On July 2, Pennsylvania Governor Tom Corbett signed into law House Bill 761, which has become Act 85 of 2012 (or "Act 85"). Act 85, among other things, completes Pennsylvania's transition to single sales factor apportionment, extends the due date for filing a report of federal changes, amends provisions related to certain credits and makes several administrative/procedural changes, including changes related to the administrative appeals process and sales and use tax filing requirements. Many of these changes are effective immediately.1

Overview of Act 85

The following summary is intended to capture some of the more significant changes contained in Act 85.

Corporate Taxes

  • Effective for tax years beginning on or after January 1, 2013, completes Pennsylvania's transition to single sales factor apportionment for purposes of the Corporate Net Income Tax (i.e., without market-based sourcing for sales of other than goods);2
  • Effective for tax years beginning on or after January 1, 2013, extends the due date for filing a tax report for changes made by the federal government from 30 days to six months following "the receipt of such final change or correction[;]"3 and
  • Effective for tax years beginning on or after January 1, 2013, requires the Pennsylvania Department of Revenue to automatically extend the due date for filing a Corporate Tax return to 30 days after the termination of the federal extension if a federal extension is filed.4

Administration/Procedure

  • Effective immediately, expressly allows a taxpayer to file a petition for reassessment (referred to as a "petition for review" in Act 85) where there has been no increase in tax liability (e.g., mere adjustment to a net operating loss), but also gives the taxpayer the right to file a petition in a subsequent tax year;5
  • Effective immediately, with respect to a petition for refund of tax paid as a result of an assessment, allows a taxpayer to file a petition for refund within six months of actual payment of the tax rather than six months after the mailing date of the notice;6
  • Effective immediately, with respect to a credit not granted for a tax period covered by an audit report, allows a taxpayer to file a petition for refund within the later of six months of the mailing date of the notice of assessment or within three years of actual payment of the tax rather than simply within six months of the mailing date of the notice of assessment;7 and
  • Effective immediately, provides statutory authority to the Secretary of Revenue to compromise a tax liability which is the subject of a petition for refund or reassessment (this amendment to the law complements and reinforces the recently implemented procedures for Board of Appeals compromises).8

Sales and Use Tax

  • Effective immediately, provides an exclusion for the purchase of wrapping or packaging services if the property wrapped or packaged will be resold by the purchaser (previously, the exclusion applied only to the purchase of the wrapping materials);9
  • Effective October 1, 2012, changes basis for determining when a monthly tax return is required to be filed to "actual tax" from "total tax reported;"10
  • Effective October 1, 2012, eliminates semi-monthly return filing (now these returns are required to be filed on a monthly basis);11
  • Effective October 1, 2012, allows a taxpayer whose actual tax liability for the third quarter of the preceding tax year is greater than $25,000 but less than $100,000 to make a prepayment equal to 50 percent of the current month or 50 percent of the same month in the prior year taxpayers;12 and
  • Effective October 1, 2012, authorizes the Department to impose an additional 5 percent penalty on monthly filers for failure to make required payments.13

Tax Credits

  • Effective immediately, repeals the December 31, 2015 Research and Development Tax Credit sunset provision and, thus, effectively extends the credit indefinitely;14
  • Effective immediately, increases the annual limitation on Research and Development Tax Credits to $55 million from $40 million, and increases the amount specifically allocated to "small businesses" (i.e., net book value of assets less than $5 million) to $11 million from $8 million;"15
  • Effective immediately, increases the Job Creation Tax Credit to $2,500 from $1,000 in the case of a newly created job filled with an unemployed individual;16 and
  • Effective immediately, in order to qualify for the Job Creation Tax Credit, a "small business" (i.e., a business that employs 100 or fewer individuals) must only agree to increase the number of employees to 10 percent within three years rather than the standard 25 new jobs or a 20 percent increase in employment.17

Commentary

While Act 85 made a number of changes to the Pennsylvania tax statues, many of which favor taxpayers, Act 85 did not include mandatory combined reporting or intangible expense addback provisions. In addition, Act 85 makes no mention of the Capital Stock/Franchise Tax phase-out, so the Capital Stock/Franchise Tax is still on track to be completely phased out as of the 2014 tax year.

