Testimony

Pennsylvania Institute of Certified Public Accountants Testimony Before Pennsylvania Business Tax Reform Commission

August 2, 2004

Good afternoon, Chairman Fajt and members of the Pennsylvania Business Tax Reform Commission. Thank you for the opportunity to once again present testimony on behalf of the 19,000 members of the Pennsylvania Institute of Certified Public Accountants.

My name is Bill Lazor. I am a certified public accountant and partner with Kronick Kalada Berdy & Co. PC, located in Kingston, Pennsylvania. I am immediate past president of the PICPA. Kronick Kalada Berdy & Co. consists of eight licensed CPA partners, 20 licensed CPAs, and 20 non-licensed professionals. We are a member of the American Institute of Certified Public Accountants' Center for Public Company Audit Firms and are registered with the Public Company Accounting Oversight Board. The majority of our clients are small businesses owned by a few individuals or family members.

The PICPA is a professional association of CPAs working together to improve the profession and better serve the public interest. Founded in 1897, the PICPA is the second-oldest and fifth-largest state CPA organization in the United States. Our members come from public accounting, private industry, government, and education.

Before I get into our recommendations, I would like, on behalf of the PICPA and our 19,000 members, to commend Secretary Fajt and his staff for making positive improvements to the entire Department of Revenue. While there have been many positive developments, I would like to specifically cite two.

First, the Board of Appeals' relatively new process to file a Petition or intent to appeal electronically has saved businesses and practitioners a lot of time and money by streamlining this process in a very user-friendly manner.

Secondly, we applaud Secretary Fajt for his commitment to staffing the Department of Revenue with highly qualified individuals. The recent announcement that the Department added two CPAs to the key positions of Director of the Bureau of Individual Taxes and Director of the Pass Through Business Office is commendable. Tax practitioners are beginning to see the benefits of securing the most highly qualified personnel.

The charge before us today is to make recommendations to possibly reform the tax appeals process as you continue your review of the Commonwealth of Pennsylvania's business tax structure. As a practitioner with more than 15 years of experience appearing before both the Board of Appeals and the Board of Finance and Revenue, I believe I am qualified to provide constructive, critical analysis of the system on behalf of our members

I would like to start with some general observations about the current appeals system that rightly or wrongly are prevalent in the tax practitioner community. Appeals involving quantifiable, objective documentation are generally more likely to be successfully argued at the Board of Appeals. Corporate taxes (Corporate Net Income and Capital Stock and Franchise taxes) are far more amenable to Board of Appeals resolution than are sales and use tax petitions. Sales tax petitions are far more numerous, and generally involve more money.

Also, there is a perception within the practitioner community that relief which is available is inversely proportional to the amount of money at stake. This is particularly true with refund claims. Most of the horror stories with which we are familiar deal with sales and use tax hearings.

Pennsylvania CPA practitioners have a solid understanding of how the process works, where it fails to work, and, more importantly, how to make it work better for the taxpayers and the Commonwealth.

Our recommendations focus on three major areas. First, standardize all appeals periods. Second, consider establishing a board of arbitration. Third, encourage more common sense in the process.

I must caution, however, that we are still in the process of exploring all options and have not fully vetted this matter before our Committee on State Taxation. We would like to request, if possible, to come back to the Commission with more concrete ideas once we have thoroughly reviewed these and other concepts with our committee.

Standardize Appeals Periods

An issue that frustrates many business taxpayers and practitioners is the fact that different taxes require separate appeals. The rules for each in many cases have subtle differences. The due dates for filing petitions are still very confusing for corporate taxes and sales and use tax.

For example, under the Board of Appeals, corporate taxpayers have 90 days from settlement mailing date to file an appeal, while sales and use taxpayers have 30 days from notice of mailing date.

Under the rules governing Board of Finance and Revenue appeals, corporate taxpayers have 90 days from a Board of Appeals decision mailing date. Sales and Use taxpayers also have 60 days from a Board of Appeals decision mailing date.

For appeals to the Commonwealth Court, corporate taxpayers have 30 days from the Board of Finance and Revenue decision date. Sales and use taxpayers have 30 days from the Board of Finance and Revenue decisions date.

An example of one area which causes taxpayers problems and limits their ability to obtain refunds is the time limit to request refunds.

After January 1, 1998, the general statute in which to petition for refund is 3 years from the date of payment which has been generally interpreted as 3 years from the due date of the tax report without extension.

However, in the case of a tax settlement or assessment, the tax must be paid and a refund filed within six months of the notice mailing date. This provision may severely reduce the three-year statute for an unwary taxpayer. For example a taxpayer shows a $10,000 liability on its filed return which is settled by the Department at $100,000. Taxpayer pays tax but seven months after the settlement date determines that its proper liability is only $8,000. Under current law, the taxpayer can only recover $2,000 and not $92,000 since the increase in tax at settlement was not protested within six months from the settlement date. Thus the 3-year statute has become a six-month statute and many taxpayers are being caught in this unfair trap.

