Act 32 - Local Tax Collection

Issue 

Act 32 of 2008 ushered in significant reforms and the consolidation of Pennsylvania’s earned income tax (EIT) collection system. Under the law, which became effective on a statewide basis on Jan. 1, 2012, the collection process was restructured, creating 69 countywide Tax Collection Districts (TCDs) and reducing the number of tax collectors from 560 to less than two dozen today. The PICPA supported the passage of this important legislation.

During the Act 32 implementation period, PICPA members have discovered several issues with the application of the new law. While the new tax collection process has been mostly beneficial, House Bill 866 is a means to clean up the unintended issues that arose as a result of implementation.


Discussion and Explanation 

House Bill 866 speaks to the concerns of taxpayers and tax practitioners with regard to the implementation of Act 32. As such, the bill addresses several issues:


J Crediting Provisions In and Out of State

In an effort to avoid double taxation on the citizens of Pennsylvania, House Bill 866 provides clarity, consistency, and fairness to the crediting provisions for all taxpayers. When Act 511 was created, the crediting language was carefully crafted to ensure that taxpayers would not be subjected to double taxation at the local level on their earned income. The intent of Act 32 of 2008 was to retain these crediting provisions, but an inadvertent change in wording resulted in taxpayers being subjected to double taxation. The word “Act” was replaced with the word “Chapter” and was not detected until recently when aggressive tax collectors started to take advantage of their ability to collect more tax and thereby increase their collection commissions.


J Taxpayers with No Income

Taxpayers with no income have no earned income tax liability, and therefore are not required to file a return with their local tax collector. Unfortunately, some tax collectors have penalized these individuals for not filing. The amendment contained in House Bill 866 clarifies that penalties cannot be charged to individuals with no taxable income after they have filed an earned income tax return marked as FINAL.


J Tax Collection Committee Oversight Board

Act 32 of 2008 provided the Department of Community and Economic Development (DCED) with certain responsibilities, including promulgating forms and collection regulations as well as receiving annual tax collector audits and compliance reports. Unfortunately, the law did not provide DCED with the power to enforce these provisions. The amending language would provide DCED with the power to enforce the provisions for which they are currently responsible as well as provide the public with a method to report tax collection issues.


J Contractor & Transient Employee Rules

Under current law, an aggressive tax collector may attempt to collect a multitude of earned income tax rates on employees who spend any time working in taxing jurisdictions outside their home jurisdiction. For example, if a taxpayer spends an hour working in four local jurisdictions in one day on temporary job assignments, there is nothing to prevent the tax collector from enforcing the collection of four different tax rates for one day of work. This situation creates confusion and places an unnecessary burden on employers and small businesses, making Pennsylvania a less desirable location to do business. House Bill 866 puts rules in place for employer withholding of taxes for taxpayers on temporary job assignments in jurisdictions outside their home jurisdiction, in addition to establishing a 90-day threshold. Employees on temporary job assignments in Philadelphia are subject to the Sterling Act. This makes the administration of tax collection easier and less confusing.


J Establishing Estimated Payment Safe Harbor

Following the implementation of Act 32, tax collectors penalized individuals who were making estimated payments under Section 502 of the Local Tax Enabling Act (Act 511 of 1965). House Bill 866 provides that a taxpayer shall have been deemed to have met the estimated payment requirements, and therefore is not subject to penalty, so long as four equal and timely estimated payments are made that are equal to 100 percent of the prior year tax liability or 90 percent of the current year’s tax liability (less tax withheld in either case). This language is consistent with federal language in the Internal Revenue Code.


J W-2 Reporting Requirements

There is a concern that the two-digit coding method currently used, which reflects the tax collection district where the tax payments were remitted, does not provide sufficient information for the taxpayer to complete an accurate year-end tax return. House Bill 866 would require that coding use the full political subdivision code in a specified format to clarify exactly the rate used in withholding the tax and where the tax was remitted.


J Audits

To avoid the potential for inappropriate personal gain to private audit companies at the expense of taxpayers, House Bill 866 prohibits auditing tax records on a contingency fee basis. The examination of tax collectors’ books would also be carried out on a calendar year basis. Some tax collectors are working on a fiscal year basis. By using two different calendars, audit samples are not consistent and DCED is not getting an accurate picture across Pennsylvania.
Legislative History

During the 2013-2014 session, Rep. George Dunbar (R-Westmoreland) introduced House Bill 2423 to address issues that came about during the implementation of Act 32. Because of its late introduction, the bill was not brought up in the House Finance Committee, but was reintroduced as House Bill 245. In the 2015-2016 legislative session House Bill 245 was overwhelmingly passed by the House (148-42) and Senate (36-12) but was vetoed by Gov. Wolf.

The bill has been reintroduced in the 2017-2018 legislative session as House Bill 866. House Bill 866 was unanimously approved by the state House in June and is pending in the Senate.