In addition, several of the administrative/procedural and corporate tax changes incorporated in Act 85 are ostensibly intended to address the Council on State Taxation ("COST") 2010 Scorecard,18 which gave Pennsylvania a "D" grade with respect to the fairness and efficiency of Pennsylvania's tax procedure, and correlate with the Department's mission to "fairly, efficiently and accurately administer the tax laws." For example, extending the period for filing a report of federal changes to six months, removing the separate Pennsylvania extension request requirement and providing the Department with the authority to issue a reassessment on an appeal from an assessment that does not result in an increase in tax provide for a more taxpayer-friendly environment.

One thing to note about the revision to the report of federal changes due date is its effective date. As this provision is effective for tax years beginning on or after January 1, 2013, the provision does not apply to federal RARs issued with respect to tax years beginning prior to that date. Because the provision applies only to tax years beginning on or after January 1, 2013, it may be a number of years before taxpayers are able to utilize the additional time to file that has been afforded by this provision.

While likely not associated with Pennsylvania's COST Scorecard "D" rating, even some of the sales and use tax changes under Act 85 ease the tax burden placed on taxpayers. For example, Act 85 expands the packaging and wrapping supplies exclusion to include packaging and wrapping services where the item wrapped or packaged is resold. In addition, with respect to a taxpayer whose actual tax liability for the third quarter of the preceding tax year is greater than $25,000 but less than $100,000, Act 85 eliminates the semi-monthly reporting requirement and allows such a taxpayer to make a prepayment equal to 50 percent of the current month or 50 percent of the same month in the prior year (i.e., prior to the enactment of Act 85, the prepayment was required to be 50 percent of the same month in the prior year – the same prepayment requirement as other taxpayers).

Lastly, Act 85 repeals the December 31, 2015 Research and Development Tax Credit sunset provision, which effectively extends the credit indefinitely – yet another pro-taxpayer development. And Act 85's credit provisions seem to focus on easing the tax burden on small businesses. For example: (1) Act 85 increases the annual limitation on Research and Development Tax Credits specifically allocated to "small businesses" (i.e., net book value of assets less than $5 million) to $11 million from $8 million; and (2) reduces the threshold for a small business (i.e., a business that employs 100 or fewer individuals) to qualify for the Job Creation Tax Credit to a 10 percent increase in the number of employees within three years from 25 jobs or a 20 percent increase in employment within three years.

Clearly, Act 85 improves Pennsylvania's tax environment. The current administration, the Department, and the legislature should be commended for recognizing the need for improvement and taking action.

Footnotes

1 Portions of this article will be published in the Fall 2012 edition of the Pennsylvania CPA Journal.

2 Amends 72 PA. STAT. § 7401(3)2(a)(9)(A), which currently requires use of an apportionment formula consisting of 90 percent sales, 5 percent property and 5 percent payroll.

3 Amends 72 PA. STAT. § 7406(a).

4 Amends 72 PA. STAT. § 7405.

5 Amends 72 PA. STAT. § 9702.

6 Amends 72 PA. STAT. § 10003.1(d).

7 Amends 72 PA. STAT. § 10003.1(b).

8 Adds 72 PA. STAT. § 9707. See Miscellaneous Tax Bulletin 2011-02, Pennsylvania Department of Revenue, Nov. 16, 2011.

9 Amends 72 PA. STAT. § 7204(13).

10 Amends 72 PA. STAT. § 7217(a)(2), (3).

11 Amends 72 PA. STAT. §§ 7217(a)(3) and 7222(a).

12 Amends 72 PA. STAT. § 7217.

13 Amends 72 PA. STAT. § 7217(a)(9).

14 Repeals 72 PA. STAT. § 8712-B.

15 Amends 72 PA. STAT. § 8709-B(a).

16 Amends 72 PA. STAT. § 8804-B(a).

17 Amends 72 PA. STAT. §§ 8801-B and 8803-B(b).

18 Every three years, COST evaluates state statutes and rules that govern the degree of taxpayer access to an independent appeals process, and state treatment of selected procedural elements that impact taxpayers' perceptions of fairness and efficiency. The results of the latest study may be found at: http://www.cost.org/Page.aspx?id=75918.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.