PA Tax Law News – March 2015
March 13, 2015
In this issue: Gov. Wolf Proposes Reordering of PA Tax System l PA Short Notes l PA Unclaimed Poperty Filings Due April 15 l Same-Sex Marriages Recognized for Inheritance and Realty Transfer Tax Purposes
Gov. Wolf Proposes Reordering of PA Tax System for FY2015-16
by James L. Fritz
In office only two months, Governor Wolf has wasted no time in proposing a budget which would boost education funding, provide local real estate tax relief, close a $2 billion operating deficit and address Pennsylvania’s $50 billion accumulated pension deficit. He would substantially reorder Pennsylvania’s state tax system in order to pay for it. The budget he proposed on March 3rd would include:
Mandatory Combined Reporting of Corporate Net Income Tax, effective 1/1/2016
CNI rate reduced from 9.99% to 5.99% effective 1/1/2016
CNI Net Loss Deduction Cap reduced from $5 million / 30% to $3 million / 12.5%
Capital Stock / Franchise Tax Phaseout completed as of 1/1/2016
New Marcellus Shale Severance Tax
Personal Income Tax rate increase from 3.07% to 3.7%, effective 7/1/2015
State Sales & Use Tax rate increase from 6% to 6.6%, effective 1/1/2016
Sales & Use Tax base expansion by eliminating numerous exemptions
Cigarette Tax increase by $1.00 per pack, from $1.60 to $2.60, effective 10/1/2015
New Tax on Other Tobacco Products, including e-cigarettes, effective 10/1/2015
School Property Tax Relief & Phila. Wage Tax Relief of $3.8 billion in October 2016
Made-in-PA Tax Credit
The Governor’s budget proposals also include increasing the minimum wage to $10.10 per hour, boosting funding for preK-12 education by $662 million (excluding pension payment), $140 million of additional funding for state-owned and state-related universities, $25 million in new PHEAA initiatives, and other higher education funding.
Governor Wolf is proposing General Fund spending of $29.88 billion for FY2015-16. This represents a 2.8% increase in General Fund spending over FY 2014-15. However, this does not account for the payments to the school pension fund which would be moved into a new restricted spending account for FY2015-16.
The Budget Hole. According to a summary published by the House Democratic Appropriations Committee, the Wolf budget assumes current year revenues will end the year essentially on-target. Although year-to-date revenues were ahead of target by more than $377 million at the end of February, some budgeted one-time transfers scheduled for the end of the fiscal year are not expected to materialize. Without the tax changes proposed by the Governor, the House D’s indicate that revenues would be projected to increase by only 1.5% in FY2015-16.
This, however, is only the beginning of the fiscal picture going into budget season. According to the Governor’s Budget Office, the Commonwealth faces a large structural operating deficit, substantial mandated spending increases and upcoming state employee contract renewals as well as the massive pension deficit.
According to data published by the Budget Office, the cupboard is almost bare in part because the current 2014-15 budget was built on one-time revenues to a much greater extent than in prior years:
Furthermore, in 2015-16, the Commonwealth faces the following substantial mandated spending increases:
Human Services: $900 million
Corrections: 200 million
Pension Costs: 500 million
Note: As this article was written, we had not seen details of the tax changes. We were told that draft language would be available soon. The following summary of tax changes is based on general budget documents.
Marcellus Shale Severance Tax. The Governor proposes a new severance tax to be imposed at a rate of 5% of the value of gas extracted plus 4.7 cents per thousand cubic feet of gas extracted – similar to West Virginia’s tax. With an effective date of 1/1/2016, the tax would yield $165.7 million in FY2015-16 and $1 billion in FY2016-17. Distributions to local governments, currently funded by Impact Fees, would be shifted to the new severance tax revenue stream. New tax revenues in excess of local government distributions would be directed primarily to increased funding of Basic Education, with small amounts to be dedicated to debt service on a proposed Economic Growth Bond and to funding additional enforcement efforts in the Department of Environmental Protection.
Corporate Net Income Tax Rate Cut and Base Changes. The CNI rate would not only be reduced to 5.99% as of 1/1/2016, but would be further reduced to 5.49% as of 1/1/2017 and 4.99% at 1/1/2018. Savings to businesses in FY2015-16 would be $249.3 million. When fully implemented, the annual savings would exceed $850 million.
The rationale for reducing the allowable Net Loss Deduction from $5 million (or 30% of income) to $3 million (or 12.5% of income) has not been made clear. House D’s indicated that this change would impact approximately 290 businesses.
