United States: Pennsylvania Department Of Revenue Issues Notice On New Receipts Factor Apportionment Rules For Bank Shares Tax

Last Updated: May 6 2014
Article by Lance S. Jacobs

Immediate Action Required by May 14, 2014 for Any Bank 'Doing Business' in Pennsylvania

On April 14, 2014 the Pennsylvania Department of Revenue issued Notice 2014-1 (the Notice). The Notice requires those taxpayers having elected Method 1 with receipts from investment assets and activities to use Method 2. These taxpayers have 30 days from the date of the Notice to recalculate the tax due in accordance with the Notice and make any additional payments due as a result. All financial institutions with any activity in Pennsylvania should carefully consider the Notice. For example, if a financial institution owns a note secured by a mortgage or lien on Pennsylvania real estate or personal property, it should consider the applicability of the Pennsylvania bank shares tax.

Background

The Commonwealth of Pennsylvania enacted on July 9, 2013 Act 52, which changes the way that banks and trust companies subject to the Pennsylvania bank shares tax calculate and remit the tax due. The bank shares tax is technically a property tax imposed upon the value of the shares of the institution subject to the tax. For tax years 2014 and thereafter, the taxable amount of the shares is based upon the book value of total bank equity capital at the end of the preceding calendar year as reflected in the call report filed with its prudential regulator(s).

1. Nexus

Until Act 52, the bank shares tax was imposed only on banks that had a physical presence in Pennsylvania. Effective January 1, 2014, Pennsylvania law imposes the bank shares tax on all banks that are "doing business" in Pennsylvania, without regard to whether such banks have capital stock or offices or branches in Pennsylvania. Under Act 52, a bank is subject to the bank shares tax if it generates $100,000 or more of gross receipts that are apportionable to Pennsylvania and satisfies any of the following conditions:

  • The bank has an office or branch in Pennsylvania.
  • Its employees, representative, independent contractors, or agents conduct business activities on its behalf in Pennsylvania.
  • Any person solicits business on the bank's behalf in Pennsylvania through person-to-person contact, mail, telephone, or electronic means, or advertising that is produced, published, or distributed in Pennsylvania.
  • The bank holds a security interest, mortgage, or lien in real or personal property located in Pennsylvania.
  • Any basis exists under Pennsylvania law or the U.S. Constitution to apportion the bank's receipts to Pennsylvania.

It is likely that a bank will not be considered to be doing business in Pennsylvania merely because the bank uses independent professionals to perform services for it in Pennsylvania if such services are not significantly associated with creating a market in Pennsylvania, or the bank uses financial intermediaries in Pennsylvania to process or transfer checks, credit card receivables, commercial paper, or other similar items.

Act 52 significantly expands what activity is sufficient to create taxable nexus, and expands the bank shares tax, to the boundaries of U.S. constitutional law. Financial institutions having any connection with Pennsylvania must review their activities to confirm compliance.

2. Apportionment

Multistate institutions subject to the bank shares tax are entitled to apportion the value of the shares subject to the Pennsylvania tax in order to ensure that the tax fairly represents the institution's activities in Pennsylvania. Prior to 2014, the value of the shares was multiplied by a fraction, which was the average of the Pennsylvania property, receipts, and deposits factors, in order to arrive at a calculation of Pennsylvania taxable value. Each factor is, in and of itself, a fraction. By way of example, the payroll factor was calculated by dividing Pennsylvania payroll of the bank or trust company by the total payroll of the bank or trust company. This apportioned value was then multiplied by the tax rate in order to arrive at the tax due.

Act 52 of 2013 changed the apportionment language of 72 Pa. Stat. Ann. § 7701.4, eliminating both the deposits factor and the payroll factor from the calculation. The bank shares tax, subsequent to this change, is apportioned solely by use of the receipts factor for tax years beginning January 1, 2014 and beyond.

The revised receipts factor calculation provided taxpayers a one-time election for a methodology by which to include receipts from investment assets and activities and trading assets and activities in the numerator of the Pennsylvania apportionment factor. The election, once made, could not be changed in subsequent years unless the Department of Revenue granted permission to make such a change. The first method (Method 1) required the amount to be included in the numerator of the apportionment factor by multiplying the "... total amount of receipts from trading assets and activities under clause (A) by a fraction ..." the numerator of which is the total amount of all other receipts attributable to Pennsylvania and the denominator of which is the total amount of all other receipts. 72 Pa. Stat. Ann. § 7701.4(3)(xiii)(B)(i). Alternatively, the second method (Method 2) dictates that the numerator be determined by multiplying the "... total amount of receipts under clause (A) by a fraction ..." the numerator of which is the average value of the receipts-generating assets properly assigned to a regular place of business in the Commonwealth and the denominator is the average value of all such assets. 72 Pa. Stat. Ann. § 7701.4(3)(xiii)(B)(ii). The "... total amount of receipts under clause (A) ..." included receipts from both investment assets and activities and trading assets and activities.

The italicized language from the foregoing paragraph created some ambiguity between the two methodologies. Under the first method, institutions with any degree of investment receipts that would be sourced to Pennsylvania under the new rules could exclude them from the apportionment factor, since the language only applies to trading assets and activities.

Pepper Points

  • Through the issuance of the Notice, the Department of Revenue has essentially eliminated an election that the legislature intended for the taxpayers. In addition the Department of Revenue has acted in advance of the conclusion of the study mandated by the lawmakers to take into account the impact of macro factors upon Act 52's consequence upon the Commonwealth and the banking industry. During the legislative process, an understanding was reached between the stakeholders and lawmakers, that the goal was revenue neutrality. The mandated study requires the following factors to be reviewed:

    1. comparable tax burdens in other states
    2. the new capital rules imposed by the prudential regulators
    3. the Pennsylvania Supreme Court's decision in Lebanon Valley Farmers Bank v. Commonwealth 83 A.3d 107 (Pennsylvania Supreme Court 2013), 2013 Pa Lexis 3248, and
    4. an appropriate methodology to allocate and apportion the tax base where the entire business of the taxpayer is not conducted in Pennsylvania.
  • Taxpayers with tax liabilities materially altered as a result of this interpretation by the Department of Revenue should consult with their tax advisors. Please note that banks are no longer required to first pay any tax assessments before petitioning for a reassessment. Alternatively, it may be advisable, for example, to comply with the terms of the Notice, but subsequently file an amended return asserting rights to use Method 1 in accordance with the language in the statute, taking the position that it is not the Department of Revenue's role to rewrite the statute. The statute of limitations on refund claims is extended from two to three years. It should also be noted that the tax appeal process may now be positively implicated by the establishment of an independent Board of Finance and Review chaired by the state treasurer with two commissioners appointed by the governor with the advice and consent of the Senate.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions