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Legislative Update

Week Ending May 23, 2008

• Call to Action for EIT Collection Reforms
• Register Today for PICPA’s 2008 Day on the Hill
• New Retroactive New Jersey S Corporation Election
• Senate Republicans Unveil Tax Stimulus Package
• Court Upholds Muni-Bond Tax Break
  

Call to Action for EIT Collection Reforms  

PICPA-supported legislation reforming Pennsylvania’s archaic and inefficient system of collecting local earned income taxes could be voted on in the state House some time in June. Opponents, however, have intensified their resistance to the bill’s consideration.    

With the legislature in recess until June 2, PICPA members are urged to use this break in legislative session to reach out to their House lawmakers to emphasize the need for earned income tax collection reforms.

Senate Bill 1063 will bring uniformity, clarity, and fairness to local earned income tax collection. Full implementation will start in 2012, with 2011 being a transition year. The proposal’s provisions include a number of important improvements:

• Establish uniform withholding, remittance, and distribution requirements;
• Require that employers withhold all local income taxes imposed on the compensation of their employees, and remit those taxes to only one collector, even if an employer operates in multiple counties;
• Institute a continually updated, comprehensive tax register, maximum twice-yearly rate changes, a uniform definition of taxable income, and a system of appeals;
• Strengthen reporting requirements so that each tax dollar is tracked from the time it is withheld until it is received by the appropriate taxing jurisdiction;
• Require that the Commonwealth issue one set of rules and regulations that apply to all collectors, taxpayers, and employers;
• Require that DCED develop uniform forms, notices, reports, returns, schedules, and codes for school districts, municipalities, and tax collection districts;
• Require that tax collectors keep a record of all public monies received and distributed, and submit monthly reports to each taxing jurisdiction and the tax collection district that must be reconciled with other records in an annual audit;
• Provide for more accountability, transparency, oversight, and enforcement; and
• Consolidate the system into tax collection districts roughly congruent with counties, but NOT a function of county government.

Pennsylvania is unrivaled in the number of jurisdictions levying local taxes, which, at almost 2,900, is more than quadruple that of the second highest state. About 560 local collectors are used to collect and distribute nearly $2 billion in annual revenue. Lack of standardized practices, coordination, reporting, and accountability among and between jurisdictions and collectors plague the process. Such complexity contributes to the perception that Pennsylvania is a difficult state in which to do business, hindering its ability to attract and keep much-needed jobs.

SB 1063 passed the Senate on April 30 by a vote of 41-8. It is currently pending in the House Finance Committee.

Register Today for PICPA’s 2008 Day on the Hill

Members, register today to attend PICPA’s 2008 Day on the Hill program on Wednesday, June 11 in Harrisburg. At that time, you will receive legislative briefings from some of the General Assembly’s most prominent figures, learn about issues important to the CPA profession, and meet with legislators to address your local and state concerns.

Senate Majority Leader Dominic Pileggi, Senate Democratic Leader Robert Mellow, Deputy House Speaker Josh Shapiro, and House Republican Leader Sam Smith are scheduled to discuss their respective caucus’s legislative agendas. Also, the Department of Revenue will provide an update.

New Retroactive New Jersey S Corporation Election

The New Jersey Division of Taxation has adopted a retroactive S Corporation election procedure. Regulation 18:7-20.3, which was recently promulgated, details the procedure that can enable a corporation and its shareholder(s) to cure a defective New Jersey S Corporation election. Taxpayers requesting a retroactive election will need to file form CBT-2553-R and remit the required, nonrefundable fee.

A retroactive election will only be granted providing all of the following criteria are satisfied:

• A completed form CBT-2553-R is submitted containing the signature of all shareholders along with a nonrefundable administrative fee equal to $100.00 for each year being impacted by the back dating.
• The corporation is authorized to do business in New Jersey and registered with the Division of Taxation.
• All appropriate corporation business tax returns have been timely filed and taxes timely paid as if the New Jersey S Corporation election request had been previously approved.
• The New Jersey S Corporation retro-active request is received prior to a final assessment for a year covered by the requested becoming final.
• The Division has not issued a notice denying a previous late filed New Jersey S election request, and the taxpayer has not protested the denial within 90 days.
• All shareholders have filed appropriate tax returns and paid the tax in full when due as if the New Jersey S Corporation election request had been previously approved, and the taxpayers have reported the appropriate S Corporation income on those returns.