We have only minimal details at this point concerning how “combined reporting” would work.
Capital Stock / Franchise Tax Phaseout. These taxes are currently scheduled to expire at the end of tax years beginning in 2015. Governor Wolf proposes to stick with this schedule.
Sales & Use Tax Increase. The proposed rate increase and tax base expansion would yield $1.5543 billion annually. The current 1% vendor discount would be capped at $25 per month, saddling major regional and national retailers with tens of millions in additional costs for administering the Commonwealth’s sales tax system and dealing with Pennsylvania’s aggressive auditors.
Sales & Use Tax exemptions to be preserved apparently would include: Food, Physician & Dental Services, Hospitals, Clothing and Footwear, Prescription Drugs and Orthopedic Equipment, Manufacturing and Processing, Residential Utilities, Trade-in Value, Isolated Sales, Common Carriers, Water, Governmental Entities, College Tuition, Charities, Religious Organizations and Non-profit Educational Institutions.
We will await draft language to see just what services would be made taxable and what specific exemptions would be repealed.
Personal Income Tax Increase. Because the PIT rate increase would be in effect only for the second half of the 2015 calendar year, the effective rate for calendar 2015 would be 3.39%, with the full increase to 3.7% then kicking in for 2016. The PIT rate increase is projected to yield $2.3767 billion, which would be dedicated to local school property tax relief. Tax forgiveness would be boosted to 150% of the poverty level, reducing revenues by $90.2 million. PA Lottery winnings would be taxed, yielding $15.7 million. Revenues from the rate increase would be earmarked for property tax and wage tax relief.
Cigarette & Other Tobacco Tax Increases. The $1.00 per pack increase in the cigarette tax would yield $358.4 million annually. New taxes at 40% of the wholesale price on cigars, smokeless tobacco, roll-your-own and e-cigarettes would yield $84.1 million per year.
Bank Shares Tax Changes. Technical corrections, retroactive to 2014, and an increase in the rate, from 0.89% to 1.25% would yield $339.2 million.
Made in Pennsylvania Tax Credit. $5 million would be distributed to manufacturing companies for up to 5% of new taxable payroll where companies increase payroll by more than $1 million in a year.
Economic Development Programs. The Governor is proposing a number of economic development programs. These include a proposed $675 million bond issue to recapitalize state loan programs, provide alternative energy incentives and fund other economic development programs. Debt service would be paid with $55 million annually from the proposed Marcellus Shale Severance Tax.
School Property Tax Relief. The Governor’s proposal would begin accumulating funds for school property tax relief in FY2015-16, with the first actual relief to be granted in October 2016. In Philadelphia, taxpayers would receive Wage Tax reductions in lieu of property tax relief. To assist renters, age restrictions would be removed from the rent rebate program and renters would receive relief of up to $500 for households earning up to $50,000. The Budget Office says the proposal would provide more than $1,000 in tax relief for the average homeowner and reduce homeowner property taxes by an average of more than 50%. The relief, however, apparently would be based on boosting the funding of the “Homestead Exemption” so that the relief would be targeted mostly at residential taxes and owners of lower valued homes would benefit to a proportionally greater extent than owners of more expensive homes. Businesses would receive property tax relief only after the Homestead Exemptions in the school districts would be fully funded. Thus the Pennsylvania business community likely would not benefit substantially from the Governor’s real estate tax reduction program.
The Governor’s real estate tax relief proposal seems clearly aimed at making the school district tax system more progressive on an overall basis, and at shifting the local cost of education more to the business community as compared to individual taxpayers.
One surprising result of the Governor’s proposal seems to be that in some school districts, where home values are low, the new state property tax relief funding would completely eliminate school real estate taxes for everyone, while taxpayers in adjoining districts would continue to pay significant property taxes. We are unaware of the justification for such a lack of uniformity in tax treatment.
Will it fly? With the PA House and Senate controlled by Republicans, whether the new Democrat Governor’s proposals will ultimately be adopted is very much an open question. Some of his proposals have had Republican support in the past. However, Republican leaders started voicing concerns about the tax increases as soon as the Governor finished his budget speech. Time will tell.
by James L. Fritz
In January, the PA Department of Revenue advised the tax community that it had – in November – joined the Multistate Tax Commission’s corporate tax audit program, in order to increase the effectiveness and efficiency of PA audits.
