United States: Pennsylvania Tax Developments - 25 August 2014

This is a brief update on recent Pennsylvania tax developments. For more information on any of these developments, contact one of the authors or the Reed Smith State Tax attorney with whom you usually work.

FY15 Budget Enacted—Includes Little Tax Reform

Earlier this summer, Governor Corbett signed into law the fiscal year July 1, 2014 through June 30, 2015 budget (Act 1A of 2014). No Tax Reform Code bill was passed in connection with the budget.

However, a Fiscal Code bill was enacted (Act 126 of 2014) to make some changes to the unclaimed property law and several other unrelated changes. Specifically, with respect to unclaimed property, Act 126 reduced the holding period for certain property from five years to three years, which is expected to generate a $150 million one-time revenue increase. Act 126 also established registration requirements for persons other than lawyers who assist others with searching for and claiming unclaimed property in exchange for compensation.

Act 126 could possibly be subject to a legal challenge on constitutional grounds because it included legislation on several unrelated subjects, and the Pennsylvania Constitution requires that bills be limited to a single subject.

Tax Reform on the Horizon?

As mentioned in a previous update, as the gubernatorial race heats up, tax reform will continue to be a hot topic of discussion. Tom Wolf, the Democratic candidate challenging the incumbent Republican Governor Tom Corbett, has mentioned the following possible tax reforms:

  • "Combined reporting" for corporate net income tax purposes
  • A progressive personal income tax
  • A 5% severance tax on oil and natural gas extraction
  • Further action to close the "Delaware loophole"

We'll likely see more tax reform proposals discussed over the coming months from both gubernatorial candidates.

Additionally, as discussed in our last quarterly update, major school district property tax reform proposals (SB 76 and HB 2425) continue to circulate in both the House and Senate. Both bills are still under consideration. HB 2425, which was referred to the House Finance Committee July 23, is at the forefront of the debate.

HB 2425 would reduce local school district property taxes and offset that revenue loss by increasing the personal income tax rate from 3.07% to 3.70%, and by increasing the state sales tax rate from 6% to 7%. Additionally, under HB 2425, school districts would be permitted to increase other local taxes, including business privilege and mercantile taxes.

Board of Finance and Revenue Update and Interim Operating Rules

Now that last year's overhaul of the Board of Finance and Revenue has been fully effective for several months, it is important for taxpayers to consider how the new Board has functioned so far and how this may impact tax appeal strategy. As a reminder, the newly reconstituted Board consists of three members—two were governor appointments (David Kraus and Scott Shearer), and the third is the treasurer's designee (Jacqueline Cook). Importantly, the Department of Revenue's designee no longer sits on the Board, as it did under the old rules. There have been several months' worth of hearings before the new three-member Board, and these hearings are proving to be a meaningful opportunity for taxpayers to have issues considered and decided by an independent tax tribunal.

Board Argument Procedure: At a hearing before the Board, the taxpayer has an opportunity to present oral argument to the three-member Board and respond to questions from the Board. After the taxpayer's argument, the Department is permitted to present its arguments to the Board and respond to any questions the Board may have. (Lawyers from the Department of Revenue's Office of Chief Counsel have been representing the Department at these hearings and presenting legal arguments to the Board.) The taxpayer is then provided an opportunity to respond to the Department's argument.
The Board has been engaged during the arguments, asking many questions. Also, on more than one occasion, the Board has suggested that the parties try to reach a settlement.

Interim Operating Rules: The Board released Interim Operating Rules that set forth the procedures for practice before the new Board. The Treasury Department is expected to initiate the formal regulation process with the Independent Regulatory Review Commission so that these interim rules become final regulations.

The following are some important changes covered by these Interim Rules:

  • Ex Parte Communication: While ex parte communications between a party and the Board's staff are not permitted under Act 52, a party can waive its right to participate in such communications. Furthermore, where a party is given notice and an opportunity to participate, the failure of a party to participate in a communication will be deemed a waiver by that party.
  • Communication with Board Members: The Board members may not participate in any communications with either party regarding the merits of a case, outside of the hearing.
  • Initial Submissions: Unless a different time is provided by the Board, all submissions must be submitted to the Board no later than 60 days after filing the petition.
  • Responses: The opposing party has 30 days to respond to any submission. The Board is not required to review submissions and responses filed after the prescribed deadline.
  • Compromise: If a petitioner offers a compromise, it must submit a completed Board of Finance and Revenue Compromise Form either with the petition or within 30 days of filing the petition. For the Board to issue a compromise order, the parties must agree to waive any right to file an appeal that raises the same issues for the tax period(s) and liability(ies) addressed in the compromise order.
  • Request for Reconsideration: A party may file a request for reconsideration of the Board's order within 15 days of the decision.
  • Publication of Orders: The Board is required to publish all final orders on the Internet. Prior to an order being published, the Board will redact certain confidential taxpayer information. Taxpayers are permitted to participate in the redaction process.

These Interim Rules, however, also provide that they are to be liberally construed such that the Board may, at any stage of the proceeding, waive a particular requirement, including a deadline, where appropriate. Nonetheless, it is important to follow these rules unless otherwise instructed to ensure a taxpayer takes full advantage of this judicial-like forum.

