Act 18 of 2018

Issue

Act 18 of 2018 amends several items within Act 32 of 2008, which brought sweeping changes to how Pennsylvania collects local earned income taxes. While Act 32 made the collection process simpler across the state, an unintended consequence of that law allowed some collectors to limit local credit provisions, thus resulting in some Pennsylvania residents being taxed twice on the same income.

Act 18 of 2018, supported by the PICPA and introduced as House Bill 866 by Rep. George Dunbar (R-Westmoreland), prevents this practice and makes collection more uniformed across the state. It also prohibits penalties against those with no income who do not file a local tax return, and provides clarification of withholding tax rates for employees who are on a temporary assignment outside their usual tax jurisdiction. 


Act 18 Clarifies Local Tax Collection, Avoids Double Taxation in Pennsylvania

Tom Wolf signed Act 18 of 2018 into law on May 4, 2018. Matt Melinson, CPA, partner in state and local tax of Grant Thornton, discusses what these local tax changes mean for CPAs and, most importantly, Pennsylvania residents.

Summary of Changes 

Act 18 of 2018 amends the items below that were part of Act 32 of 2008. 

J Crediting Provisions In and Out of State

In an effort to avoid double taxation on the citizens of Pennsylvania, Act 18 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 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 penalized these individuals for not filing in the past under Act 32. The amendment contained in Act 18 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, that law did not provide DCED with the power to enforce these provisions. The amending language of Act 18 provides DCED with the power to enforce the provisions for which they are responsible as well as provide the public with a method to report tax collection issues.

J Contractor & Transient Employee Rules

Under the previous law, an aggressive tax collector could 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 created confusion and placed an unnecessary burden on employers and small businesses, making Pennsylvania a less desirable location to do business. Act 18 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). Act 18 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

The two-digit coding method used in the past, which reflected the tax collection district where the tax payments were remitted, did not provide sufficient information for the taxpayer to complete an accurate year-end tax return. Act 18 requires 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, Act 18 prohibits auditing tax records on a contingency fee basis. The examination of tax collectors’ books will also be carried out on a calendar year basis. 
Legislative History

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 was reintroduced in the 2017-2018 legislative session as House Bill 866. House Bill 866 was unanimously approved by the state House in June and by a vote of 44-6 in the Senate.

Pennsylvania Governor Tom Wolf signed Act 18 of 2018 on May 4, 2018.

For a more complete history of the legislation and where PICPA stood on the issue, check out PICPA's issue brief.