Q&A with the Pennsylvania Department of Revenue
Scenario: underpayment of estimated tax interest
ABC Corp. had made an estimated 2011 Gross Receipts Tax (GRT) payment in the amount of $1,000,000 on or before March 15, 2011. (The corporation’s safe harbor amount was $5,000,000.) On June 14, 2011, ABC Corp. made another estimated 2011 GRT payment in the amount of $4,000,000. Thus, ABC Corp. met its safe harbor as of June 15, 2011. On March 15, 2012, ABC Corp. filed its 2011 GRT report and reported tax in the amount of $10,000,000.
Pursuant to 72 Pa.C.S. sec. 10003.3, the Department assessed $96,789 in interest resulting from the underpayment of estimated tax. The interest was assessed from March 15, 2011 through June 14, 2011, the date ABC Corp. met its safe harbor. Under 72 Pa.C.S. sec. 10003.3 the interest was computed based upon 90% of the tax due for 2011 or (((2011 tax liability x 90%) - amount paid in on 3/15/11) x 4.8% (4% x 120%) x 92/365).
Is the imposition of interest based upon 90% of ABC’s 2011 GRT liability, as opposed to the safe harbor amount for the 92-day period, constitutional, or at a minimum equitable? The imposition of interest is supposed to reflect the Commonwealth’s loss of the use of funds. In the instant case, the taxpayer was only required to remit $5,000,000, the safe harbor amount. Once ABC Corp. did remit the amount, interest stopped accruing. Thus, the Commonwealth only lost the use of $4,000,000 for a 92-day period and not $8,000,000.
The underpayment of estimated tax interest is a penalty imposed for failure to timely remit estimated tax. In the facts presented, the underpayment was a substantial underpayment of estimated tax (an underpayment of 25 percent or more) which resulted in the interest penalty being computed at 120 percent of the statutory interest rate. Since the taxpayer did not satisfy the required safe harbor estimated tax payment amount, the estimated tax underpayment interest penalty is computed upon 90 percent of the final tax liability for the tax year for the period of the underpayment.
The estimated tax underpayment interest penalty encourages taxpayers to accurately and timely remit estimated tax. The severity of the penalty is directly related to the severity of the underpayment of estimated tax. In the example above, the Taxpayer’s estimated tax payment amount was only 20 percent of the statutory required safe harbor estimated tax payment amount and only 10 percent of the taxpayer‘s ultimate tax liability for the tax period.
Note: The underpayment penalty computation in the example above is incorrect. The underpayment interest rate for 2011 is 3 percent, not 4 percent as used in the example.