20 of 46 states now use some form of combined reporting for state corporate tax purposes—how the legislation defines a “unitary business” is critical to its ultimate success.

Under a unitary, or combined, reporting system, a taxpayer calculates its state taxable income based on its involvement in a unitary business, most commonly defined as two or more related companies whose activities are such that they are deemed to be operating as a single business entity. In theory, the method is designed to ensure that the apportionment result is not affected by the companies’ corporate structure.

Other concerns expressed in PICPA’s letter centered on the need for additional resources for the Department of Revenue. As PICPA pointed out to lawmakers, the Department’s computer system is programmed to accommodate a separate company reporting system. “A significant financial investment is necessary to upgrade its internal system so that the cost of collection and compliance by businesses will be kept to a minimum,” wrote PICPA.

A series of amendments were filed—including attempts to strip the legislation of the combined reporting language—but only three of these were adopted by the committee. The vote was largely along party lines, with the majority of Republican amendments rejected by a single vote.  

The first amendment, adopted 21-8, delays applicability of combined reporting for certain electric light companies until after their transition bonds expire. 

A second amendment establishes two sales tax holiday periods for certain "Energy Star" appliances. The amendment was adopted by a vote of 19-10.

Lastly, a technical amendment relating to the CNI Tax was adopted unanimously.

The Republican members failed by a vote of 16 to 13 in their attempt to table the bill until further testimony from the public—and, more specifically, from the business community—could be heard by the committee.

HB 1186 has been referred to the House Rules Committee.

Browne's EMS Tax Reform Headed to Governor

On Tuesday, June 12, the Senate concurred with House amendments to Senate Bill 218 —a measure introduced by PICPA member Sen. Pat Browne to bring about reforms to the 2004 Emergency and Municipal Services Tax Act—and sent the legislation to the Governor for his signature.

Senate Bill 218 will end the lump-sum maximum payment of $52 and set specific restrictions on how taxing entities may use revenues raised by the levy. It also requires that the tax be withheld on a payroll-period basis with a maximum deduction of $1 per week. Employers will be required to send collections on a quarterly basis. Those earning $12,000 or less per year are exempted from paying the tax.

SB 218 would rename the tax as the “Local Services Tax” and requires that a minimum of 25 percent of the total revenue collected must go to support emergency services including police, fire and emergency medical services operations. The bill permits the remaining revenues to be used for the following specific purposes:

• Road construction and maintenance;
• Property tax reduction; and/or
• Property tax relief through the use of homestead/farmstead exemption.

Gov. Rendell has until June 23 to take action on the bill.

Court Rules County Assessment System Unconstitutional

The Allegheny Court of Common Pleas recently declared a state law that allows counties to use a base-year system for property assessments unconstitutional. While the decision is likely to be appealed, it could have statewide implications because so many counties use the base-year system.

Assessment laws that allow the use of a base year assessment without requiring reassessments violate the Uniformity Claus because (1) base year assessments are not intended to assess all properties at the same percentage of assessed value to actual value, (2) base year assessments inherently cause significant disparities in the ratio of assessed value to fair market value, and (3) base year assessments inevitably discriminate against owners of properties in lower-value neighborhoods.

Pennsylvania and Delaware are the only states without requirements that assessments be based on current or relatively current actual values. The laws and regulations of 22 of the remaining 48 states provide for annual assessments. Nine of these 22 states have specific requirements for periodic field reviews, according to the court.

Pennsylvania and Delaware also hold the distinction of not having a state agency to exercise supervisory responsibility over the assessment programs of the different counties. The other 48 states have such agencies.

House Passes Bill Extending County Auditing Deadline

The state House this week approved House Bill 635, legislation allowing county auditors more time to complete and submit their annual audit reports to the state.

Specifically, HB 635 extends the date for audit report completion from April 1 to July 1 and the dates for audit report submission to the Court of Common Pleas and the Department of Community and Economic Development (DCED) from May 1 to July 1.

The bill has now been referred to the Senate Local Government Committee for its consideration.

Panel Endorses Lifting Tax on “Goodwill,” Tax Credits for REAP

The Senate Finance Committee on Wednesday approved four bills, including legislation allowing banks involved in a merger or acquisition to exclude goodwill from the book value of total assets generated as a result of combinations, and sent them on to the full Senate.

Senate Bill 97 would clarify that the bank shares tax should not be imposed upon the “goodwill” generated under the purchase method of accounting for acquisitions. Under the bill, the exception is provided for shares reported on tax returns due on or after Jan. 1, 2008, and applies to acquisitions or combinations dating back to June 30, 2001. The bill also changes the method for computing what constitutes a “combination” under state Tax Reform Code from a “pooling of interest method” to a “purchase method.”

PICPA member and Finance Chairman, Sen. Pat Browne, offered an amendment clarifying that combination goodwill generated as a result of the adoption of FAS 141 is excluded from the total equity capital for returns filed as of Jan. 1, 2008. The Browne amendment was adopted unanimously.

Senate Bill 375 amends the Volunteer Firefighters Relief Association Act to provide for a permanent exemption from certain taxes for qualifying organizations. Currently, those organizations must file for the exemption every five years.

Senate Bill 690 would create the Resource Enhancement and Protection Tax Credit Program (REAP), which would provide credits up to a maximum of $150,000 to encourage private investment in the implementation of best management practices for agricultural operations, the planting of riparian forest buffers and the remediation of legacy sediment in the Chesapeake Bay Watershed.

