Nonprofit entities that own Pennsylvania real property are under relentless attack from local taxing jurisdictions regarding the exempt status of property used for charitable purposes, and thus must be ever vigilant in fighting back to either maintain a property’s exempt status or gain exempt status for a newly built or acquired property.

To be successful, nonprofit entities need to fully understand the constantly evolving landscape of the real estate tax “purely public charity” exemption in Pennsylvania.

A summary of the current legal standard for Pennsylvania’s “purely public charity” exemption:

To qualify for an exemption from tax as a “purely public charity,” an entity must meet both constitutional and statutory requirements. Mesivtah Eitz Chaim of Bobov, Inc. v. Pike Cnty. Bd. of Assessment Appeals, 44 A.3d 3 (Pa. 2012).

First, an entity must prove it is a “purely public charity” under Article VIII, Section 2(a)(v) of the Pennsylvania Constitution, which provides:

(a) The General Assembly may by law exempt from taxation:

…

(v) Institutions of purely public charity, but in the case of any real property tax exemptions only that portion of real property of such institution which is actually and regularly used for the purposes of the institution.

CONST. art. VIII, § 2(a)(v).

Unfortunately, the Pennsylvania Constitution does not define the term “purely public charity.” For over a hundred years the courts in Pennsylvania were left to determine what was a “purely public charity.” In 1985, the Pennsylvania Supreme Court decided Hospital Utilization Project v. Commonwealth, 487 A.2d 1306 (Pa. 1985) (commonly known as “HUP”), which set forth the following five criteria that an organization must satisfy to be considered an “institution of purely public charity:”

  1. Advance a charitable purpose;
  2. Donate or render gratuitously a substantial portion of its services;
  3. Benefit a substantial and indefinite class of persons who are legitimate subjects of charity;
  4. Relieve the government of some of its burden; and
  5. Operate entirely free from private profit motive.

This five-prong test for “purely public charity” status has become known as the “HUP test.” All five-prongs must be met. If an organization does not meet just one prong, it is not a “purely public charity,” and thus its property is not entitled to a tax exemption. By satisfying the HUP test, the applicant demonstrates that it meets the minimum constitutional qualifications for being an appropriate subject of a tax exemption.

Once the Constitutional HUP test is satisfied, an entity seeking a “purely public charity” exemption must satisfy the five statutory requirements of the Institutions of Purely Public Charity Act, codified at 10 P.S. §§ 371-385 (“Act 55”). The purpose of Act 55 was to legislatively clarify the five-point test for exemption adopted by the HUP test in a way that would eliminate inconsistent application of standards by providing uniform grounds for exemption. 10 P.S. § 372(b).   However, the Pennsylvania Supreme Court in Mesivtah Eitz Chaim of Bobov, Inc. v. Pike Cnty. Bd. of Assessment Appeals, 44 A.3d 3 (Pa. 2012) held that before ever getting to Act 55’s test, an institution must pass constitutional muster by clearing the five-prong HUP test. Thus, instead of replacing the HUP test, Act 55 just became another test a charitable organization must satisfy to qualify for tax exemption.

Finally, an entity must also prove it merits an exemption under the applicable county assessment law. The Consolidated County Assessment Law, 53 Pa.C.S. § 8812, provides tax exemptions for second class A through eight class counties, which accounts for 65 of the 67 counties in Pennsylvania. Exemptions for first class (Philadelphia County) and second class (Allegheny County) counties are still governed by the General County Assessment Law, 72 P.S. § 5020-204.

Accordingly, an entity will be considered a “purely public charity” and its property will be exempt from real estate taxes only after it satisfies the five criteria of the HUP test, the five criteria of Act 55 and the specific criteria in each relevant county assessment law .

Current “Purely Public Charity” Exemption Landscape in Pennsylvania:

The current landscape for the “purely public charity” exemption in Pennsylvania is filled with landmines. The local taxing jurisdictions (schools, municipalities and counties) in Pennsylvania are looking for revenue sources wherever they can find them with the ever-increasing pension issue, shrinking tax bases and rising administration costs. Thus, taxing jurisdictions are appealing “purely public charity” exempt property classifications at an alarming rate with a “nothing to lose attitude.”

The heavy burden to prove it is entitled to exemption is on the organization seeking exemption. Four Freedoms House of Philadelphia, Inc. v, Philadelphia, 279 A.2d 155 (Pa. 1971 ). This principle is not overruled even if the taxing authority is seeking to remove the exemption from the exempt realty. School District of City of Erie v. Hamot Medical Center, 602 A.2d 407 (Pa. Cmwlth. 1992). Accordingly, the cards are affirmatively stacked in favor of the taxing jurisdictions because an organization seeking exemption only must not satisfy one of the criteria under the HUP test, Act 55 or the county assessment law to not be considered a “purely public charity.”