DOR Releases Draft Market-Sourcing Guidance

The Department of Revenue released draft guidance for applying Pennsylvania's new market-based, sales factor sourcing legislation. The new market-sourcing legislation is effective for tax years beginning on or after January 1, 2014. Because Pennsylvania's corporate net income tax apportionment formula is now based entirely on the sales factor, understanding the recent changes to the sourcing rules is essential.

The new market-sourcing rules apply to receipts from: (i) services; (ii) sales, leases and rentals of real property; and (iii) rentals, leases and licenses of tangible personal property. The Department's draft guidance further explains the new rules for sourcing services and provides several examples applying these rules to specific services and industries.

This guidance also includes some insight on the Department's interpretation of the "cost of performance" sourcing rule, which continues to apply to receipts from intangibles.

Interested parties have submitted comments to the Department regarding this draft guidance, and the Department is currently considering those comments.

Click here for the Department's June 16 draft guidance.

Pittsburgh Drops "Purely Public Charity" Challenge; Constitutional Amendment Proposed?

As discussed in a prior update, the City of Pittsburgh sued University of Pittsburgh Medical Center (UPMC) for back payroll taxes, alleging that UPMC did not qualify as a "purely public charity" and, therefore, was not exempt from this tax. UPMC argued that it did not have any employees so it could not owe payroll taxes. (UPMC's subsidiaries had the employees.) On June 14, the Allegheny County Court of Common Pleas issued a ruling in favor of UPMC. The court did not, however, address the issue of whether UPMC was a purely public charity.1 The city could have filed a new claim against the UPMC subsidiaries that did have employees, but the city instead chose to drop the case.

Meanwhile, an amendment to the Pennsylvania Constitution has been proposed to clarify that the General Assembly has the authority to determine what is a "purely public charity." The proposed amendment would need to win further approval from the Legislature during the upcoming session, as well as voter approval in the form of a ballot referendum.

Non-resident Limited Partner can be Taxed on Phantom Gain

In Wirth v. Commonwealth,2 the Pennsylvania Supreme Court held that Pennsylvania was permitted under the Due Process Clause of the U.S. Constitution to tax non-resident limited partners whose only connection to Pennsylvania was a minority interest in a limited partnership.

The partnership in this case purchased a building in Pittsburgh using a nonrecourse mortgage, and continuously produced losses that the non-resident partners could not use to offset other Pennsylvania income. Eventually, the mortgage was foreclosed, and Pennsylvania took the position that the non-resident partners owed tax on their distributive share of their partnership's discharge of indebtedness income related to the foreclosure.

Not only did the taxpayers argue there was no due process nexus, but they also argued: there was no taxable event; the "tax benefit rule" prohibited imposing tax in this situation; and imposing tax in this manner violates the Uniformity Clause of the Pennsylvania Constitution. The court ruled against the taxpayers on all of these issues. Notably, however, the Supreme Court did not consider whether the partners had commerce clause nexus with Pennsylvania (i.e., whether imposing tax in this situation inhibits the free flow of interstate capital).

Pa. Supreme Court to Decide if Taxpayers can Receive "Credits" in Lieu of Refunds, When Refund Claim Would be Time-barred

The Pennsylvania Supreme Court has agreed to review the Pennsylvania Commonwealth Court's decision in City of Philadelphia v. Philadelphia Tax Review Board, et al.,3 that granted more than $6 million in Philadelphia tax credits to taxpayers who filed refund claims as a result of federal audit changes—even though the statute of limitations for refunds had expired.

The taxpayers in this case timely reported and paid their 2003 and 2004 Philadelphia Business Income & Receipts Tax ("BIRT"). Then, in 2009, after the three-year statute of limitations for filing a refund claim expired, the taxpayers' 2003 and 2004 federal taxable income was reduced as a result of federal audits. The taxpayers properly filed amended BIRT returns reporting the federal audit changes. The taxpayers also petitioned for refunds of the resulting overpayments. The Philadelphia Department of Revenue refused to issue refunds because the petitions were filed after the expiration of the three-year statute of limitations.

The taxpayers appealed to the Philadelphia Tax Review Board. The Board agreed with the Department that the taxpayers' refund petitions were untimely, but the Board awarded the taxpayers credits equal to the amount of tax overpaid. The Commonwealth Court affirmed the denial of the refund claims and upheld the award of credits to the taxpayers. According to the Commonwealth Court, the three-year limitations period on refunds was inapplicable to credits; unlike refunds, taxpayers could receive credits for overpayments at any time. The Commonwealth Court denied rehearing, and the city filed a Petition for Allowance of Appeal with the Pennsylvania Supreme Court. The Supreme Court agreed to hear the appeal, and briefing has already begun.

Any company that paid BIRT and received favorable federal audit adjustments after the deadline to file a refund claim should continue to monitor this case and consider filing refund claims.


1 Civil Division No. GD-13-005115.

2 82–85 MAP 2012.

3 97 & 98 C.D. 2013

This article is presented for informational purposes only and is not intended to constitute legal advice.

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.

In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

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