Senate Republicans Unveil Tax Stimulus Package

At a May 20 Capitol news conference, the Senate Republican Caucus unveiled a sweeping stimulus package that would provide nearly $96 million in tax relief in the upcoming fiscal year for lower-income working Pennsylvanians and small businesses looking to expand, as well as major employers and job creators.

PICPA member Sen. Pat Browne, CPA, (R-Lehigh) chairman of the Senate Finance Committee, which has oversight powers over state tax matters, spoke at the news conference in support of the legislation.

"The package we are unveiling today is the result of intensive study and review of a number of proposals with the goal of finding the optimum combination to provide tax relief where it is most needed and best be able to stimulate Pennsylvania's economy," Senator Browne said. "I plan to bring these proposals to the Finance Committee as soon as possible, since these measures must be included as part of the General Assembly's consideration of Pennsylvania's 2008-09 budget."

Senate Bill 1385, sponsored by Senator Jake Corman (R-Centre), would expand the cap on the Net Operating Loss provision of the Corporate Net Income Tax to $5 million or 20 percent of taxable income. The NOL cap is currently set at $3 million, or 12.5 percent of taxable income. If enacted, the effective date of the increase would be January 1, 2009.

The NOL expansion is projected to save Pennsylvania employers $21.5 million in Fiscal Year 2008-09, $68.4 million in Fiscal Year 2009-10, and $78.2 million in Fiscal Year 2010-11.

Senate Bill 1386, sponsored by Senator Bob Regola (R-Westmoreland), would increase the eligibility limits for special tax forgiveness for low-income Pennsylvanians. The bill would increase claimant income eligibility limits by a total of $2,000 over three years and the dependent allowance by $500 over the same period.

Currently, a family of four with a combined income of less than $32,000 pays no state income tax.

Under SB 1386, families earning $37,000 or less would be exempt. That increase is projected to provide $74.6 million annually in savings to low-income working Pennsylvanians.

Senate Bill 1387, sponsored by Senator Pat Vance (R-Cumberland), would double the amount that small businesses may deduct as Section 179 expenses on their income tax filings. Section 179 of the federal Internal Revenue Code provides for the deduction of all or part of the costs of machinery and equipment used for business purposes.

SB 1387 would increase the maximum annual deduction to $50,000, which is projected to provide $6.6 million in savings to Pennsylvania's small businesses.

Senate Bill 1388, sponsored by Senator John Eichelberger (R-Bedford, Blair), would amend Pennsylvania's Corporate Net Income Tax to expand the sales factor to 85 percent.  Most corporations that conduct business in more than one state are required to use a three-factor apportionment in order to allocate their business income among the states where they have activity. 
  
The three-factor apportionment formula consists of property, payroll, and sales factors.  As things stand, Pennsylvania companies continue to be penalized by increased taxes when they hire new employees or make capital investments in the Commonwealth. Currently, the sales factor accounts for 70 percent of the apportionment formula, and the property and payroll factors each account for 15 percent.

Court Upholds Muni-Bond Tax Break

In a 7-2 decision announced this week, the U.S. Supreme Court upheld the common practice of offering tax breaks to residents who purchase state municipal bonds. The ruling overturns a Kentucky Court of Appeals decision that held the tax exemption Kentucky and the 41 other states grants home-state buyers violates the U.S. Constitution’s Commerce Clause.

Justice David Souter was joined in his opinion by Chief Justice John Roberts and Justices John Paul Stevens, Stephen Breyer, Ruth Bader Ginsburg, Antonin Scalia, and Clarence Thomas.

Justices Anthony Kennedy and Samuel Alito dissented.