Q&A with the Pennsylvania Department of Revenue
A federally chartered bank based outside PA derives income from sources in PA – for example, from a rental property. Is the bank subject to Bank Shares Tax or Corporate Net Income Tax and Capital Stock / Foreign Franchise Tax?
A federally chartered bank based outside Pennsylvania derives income from sources in Pennsylvania – for example, from a rental property. The bank does not have any branches in Pennsylvania nor does it conduct any lending activities in the state. Would the bank be subject to Bank Shares Tax or Corporate Net Income Tax and Capital Stock / Foreign Franchise Tax? What if the rental activity in the example above was conducted by a partnership in which the bank was a partner – which tax(es) would the bank be subject to?
a) Section 701 of the Tax Reform Code of 1971 (“TRC”) imposes bank shares tax upon an institution. An “institution” is defined in TRC section 701.5 as a bank located within this Commonwealth. Section 701.5 also defines “located." Please note that the ownership of tangible property that is within the Commonwealth and that is leased to others for their use is set forth as an activity that falls within the definition of located. Therefore, this bank would be subject to bank shares tax. Please see the definition of located for other activities that make a bank subject to bank shares tax.
b) The Department has promulgated a regulation that reads that an ownership interest in a partnership may create nexus for a corporate partner. However, the Department’s partnership regulation, which is found at 61 Pa. Code § 153.29, does not extend to bank shares tax. In addition, there are statutory provisions on this same matter. However, subsection 402.2 of the TRC is limited to corporate net income tax and subsection 602.6 of the TRC is limited to capital stock/foreign franchise tax. Also, only Parts III, IV, V, VI and VII of the corporate net income tax article are incorporated by reference into the bank shares tax. Since subsection 402.2 is a division of Part II of the corporate net income tax article, it is not incorporated by reference into the bank shares tax. Therefore, there is no statutory or regulatory provision that provides that the type of investment in question creates nexus for bank shares tax. Our opinion is that a mere investment in a partnership that owns rental tangible property located in Pennsylvania does not make a bank subject to bank shares tax. However, a corporate bank would be subject to corporate net income tax and foreign franchise tax.