Senate Bill 961 would allow the City of Hazelton to increase its earned income taxation rate up to an additional five-tenths percent beyond the maximum rate provided by law, provided that the proceeds are used solely to reduce any taxes assessed and collected under the Municipal Pension Plan Funding Standard and Recovery Act from and after Jan. 1, 2003.

Volunteer Fire and Ambulance Grants Extender Bill Clears Senate

Pennsylvania’s nearly 2,460 volunteer fire companies will benefit from legislation passed this week by the state Senate to reauthorize the state’s $25 million Volunteer Fire Company and Volunteer Ambulance Service Grant Program for five years. House Bill 906 now moves back to the House for consideration.

Since 2000, the General Assembly has regularly appropriated $25 million to the PA Emergency Management Agency to provide grants to volunteer fire and EMS departments. However, this program is not guaranteed and has lapsed in the past.

The program provides volunteer fire companies with grants of up to $15,000 and volunteer ambulance and rescue services with grants of up to $10,000 for construction and renovation of fire houses, the purchase or repair of equipment, and debt reduction.

Bill Would Require VoIP providers to Forward 911 Fees to State

The state Senate approved legislation Tuesday that would require voice over the internet protocol (VoIP) providers who charge customers for E-911 services to forward those fees to the Commonwealth.
 
Senate Bill 385 requires all interconnected VoIP companies to charge customers $1 for each line and forward that money to Pennsylvania. The Pennsylvania Emergency Management Agency would then provide the fees to the counties where the customers are located. 

In May of 2005, the FCC issued an order requiring interconnected VoIP providers to provide customers with E-911 service. These companies are similar to traditional telephone providers in that they enable customers to receive calls from and terminate calls to the public switched telephone network.

Senate Bill 385 now goes to the House of Representatives for consideration.

Alternative Health Care Reforms Proposed

Members of the House Republican Health Care Task Force this week unveiled the GOP’s  alternative on health care which focuses on expanded health care choices, increased access, improved quality of services, and lower costs.

The plan, known as the “Real” Prescription for Pennsylvania, was the result of hearings held by the Policy Committee and testimony gathered during other committee hearings. It is designed with the health care consumer in mind to keep Pennsylvanians safe, make health care affordable and accessible, give consumers flexibility, make the health care system effective and efficient, and ensure health care and health insurance costs are transparent.

Specifically, the plan includes expanding the use of Health Savings Accounts (HSAs), expanding the use of Federally Qualified Health Centers to cut down on the use of costly emergency room use, and using best practices from other states.

Reform Panel Recommends Cost-Cutting Measures for Legislature

The Speaker’s Commission on Legislative Reform this week pushed through a plan to reduce the cost of Pennsylvania’s legislature. The commission also voted in support of putting limits, as yet unspecified, on campaign contributions. Currently there are no such limits for any state candidates or for local candidates outside Philadelphia.

On campaign finance, the commission voted to recommend that donation limits should exist for candidates running for the state legislature and for statewide offices. The panel also recommended that “527” groups that often spend large sums on campaigns without reporting their activity should be required to disclose their contributors and expenditures in the same manner that candidates and their committee do.

After this week’s voting, the commission will issue a report to Speaker Dennis O’Brien detailing the individual votes taken, proposals recommended, and additional comments by members.

New Insurance Commissioner, Banking Secretary Nominated

This week, Gov. Ed Rendell nominated Joel Scott Ario to serve as Pennsylvania’s next insurance commissioner and Steven Kaplan to serve as Pennsylvania’s banking secretary. Both nominees must be confirmed by the state Senate.

Ario currently serves as the insurance administrator with the Oregon Department of Consumer & Business Services. He has promoted new consumer protections involving credit scoring and other risk-rating practices, advanced health reforms that give small businesses better pooling options, built a coalition between employers, insurers and providers to create greater transparency in health care pricing by insurers and hospitals, and streamlined producer licensing and the review process for new insurance products.

Kaplan, chief of staff for Mellon Financial Corporation’s Mid-Atlantic Region and chairman of the Mid-Atlantic Charitable Trusts, has served in various leadership capacities at Mellon since joining the corporation in 1982.

Previously, he was assistant district attorney in the Philadelphia District Attorney’s Office. Kaplan, 55, earned a Bachelor of Arts in English and a law degree from Temple University. He currently serves as a member of the President’s Advisory Board at Temple University and as a trustee at the Jewish Federation of Greater Philadelphia. He is also an active board member for numerous organizations, including the Congreso de Latinos Unidos, the Greater Philadelphia Urban Affairs Coalition, the Pyramid Club and the Anti-Defamation League.

Treasury Grants Request for Transitional Relief 

At the urging of the AICPA, the U.S. Treasury Department has granted transition relief for the return preparer penalty provisions under section 6694 of the Internal Revenue Code, as amended by the Small Business and Work Opportunity Act of 2007. IRS Notice 2007-54 outlines the transitional relief.

The transitional relief is provided for all returns, amended returns, and refund claims due on or before Dec. 31, 2007 (determined with regard to any extension of time for filing); to 2007 estimated tax returns due on or before Jan. 15, 2008; and to 2007 employment and excise tax returns due on or before Jan. 31, 2008. No transitional relief was granted for penalties under section 6694(b), relating to penalties due to willful or reckless conduct.