Pennsylvania Budget - Tax Impact Affecting Businesses and Individuals

By William Finnecy, CPA

Governor Edward G. Rendell has signed a bill that enacts a tax on managed care organizations, increases the rate of cigarette tax and applies the tax to little cigars, provides a tax amnesty program for delinquent taxpayers and makes other changes including: changing net operating loss and apportionment provisions, changing the fixed formula deduction and phase out schedule for capitals stock and franchise tax, accelerating the due date for payment of employer withholding and extending the period of certain return checkoffs, exempting helicopters and helicopter parts from sales and use tax and accelerating the due date for sales tax collection, and limiting the amount of various tax credits.

Tax on managed care organizations. The bill enacts a gross receipts tax on managed care organizations that are parties to Medicaid managed care contracts with the Department of Public Welfare in order to draw down federal reimbursed dollars. The tax is levied against each dollar of gross receipts received from payments under the Medicaid managed care contract at a rate of 59 mills, and applies for tax years starting after Dec. 31, 2008 and gross receipts received after Sept. 30, 2009. The first payment of tax for 2009 is due on March 15, 2010. A payment of estimated tax for calendar year 2010 is due on March 15, 2010. Payment for calendar year 2011 and each year thereafter will be due in accordance with Pa. State. Ann. Sec. 10003.2.

Cigarette tax increase. Effective November 1, 2009, the rate of cigarette tax is increased to $1.60 per pack or 8 cents per cigarette. The current rate is $1.35 per pack or 6.75 cents per cigarette. The tax will also apply to “little cigars,” which are defined as any roll for smoking that weighs not more than 4 lbs. per 1,000 where the wrapper or cover is made of natural leaf tobacco or other substance containing tobacco. The bill also adds definitions for “wholesaler” and “retailer”; and amends the definition of “unstamped cigarettes” to include any cigarette for which the proper amount of cigarette tax has not been paid. Starting in January of 2010, any person selling unstamped cigarettes to retailers, or buying unstamped cigarettes will be required to file a monthly report.

Tax amnesty. The bill enacts a tax amnesty program that will run from April 26, 2010 through June 18, 2010. Under the program, half of all interest and all penalties on eligible taxes that are delinquent as of June 30, 2009 will be waived for taxpayers who file returns and pay delinquencies (plus 50% of interest due) within the amnesty period. An “eligible tax” is any tax administered by the Pennsylvania Department of Revenue and delinquent as of June 30, 2009. The term includes any related penalties interest. Amnesty applies to unknown liabilities for five years prior to June 30, 2009. An “unknown liability” is: (1) a tax for which no return has been filed, no payment has been made, and the taxpayer has not been contacted by the Department regarding the unfiled reports or returns or unpaid tax, or (2) a tax for which a return or report has been filed, the tax was underreported and the Department has not contacted the taxpayer regarding the underreported tax. A taxpayer who otherwise qualifies for amnesty who certifies that payment in full under the program would create a financial hardship may be allowed to pay the taxes and interest due under the program in installments.

The Department may assess and collect all penalties and interest waived under the program within two years after the end of the program if the taxpayer becomes delinquent in the payment of taxes or filing of semi-monthly, monthly, quarterly or other returns without contesting the tax liability through a timely filed administrative or judicial appeal; or if the taxpayer is eight or more months late in filing an annual return without contesting the tax liability through a timely filed administrative or judicial appeal. A taxpayer participating in the amnesty program is barred from filing an administrative or judicial proceeding with regard to amnesty returns. A taxpayer who participates in the amnesty program is also barred from participating in any future tax amnesty program. No refund or credit is allowed for any interest or penalty on eligible taxes paid prior to the amnesty period. And if any overpayment of eligible taxes is refunded or credited to the taxpayer within 180 days after the later of the date the amnesty return is filed or the eligible tax is paid, there will be no interest allowed on the overpayment.

Business tax changes. Apportionment: The apportionment of business income is amended to increase the weighting of the sales factor. For tax years starting after Dec. 31, 2008, the numerator of the fraction is the sum of 8.5 times the property factor, 8.5 times the payroll factor, and 83 times the sales factor; and the denominator is 100. For tax years starting after Dec. 31, 2009, the numerator of the fraction is the sum of 5 times the property factor, 5 times the payroll factor, and 90 times the sales factor; and the denominator is 100.

Net operating loss: For tax years starting after Dec. 31, 2008, the net loss deduction is limited to the lesser of 15 percent of taxable income; $3 million; or the amount of net loss(es) that may be carried over, or the amount of taxable income. For tax years starting after Dec. 31, 2009, the net loss deduction is limited to the lesser of 20 percent of taxable income; $3 million; or the amount of net loss(es) that may be carried over, or the amount of taxable income.

Accelerated withholding payments: Effective Oct. 9, 2009, an employer whose aggregate withholding for the calendar year can reasonably be expected to equal $20,000 or more is required to pay withholding on the Wednesday following each payday if the payday falls on a Wednesday, Thursday or Friday. Employers whose payday falls on a Saturday, Sunday, Monday or Tuesday must pay withholding on the Friday after payday. Employers whose aggregate withholding is reasonably expected to equal at least $4,000 but less than $20,000 for the calendar year must pay their withholding on a semi-monthly basis, with payment due within three banking days of the semi-monthly period.

Employers whose aggregate withholding is reasonably expected to equal at least $1,200 but less than $4,000 are required to pay withholding on a monthly basis, with payment due by the fifteenth day of the succeeding month from January through November, and on the last day of January for the month of December. Employers whose aggregate withholding is reasonably expected to equal less than $1,200 may pay withholding on a quarterly basis, with payment due on or before the last day for filing quarterly returns under Pa. Stat. Ann. Sec. 7318. Previously, due dates for payment of withholding were based on the estimated aggregate amount of withholding for each quarterly period, thresholds were lower, and payments were due on a semi-monthly, monthly, or quarterly basis.

Personal income tax checkoffs. Return checkoffs: The bill extends return checkoffs for contributions for breast and cervical cancer research and contributions to juvenile diabetes cure research indefinitely. Checkoffs for contributions to wild resource conservation, contributions for organ donation awareness, and contributions for military family relief assistance are extended through Jan. 1, 2014.

Calculation of capital stock and franchise tax. For tax years starting after Dec. 31, 2009, the fixed formula deduction for purposes of capital stock and franchise tax is increased from $150,000 to $160,000, and the phase-out of capital stock and franchise is substantially slowed by maintaining a rate of 2.89 mills through December 2011 and decreasing the rate to 1.89 mills for 2012 and 0.89 mills for 2013. Note however, that because the schedule originally called for a reduction in the rate to 1.89 mills for 2009, the change will not apply to any estimated payment of capital stock and franchise tax due before Jan. 1, 2010. The tax will be phased out completely by 2014.

Sales tax exemption. Effective Oct. 9, 2009, the sale or use of helicopters and helicopter parts is exempt from Pennsylvania sales and use tax. Also effective October 9, 2009, licensees whose total tax for the third quarter of the preceding calendar year is $25,000 or more must file and pay sales and use tax on a semi-monthly basis. The report and payment for the first through the 15th of the month is due by the 25th of the month, and the report and payment for the 16th through the end of the month is due by the 10th of the following month. Licensees whose total tax for the third quarter of the preceding calendar year is at least $600 but less than $25,000 will continue to file monthly reports, which are due on the 20th of the month following the month for which sales or use tax was collected. Licensees required to file semi-monthly reports will not be required to file monthly report.

Please contact us with questions or comments.

The Malin Bergquist Tax Group: