United States: Pennsylvania Tax Developments (November 2014)

Last Updated: November 26 2014
Article by Frank J. Gallo, Stephen J. Blazick, Kenneth R. Levine, Daniel M. Dixon and Christine M. Hanhausen

Most Read Contributor in United States, October 2017

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.

Does New Governor Mean More Tax Reform? In the recent gubernatorial election, challenger Tom Wolf (D) defeated incumbent Governor Tom Corbett (R). If campaign promises are any indication, the governor-elect will likely push for more major tax reform in Pennsylvania, such as: a severance tax; combined reporting; further addressing the "Delaware loophole"; and a progressive personal income tax.1 That said, Pennsylvania still has a Republican-controlled legislature that may not share the same views on tax reform as the governor-elect.

One of the major tax items in Wolf's campaign platform was a 5% severance tax similar to taxes imposed by other gas-rich states. Under Wolf's plan, revenue raised by the tax would fund education and environmental agencies overseeing gas-extraction activities. This contrasts with Pennsylvania's current "Impact Fee," which provides revenue directly to counties and municipalities to fund infrastructure improvements and other programs that are necessary because of the increased shale activity. Because the current impact-fee law automatically expires if a severance tax on gas wells is enacted, many have expressed concerns about how that loss of revenue will impact the affected localities.

However, it's possible that the impact fee could remain in place even if a severance tax is enacted, because the legislature could amend the impact-fee law to remove the automatic expiration provision. Additionally, even if the current impact fee goes away, two state senators introduced a bill in the last legislative session that would create a new impact fee to generate money for the counties and municipalities. This same bill will likely be reintroduced during the next legislative session.

To sum this up—we could see a whole host of tax reform proposals during the upcoming legislative sessions. Although the new administration may push for new and increased taxes, they'll have some work to do getting the legislature on board. Taxpayers should keep a close eye on this.

Is the Department Overstepping its Authority in Applying Overpayments to Offset Assessments? According to the newly reconstituted and independent Board of Finance and Revenue,2 the answer to this question is "yes." In the case of In re Paul F. Brown,3 the Board of Finance and Revenue held that the Department of Revenue cannot transfer an overpayment credit to offset an underpayment for which the administrative appeals process is still available. This decision is particularly important now that the Department's new computer system is automatically making these transfers. This case involved personal income tax, but many corporate taxpayers are also facing the same issue.

Paul F. Brown involved the following situation: The Department issued an assessment for the 2008 tax year, and the taxpayer timely appealed to the Board of Appeals. After the Board of Appeals issued its decision regarding the 2008 assessment, the taxpayer timely appealed to the Board of Finance and Revenue. After the Board of Appeals decision, but before the filing of the Board of Finance and Revenue petition, the Department unilaterally transferred an overpayment from the taxpayer's 2011 tax year to pay the 2008 assessment that was already under appeal. The taxpayer filed a refund claim for the 2011 tax year requesting a refund of the overpayment credit that the Department used to offset the 2008 assessment.

The Board of Appeals rejected the taxpayer's claim, concluding that "the Department did not error in 'offsetting' the 2011 tax year refund against liabilities outstanding on the prior tax years as this is the standard procedure of the Department." This, of course, is not surprising, given that the Board of Appeals is part of the Department of Revenue. On appeal to the Board of Finance and Revenue, however, the Department's "standard procedure" was rejected.

The Board of Finance and Revenue found that the Department's application of the taxpayer's overpayment to offset an assessment prior to the end of the appeal period was improper. According to the Board, the Department does not have the authority to collect a deficiency until the administrative appeal process has ended, which means the taxpayer has not appealed an administrative decision during the appeal period or the taxpayer has appealed to Commonwealth Court. The Board ordered the Department to refund the 2011 overpayment.

The Commonwealth has appealed this decision to Commonwealth Court.

Department's Sales Tax Computer System Conversion is Underway As part of the Department's Revenue Modernization Project, the updated sales and use tax computer system went live last week. (The Department implemented the new system last spring for corporate taxes.) If you're looking for account information or waiting for refund checks, don't be surprised by delays.

Although the ultimate goal of the new system may be to streamline notices and processes, the corporate tax system update has caused numerous headaches. Less information is available to taxpayers, and the new system generates more confusing notices than before (see more on the issue here). However, the Department of Revenue is supposedly revising those notices and eliminating the Billing Notice (the second of three adjustment notices).

In addition, the new system automatically transfers a taxpayer's payments between various tax years and tax types without any input from the taxpayer. With sales and use taxes added to the new system, taxpayers should expect even greater offsetting between various tax types. Taxpayers will need to pay close attention to their Pennsylvania tax accounts to keep track of their payments and credits.

Supreme Court To Hear Oral Argument in Telecom Gross Receipts Tax Appeal Last year, in the case of Verizon Pennsylvania, Inc. v. Commonwealth,4 the Commonwealth Court concluded that receipts from non-recurring service charges are not subject to the telecommunications gross receipts tax, but receipts from private line and directory assistance charges are taxable (see more on the issue here). Both parties appealed to the Pennsylvania Supreme Court.

The court has granted oral argument, but limited to the issue involving the non-recurring service charges, which consists of three different charges: (i) installation of telephone lines; (ii) moves of, and changes to, telephone lines and services; and (iii) repairs of telephone lines. Argument is currently scheduled for March 2015.

Updated Guidance on Sales Tax Mining Exemption On September 22, 2014, the Department of Revenue issued a detailed information notice on the sales and use tax exemption for tangible personal property and services predominantly used directly in mining activities.5

The Department's Information Notice incorporates guidance from its Sales and Use Tax Bulletin 2012-01, as well as other informal guidance, including online questions and answers. This new Information Notice, however, is more detailed and offers specific examples of taxable and exempt property.

