Reed Smith Client Alerts

作者: Christine M. Maddison Frank J. Gallo Kenneth R. Levine Michael I. Lurie

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.

About Reed Smith State Tax Reed Smith’s state and local tax practice is comprised 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

  1. Civil Division No. GD-13-005115.
  2. 82–85 MAP 2012.
  3. 97 & 98 C.D. 2013


Client Alert 2014-223