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Pennsylvania SALT Update

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By Stephanie Boris, JD

State and Local Taxation, director

Pittsburgh, Pa.

In Pennsylvania, we are watching to see which of the budget proposals introduced by Gov. Tom Corbett on Feb. 5 will make it to the enacted budget expected by June 30.  The following is a brief overview of the budget proposals related to tax.

Capital stock/foreign franchise tax

The capital stock/foreign franchise tax is still scheduled to phase out after 2013. This is an entity-level tax for C and S corporations and limited liability companies based on a combination of book income and net worth been a great tax for practitioners to help with planning opportunities, and I am sorry to see it go.

Corporate net income tax

From a corporate net income tax standpoint, Pennsylvania may provide some relief from the current net operating loss limitation, which is currently the greater of $3 million or 20 percent of Pennsylvania taxable income.

For corporate taxpayers that provide services, sales related to services are currently sourced based on an income-producing activity test for apportionment purposes. Pennsylvania may jump on the bandwagon with states such as Georgia, Illinois and Michigan to source the sales of services using a market-based approach.

Pennsylvania is one of the only states left in which an operating company still benefits from royalty or interest payments to an affiliate (i.e., a Delaware holding company). The good news is that Pennsylvania is not yet proposing combined reporting or an add-back, either of which would eliminate the current benefit. The not-so-good news is that Pennsylvania is proposing to require disclosure of these payments. In a similar disclosure recently in Tennessee, an operating company could deduct the expense to the affiliate as long as a disclosure form was completed and attached to the tax return. Tennessee later used this information to disallow the deduction of the expense for many taxpayers on the premise that the intercompany transaction did not have economic substance or was a “sham” transaction. It is still unclear how this would work in Pennsylvania.

Lastly, there is a rate reduction proposal to reduce the corporate net income tax rate from 9.99 percent to 6.99 percent. However a slow phase-in is expected through 2025.

Administrative appeals process

The current appeals process in Pennsylvania for tax assessments, including sales/use tax, corporation taxes or personal income tax is a bit dated. The first appeals level is the Board of Appeals, which was established as a unit within the Department of Revenue responsible for the review of appeals filed by taxpayers contesting tax assessments. Pennsylvania has recently made an effort to improve efficiency at this level by permitting taxpayers to submit a “request for compromise,” wherein issues may be essentially settled by agreement at the BOA. Whether this will be effective is still to be determined.

The second appeals level is the Board of Finance and Revenue, which has six members:

  • The state treasurer (chairman of the board)
  • The auditor general
  • The attorney general
  • The secretary of the commonwealth
  • The secretary of revenue
  • General counsel to the governor

The proposal is to replace the BF&R with a Tax Review Commission, independent from the Department of Revenue. The commission would have three members, appointed by the governor and approved by the Senate. Each member is to be an attorney with at least 10 years of Pennsylvania tax experience. In addition, decisions at this appeals level would be published and accessible online. Currently, BF&R decisions are not published, so practitioners and corporate tax accountants have no way of knowing, other than sharing general knowledge at seminars or over lunch with colleagues, whether the decisions made are consistent or what the BF&R’s interpretation of a particular statute/regulation might be. While this proposal may not have a direct or immediate impact on taxes, this is a step in the right direction for Pennsylvania appeals.

Loans tax

This is an archaic tax that many outside of Pennsylvania may not even be aware of. All corporations doing business and having officers in Pennsylvania are subject to corporate loans tax when the company has indebtedness/pays interest to Pennsylvania individual residents. Don’t worry about trying to understand the loans tax at this point – the proposal is to repeal it.

For more information, contact Stephanie Boris at sboris@alpern.com or (412) 281-2501.