Also in January, the PA DOR announced a new sales and use tax “desk audit” program which will be conducted within the Pass-Through Business Office. The exact scope of the program is not clear, but one focus will be online purchases.
PA interest rates for 2015 on assessments are 3%; refunds of personal income tax bear interest at 3% while other types of tax refunds bear interest at 1%. 44 Pa.B. 8063.
PA Fuel Tax rates for 2015: 5.9 cents per gallon for aviation gasoline; 2.0 cents per gallon for jet fuel; 50.5 cents per gallon Oil Company Franchise Tax on gasoline and gasohol; 64.2 cents per gallon OCFT on undyed diesel and kerosene. PA Motor Fuel Tax Bulletin No. 2015-1.
Liquefied Natural Gas (LNG) tax rate for 2015 has been reduced to 33.5 cents per gallon equivalent, reversing an administrative determination made last year to increase the tax by applying the higher diesel rate in the calculation. Governor’s Office Press Release, 3/5/2015.
Eileen McNulty has been appointed by Governor Wolf as the new PA Secretary of Revenue. She previously served as Secretary of Revenue in the Casey administration and has held several other government positions.
PA Unclaimed Property Filings Due April 15: Legislative Changes Impact Reporting Requirements and Enforcement Powers
The deadline for filing a 2014 Abandoned and Unclaimed Property Report with the Pennsylvania Treasury Department is April 15. Major changes were made to PA’s Disposition of Abandoned and Unclaimed Property Act (the “Unclaimed Property Law”) by Act 126 of 2014 (“Act 126”), which impact reporting requirements for 2014 and subsequent years as well as the State Treasurer’s enforcement powers. Some changes, including the shortening of the “holding period” for various types of property, modifications to the standards for determining when the holding period begins to run, and expansion of the State Treasurer’s enforcement powers, took effect on July 10, 2014. Other changes, primarily registration and regulatory requirements for unclaimed property “finders,” took effect on January 6, 2015.
Notably, Act 126 specifically authorizes the State Treasurer to hire contract auditors to conduct unclaimed property audits on its behalf. Under this authority, the State Treasurer has contracted with Kelmar Associates, LLC, which has developed a reputation for using very aggressive estimation techniques when performing unclaimed property audits, to perform at least some unclaimed property audits on its behalf.
Shortening of “Holding Period”
Act 126 shortened the dormancy or “holding period” for most types of unclaimed property from five years to three years. Exceptions to the standard holding period still exist for wages and other compensation for personal services (2 years), property distributable in the course of dissolution (2 years), money orders (7 years) and travelers checks (15 years). Also, gift certificates or cards with expiration dates, but no service fees, are now reportable upon the later of 2 years from the expiration date or, in the case of store gift cards or general use prepaid cards, 5 years after the card was issued or funds were last loaded. “Qualified” gift cards and certificates (those with no expiration date or post-sale charges or fees) remain exempt from reporting requirements in Pennsylvania.
“Indicating an Interest in Property”
In most cases, the holding period for unclaimed property does not commence until after the last activity on an account or the last “indication of an interest in property.” Prior to Act 126, the Unclaimed Property Law did not specify what constituted an indication of interest in property, although it did require that any indication of an interest in certain property held by financial institutions be “evidenced by a writing.” Act 126 expanded the criteria for overcoming a presumption that property is “abandoned or unclaimed” by defining what constitutes an indication of interest in property and eliminating requirements that indications of interest be in writing. “Indicated an interest in property” is now specifically defined to include electronic and verbal contacts and communications.
Act 126 also expanded the definitions of “holder” and “owner” to include legal representatives of persons qualifying as holders and owners, and agents acting on behalf of holders.
Expansion of Enforcement Powers
The broad new enforcement powers given to the State Treasurer under Act 126 include expanded authority to require reporting by “holders,” authority to share reports and examination records with other government agencies and with unclaimed property administrators in other states, and the authority to impose new civil and criminal penalties for noncompliance with the Unclaimed Property Law. Under prior law, the State Treasurer was authorized to examine a holder’s records only if the Treasurer had “reason to believe that [the] holder [had] failed to report property that should have been reported” under the Unclaimed Property Law. See 72 P.S. § 1301.23(a) (prior to changes made by Act 126). This “reason to believe” requirement was eliminated by Act 126. Also, holders are required to provide the State Treasurer with information concerning any property for which the Treasurer makes an “inquiry.” Thus, the Treasurer may seek information as to why certain property has been determined not to be reportable.