While this Information Notice provides useful insight into the Department's policies, it is important to remember that it is not the law. For example, the Department's new guidance specifically lists certain items as taxable under the "vehicles required to be registered" clause. According to the Department, this includes vehicles registered under the International Registration Plan, as well as truck chassis to which a drilling unit or service rig is affixed. But cases are currently pending in Commonwealth Court in which taxpayers are arguing that these items are not taxable, and the Department's guidance goes beyond the statute.

Court Concludes That Localities May Not Impose Tax on Rental Income On September 19, 2014, the Commonwealth Court issued a decision concluding that Lower Merion Township ("the Township") may not impose its business privilege tax ("BPT") on a taxpayer's gross receipts from rental income.6

The Township imposes a BPT on "[e]very person engaging in a business, trade, occupation or profession in the Township" at the rate of 1.5 mills on gross receipts. This BPT is authorized under the Local Tax Enabling Act ("LTEA"); however, it is also subject to restrictions under the LTEA. One of those restrictions prohibits localities from imposing a tax on "leases or lease transaction s." 53 P.S. § 6924.301.1(5)(1).

The taxpayers owned and leased real property in the Township. The Township imposed its BPT on rental receipts from those properties. The trial court sided with the Township and found the imposition of tax permissible because the BPT is imposed on a taxpayer's aggregate annual income/proceeds from the lease, and not on each individual lease transaction.

The Commonwealth Court framed the issue as a matter of statutory construction involving an exclusion from tax. As a result, the court strictly constructed the statutory provision against the Township. Ultimately, the Commonwealth Court agreed with the taxpayers and concluded that the LTEA prohibited a locality from imposing any tax on leases or lease transactions. That is, because the BPT would be imposed on the lease revenue at a rate of 1.5 mills, it was a tax on leases in violation of the LTEA.

Any taxpayer that earns revenue from leases or rentals of property and pays local BPT in Pennsylvania (not including Philadelphia taxes) should consider whether it is entitled to a refund.

Commonwealth Court Finds Freight-Brokerage Provider Not Public Utility On October 15, 2014, the Commonwealth Court issued a decision concluding that a taxpayer acting as a middleman between shippers and PUC-licensed freight carriers was subject to the City of York's ("City") business privilege tax ("BPT"), because the taxpayer did not qualify for the "public utility service" exemption.7 The taxpayer in this case did not engage in any transportation activities itself. Rather, its business was charging shippers a fee and then negotiating for shipment by a licensed carrier and remitting shipping costs to the carrier.

The City's BPT is subject to the limitations of the LTEA, which exempts from BPT gross receipts derived from transactions involving the rendering of "public utility services." In this case, the court concluded that the taxpayer was not engaged in rendering a public utility service because it simply "facilitates the buying of shipping services but does not, itself, transmit, deliver or furnish transportation of property – the hallmark rendering of any public utility service as a common carrier."

Court Invalidates Scranton's Commuter Tax On September 30, 2014, the Lackawanna County Court of Common Pleas struck down a recently enacted Scranton ordinance that imposed a .75% earned income tax solely on nonresidents. Scranton enacted the tax pursuant to the Municipal Pension Funding Standard and Recovery Act, which permits a municipality to increase its tax rate on earned income above maximum rates set by otherwise applicable laws.8

The taxpayers argued that the tax was unlawful because it was imposed exclusively on nonresidents. The court agreed that Scranton's earned income tax on nonresidents was impermissible because the Local Tax Enabling Act, the Home Rule Charter and Optional Plans Law, and the Municipalities Financial Recovery Act, placed limitations on Scranton's power to tax nonresidents.

Expanded Property Tax Rent Rebate Program On September 8, 2014, as a result of the Commonwealth Court's decision in Muscarella v. Commonwealth9 (see more on the issue here), the Department of Revenue announced that, beginning with claim year 2013, it will pay property tax and rent rebate claims filed on behalf of claimants who lived at least one day during a claim year.10

About Reed Smith State Tax Reed Smith's state and local tax practice is composed of lawyers across seven offices nationwide. The practice focuses on state and local audit defense and refund appeals (from the administrative level through the appellate courts), as well as planning and transactional matters involving income, franchise, unclaimed property, sales and use, and property tax issues. Click here to view our State Tax team. For more information on Reed Smith's Pennsylvania tax practice, visit www.reedsmith.com/patax.

  1. Recall last year's major tax reform under Act 52—it included, among other things, an extension of the franchise tax, increased NOL cap, intangible expense addback, market-based sourcing for sales of services, overhaul of Board of Finance and Revenue, and bank shares tax reform. See here.
  2. For a recap of this year's overhaul of the Board of Finance and Revenue, see here.
  3. Board of Finance and Revenue Docket No. 1309311.
  4. 79 A.3d 799 (Pa. Cmwlth. 2013).
  5. Information Notice Sales and Use Tax 2014-02: Natural Gas Mining (9/22/14).
  6. Fish, et al. v. Township of Lower Merion, Pa. Commw. Ct., Dkt. No. 1940 C.D. 2013, 9/19/2014.
  7. S&H Transport, Inc. v. City of York, Pa. Commw. Ct., Dkt. No. 165 C.D. 2014, 10/15/2014.
  8. In re City of Scranton Ordinance No. 36 of 2014, No. 2014 CIV 4799, (Sept. 30, 2014).
  9. 87 A.3d 966 (Pa. Commw. 2014).
  10. Department of Revenue, "Revenue Department Expands Property Tax/Rent Rebate Program Eligibility to Include Deceased Claimants Who Lived Part of 2013," released 9/8/2014

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

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