Since the HUP decision was handed down in 1985, many charitable institutions have lost their exempt status because the appellate courts took a strict application of the mandated criteria. When Act 55 was enacted, the appellate courts took a more liberal approach of the mandated criteria at the expense of the taxing jurisdictions. However, the appellate courts have now gone back to a strict application of the mandated criteria since Mesiztah Eitz Chaim held that an institution must pass constitutional muster by satisfying the HUP test before ever getting to Act 55’s test.

Accordingly, recent case law coming out of the appellate courts regarding the “purely public charity” exemption is very inconsistent and relies heavily on the facts of each specific case. These inconsistencies have led to nonprofit entities having to expend considerable financial resources to fight for “purely public charity” exemption – resources that could be used instead for furthering the nonprofit entity’s charitable mission.

Payment in Lieu of Taxes:

In recent years, many nonprofit entities are entering into a payment in lieu of taxes agreement (“PILOT”) with the taxing jurisdictions in order to forego the costs and risks of litigation as to whether or not it is a “purely public charity.” Unfortunately, taxing jurisdictions in Pennsylvania are using every means possible to pressure nonprofit entities into entering these types of agreements in order to forego costs of litigation. Specifically, taxing jurisdictions have been known to use the media (i.e. television, social media or newspaper) to call out a nonprofit entity for seeking exempt status on a property and thus removing much needed tax revenues from a struggling school district or municipality. There have also been instances where taxing jurisdictions have publicly announced what one nonprofit entity was paying in a PILOT with the expectation that another nonprofit entity seeking a PILOT would agree to pay the same amount.  Undoubtedly, a PILOT will have an adverse financial impact on nonprofit entities that agree to pay them, and as stewards of tax-exempt donor funds, nonprofit entities may be coerced into making payments that do not necessarily fall within its particular charitable purpose. Consequently, nonprofit entities must walk a fine line between being “good corporate citizens” and fulfilling its charitable mission.

The one main advantage to a PILOT is that they are contracts between the nonprofit entity and the taxing jurisdiction and thus could be structured in any way that the parties agree. Accordingly, a PILOT should be looked at with an “outside the box” mentality. A PILOT doesn’t have to be exclusively about money changing hands from the nonprofit entity to the taxing jurisdiction. In fact, a nonprofit entity can donate its services or facilities in exchange for the taxing jurisdiction not disputing its tax-exempt status.

One of the main issues when dealing with a PILOT is whether the property at issue is a newly created property that could now be taxed or is one that was taxed and could now be nontaxable. A PILOT should be easier to agree to when dealing with a property that was never taxed and could now possibly be taxed because the taxing jurisdictions were never financially dependent on any tax revenue from that property. It is a whole other ball game when a large taxable property is sold to a nonprofit entity and could possibly be deemed exempt going forward because the taxing jurisdictions need to figure out how to fill that budget gap. In these instances, I find that a stepped down payment plan works best so that the taxing jurisdictions can adjust their budgets accordingly going forward.

There has not been a lot of litigation regarding PILOTs in Pennsylvania. However, a recent Commonwealth Court decision upheld a trial court order granting a petition to enforce a PILOT agreement. In re Appeal of Springfield Hosp., 179 A.3d 632 (Pa. Cmwlth. 2018). The relevant facts in that case were as follows: taxing authorities sought to impose property taxes upon a nonprofit entity that operated a hospital after the health campus was expanded to include medical office buildings, a sports club and a parking garage which the taxing authorities asserted were not entitled to an exemption. The matter was resolved through the parties entering into a PILOT agreement. The PILOT agreement specified that the hospital and its successors and assigns would not be subject to real property tax so long as the existing hospital building is used solely for hospital purposes by the taxpayer, or by another tax-exempt entity. When the property was sold to a for-profit entity, the taxing authorities sought to impose property tax effective on the date of transfer.

The trial court found, and the Commonwealth Court agreed, that the plain language of the PILOT agreement provided that the property would become taxable on transfer to a non-exempt entity. The Commonwealth Court further found that making the assessment of taxes effective as of the date of transfer under the PILOT agreement did not violate the tax assessment day rule as the change in taxation is not pursuant to a reassessment. The rationale being that the parties agreed in the PILOT that tax was due on the property when and if the property was not owned by a hospital that was exempt from federal taxation.

This decision is troublesome because the rule in Pennsylvania (the tax assessment day rule) has always been that if a property is tax exempt on the day of assessment, it remains tax exempt for the entire year. Accordingly, if a property is tax exempt on January 1, it is exempt until December 31. Likewise, if a property is taxable on January 1, it is taxable until December 31. The rationale being that the taxing jurisdictions could budget accordingly if they knew that a property was taxable or nontaxable the entire year, instead of only part of the year.