Act 126 further authorizes the State Treasurer to “contract with any other person to conduct the examination on behalf of the State Treasurer, the selection of whom shall not be questioned.” (emphasis added). While holders cannot contest the selection of a contract auditor, they will obviously have the right to contest any inappropriate audit procedures employed by such auditors.
Cost Assessments Against Noncompliant “Holders”
If the examination of a business association or financial institution results in the disclosure of unreported property, the State Treasurer is authorized to assess the cost of the examination against the holder at the rate of $200 a day for each examiner, or a greater amount that is reasonable and was incurred, provided that the assessment may not exceed the value of the property found to be reportable. 72 P.S. § 1301.23(e). Thus, business associations and financial institutions could be subject to cost assessments equal to the amount of any unreported property found during an examination by the State Treasurer, plus interest and penalties.
Under Act 126, if a holder fails, without proper cause, to report or to pay and deliver unclaimed property to the State Treasurer, the Treasurer may impose a penalty not to exceed $1,000 per day, beginning with the day after the report should have been filed and continuing each day thereafter until a proper report is filed. The State Treasurer may, however, waive all or a portion of the penalty for good cause. 72 P.S. § 1301.24(c).
Effective January 6, 2015, the amendments made by Act 126 also authorize the criminal prosecution of persons who fail to file unclaimed property reports or transfer unclaimed property to the State Treasurer. Such violations are classified as a third degree misdemeanor subject to a fine of up to $1,000.00 for a first offense and up to $5,000.00 for a subsequent offense.
Unclaimed Property “Finders”
Effective January 6, 2015, the Treasury Department is authorized to oversee “finders” – those who assist others with searching for and claiming unclaimed property for a fee. Individuals, other than attorneys and non-attorney representatives compensated on a non-contingent basis, will be required to obtain a certificate of registration from the State Treasurer prior to engaging in and receiving compensation for the location and recovery of unclaimed property. Certificates of registration will be valid for two years and may be renewed.
Under the new provisions, agreements or powers of attorney allowing “finders” to recover unclaimed property for owners are valid and enforceable only if the agreements are in writing and signed by the owner; clearly state the fee to be paid to the finder, which may not exceed 15% of the value of the unclaimed property; and contain certain additional information, including a valid certificate of registration number assigned to the “finder.” The Treasury Department has authority to conduct investigations and to revoke, suspend or refuse to issue a certificate of registration under certain circumstances, provided the finder or applicant is afforded appropriate administrative due process rights. Persons who violate the statutory provisions regarding finder contracts and registration are subject to the same criminal sanctions as those discussed above for violations of the reporting and transfer provisions.
Please contact Sharon Paxton or another member of the McNees SALT Group if you need advice concerning unclaimed property reporting or dealing with an unclaimed property audit.
In Inheritance Tax Bulletin 2015-01 and Realty Transfer Tax Bulletin 2015-01, issued on February 25, 2015, the PA Department of Revenue announced its policy concerning same-sex marriages and the impact of the May 20, 2014 decision by the United States District Court for the Middle District of Pennsylvania in Whitewood v. Wolf, 992 F. Supp.2d 410 (M.D. Pa. 2014). In Whitewood, the court ruled that Pennsylvania laws prohibiting same-sex marriages and refusing to recognize same-sex marriages validly performed in other jurisdictions were unconstitutional. As a result, the Department of Revenue has confirmed that, for an estate in which the decedent was party to a same-sex marriage which is legally recognized in Pennsylvania as a result of theWhitewood decision, the surviving same-sex spouse will be treated as a “husband” or “wife” for purposes of establishing rights and responsibilities under the Inheritance and Estate Tax Act. In addition, a natural or adopted child of any individual and that individual’s spouse, or a step-descendant, will be considered a lineal heir for purposes of establishing tax rates. Finally, financial institutions are to treat joint accounts titled in the name of individuals in a same-sex marriage as accounts held by “husband” and “wife.”
For purposes of Realty Transfer Tax exemptions, the Department has clarified that the phrase “husband and wife” will be deemed to include same-sex spouses and that an individual’s child (whether natural or adopted) is in a stepchild/stepparent relationship with the individual’s same-sex spouse.
Refund petitions may be filed with the Department to recover taxes paid on transfers to same-sex spouses or their descendants as a result of the non-recognition of a same-sex marriage within the applicable limitations periods for these taxes.
© 2015 McNees Wallace & Nurick LLC
PA TAX LAW NEWS is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.