Furthermore, the requirement that only the United States Postal Service qualifies for timely filing on the due date of a return or petition is unreasonable. If the mailing date is considered timely filed, then mailing services such as UPS and Federal Express, that retain a mailing trail, should qualify.

One recommendation we can offer would be to adopt federal standards (Internal Revenue Code) for appeal periods. Taxpayers and practitioners generally understand federal statute of limitations concepts, but erroneously try to apply them to states. With 50 states and the District of Columbia, this leads to a multiplicity of statutory periods, unnecessary confusion and contempt within the taxpayer and practitioner communities, which was captured by the CFO magazine survey of earlier this year.

One other note relative to the corporate tax settlement process. As you all probably know, corporate taxes are self-assessed in Pennsylvania. The Department of Revenue reviews every corporate tax report and "settles" the tax by either accepting it as filed or making adjustments. The entire settlement process is subject to audit and approval by the Auditor General.

Historically there were valid reasons for involving the Auditor General in this process, but those reasons are no longer valid. This process is particularly ripe for improvement. Perhaps the Auditor General could be called upon to audit those tax settlements in excess of a dollar threshold.

To this end, the PICPA strongly encourages the Department to re-engage the Uniform Procedures Act practitioners working group. This diverse group of practitioners and Revenue personnel worked through many difficult, complex issues, but more work remains. The PICPA is committed to this endeavor. The project is important and should be revived.

Consider Establishing a Board of Arbitration

In Pennsylvania, taxpayers do not have the opportunity to negotiate a case with the Department of Revenue before going to court. This adversely impacts small businesses that don't have the resources to put up a strong challenge to departmental decisions. In fact, a perceived problem with the Board of Finance and Revenue is that ANY administration-Republican or Democrat-can control the Board, due to the presence of three "administration" officials on the six-member panel.

Furthermore, when a taxpayer files an appeal to Commonwealth Court, the taxpayer must either pay the tax or post a bond, which usually is 120% of the tax. Access to justice should not depend on ones ability to pay.

This is the crux of the problem. Taxpayers have to go through two administrative appeals before anyone can consider the hazards of litigations. With respect to large taxpayers, who can afford representation, this is but a nuisance. With respect to small taxpayers, this represents the denial of process.

To this end, an independent board of arbitration, perhaps replacing either the Board of Appeals or the Board of Finance and Revenue should be explored. This "board" would have the authority to negotiate resolutions on a case-by-case basis as soon as possible, and before the taxpayer has to pay.

Again, I want to emphasize that this idea is only a concept at this point. We have not fully debated the pros and cons of such an entity, but in light of the Commission's charge, and our professional mission to "articulate positions on professional and public issues when the expertise of CPAs is relevant," we put this "out of the box issue" on the table for discussion.

Encourage Common Sense

Secretary Fajt and his administration have made tremendous strides in improving the overall operation of the Department. However, common sense, in some cases, appears to be lacking in the way a few Department representatives conduct business.

Here are two quick examples. In the conduct of a sales and use tax refund claim at the Board of Appeals, a taxpayer was asked to provide documentation on over 100 items in a sample. The requested documentation was located for 96 percent of the items, representing 98.4 percent of the dollars in the sample. Rather than granting relief based upon these ratios, which the taxpayer would find difficult to reject, the claim was denied in its entirety.

Second, Board of Appeals hearing officers routinely deny claims in their entirety if proof is not provided on 100 percent of the issues. This places undue burden on the Board of Finance and Revenue and the taxpayer who must now present their entire case again.

In this case, transparency is another issue that should be addressed. Taxpayers are generally left in the dark as to the grounds for denying relief at the Board of Appeals. The Department of Revenue can file a brief with the Board of Finance and Revenue that the Board considers, but taxpayers never get to see. There is no "give and take" at the Board of Finance and Revenue level. While a meeting with the Board briefer sometimes identifies the "real" issue or issues that the taxpayer can begin to address, it is far too late in the administrative appeal process to be helpful to the taxpayer.

In closing, we would like to leave you with two more thoughts. In previous testimony before this Commission, you heard groups advocate for an independent tax court. Let me be unequivocally clear on this point: The PICPA strongly opposes the creation of a tax court that precludes our members from representing our clients. Many of the issues under appeal consist of non-legal matters that do not rise to the level necessitating the need for legal counsel. Furthermore, by rule only taxpayers representing themselves or attorneys can argue legal issues at the Board of Finance and Revenue.

Attorneys certainly play an important role in this process. Excluding all other practitioners would be a disservice to Pennsylvania taxpayers.

Lastly, we caution the Commission to keep an eye on the federal Sarbanes-Oxley Act and subsequent rulemaking by the Public Company Accounting Oversight Board. The law limits the type of non-audit services CPAs can provide to publicly traded companies. The Commission should strive not to go beyond the changes implemented by Sarbanes-Oxley in order to make Pennsylvania a more business-friendly state.

Once again, thank you for the opportunity to provide testimony on behalf of the 19,000 members of the Pennsylvania Institute of Certified Public Accountants. I will gladly entertain your questions.