Pursuant to this decision, nonprofit entities should be careful how they address the sale of an exempt property in a PILOT. Because a PILOT is a contract, the parties to a PILOT can agree that a property will be taxable January 1, the year after the property is sold to a for-profit entity. Thus, ensuring a for-profit buyer certainty of future local real estate tax liabilities that potentially could help close the sale.

Conclusion:

In sum, nonprofit entities need to be vigilant in understanding the “purely public charity” exemption laws in Pennsylvania to properly contest increased scrutiny on their properties from local taxing jurisdictions. Additionally, nonprofit entities need to be creative when negotiating PILOT terms with a taxing jurisdiction and should come to the negotiation table with an “outside the box” mentality.

 

Please contact Paul Morcom, Esq. at 717-237-5364 or Randy L. Varner, Esq. at 717-237-5464 if you have any questions regarding the “purely public charity” exemption or PILOTs in Pennsylvania.

 

On October 1, 2018, the Pennsylvania Department of Revenue (“DOR”) revised its Tax Bulletin – Sales and Use Tax 2018-02 to be effective July 1, 2019 instead of the previous effective date of January 1, 2019.  This change gives manufacturers of malt or brewed beverages an extra 6-months to become compliant with collecting and remitting sales tax to the DOR on its sales of malt or brewed beverages.  Please read our previous blog post from August 3, 2018 that explains the details of Tax Bulletin – Sales and Use Tax 2018-02.

If you have any questions regarding Tax Bulletin – Sales and Use Tax 2018-02, please contact Paul Morcom (717-237-5364), Sharon Paxton (717-237-5393) or Randy Varner (717-237-5464) to discuss.

 

On August 20, the Pennsylvania Department of Revenue issued Corporation Tax Bulletin 2018-04, which announces the Department’s position regarding the scope of taxable and nontaxable telecommunications receipts for Gross Receipts Tax (“GRT”) purposes based on the Pennsylvania Supreme Court’s decision in Verizon Pennsylvania, Inc. v. Commonwealth, 127 A.3d 745 (Pa. 2015), and Act 52 of 2018, which provides a statutory exclusion for receipts from certain equipment and accessories (“Equipment”).  Act 52, which took effect on June 28, 2018, excludes receipts from “the sales of telephones, telephone handsets, modems, tablets and related accessories, including cases, chargers, holsters, clips, hands-free devices, screen protectors and batteries” from the tax base and applies retroactively to gross receipts from transactions occurring on or after January 1, 2004.  Act 52 further provides that “no claim for refund or credit for a tax paid prior to [June 28, 2018]” shall be based on the Act, which creates a potential uniformity issue.

The Bulletin provides the following non-comprehensive sample of sales of services and equipment generating taxable receipts:

(1) End user charges, including costs, fees, and surcharges itemized on a customer’s bill (e.g., subscriber line charges and gross receipts tax surcharges).

(2) Directory Assistance.

(3) Late payment fees.

(4) Non-recurring charges, including termination, installation, repairs, moves and changes to service.  Non-recurring charges include any charges for wires, switches, connectors, or similar property provided as part of the termination, installation, repairs, moves and changes to service.

(5) Enhanced telecommunications receipts, including voicemail, call forwarding, call waiting and custom ringtones.

(6) Receipts from sales of service using voice over Internet protocol (VOIP).

(7) Receipts from paging services.

(8) Receipts from sales and leasing of private lines and private networks, including dark fiber.

(9) Receipts from sales and leasing of equipment and property, except for excluded Equipment charges (see below).

The following is a comprehensive list of authorized GRT deductions per the Department:

(1) Receipts from sales of internet service to the ultimate consumer and sales of service exempt under the Internet Tax Freedom Act.

(2) Resale receipts from persons subject to GRT on the resale of the telecommunications.

(3) Sales tax collected by the taxpayer.

(4) Distributions to a telecommunications provider from the USF authorized by USAC.

(5) The uniform 911 surcharge.

(6) Bad debt, provided the taxpayer satisfies the conditions established in Corporation Tax Bulletin 2011-02.

(7) Receipts from sales and leasing of telephones, telephone handsets, modems, tablets and related accessories, including cases, chargers, holsters, clips, hands-free devices, screen protectors and batteries.

 

 

 

 

 

 

 

On July 27, 2018, the Pennsylvania Department of Revenue (“Department”) issued Tax Bulletin – Sales and Use Tax 2018-02 regarding taxpayers engaged in the manufacture and sale of malt or brewed beverages.  The Bulletin is intended to help clarify when a manufacturer of malt or brewed beverages must collect sales tax on the sale of malt or brewed beverages.  Unlike a retail liquor licensee or retail dispenser, a manufacturer of malt or brewed beverages is required under the Tax Reform Code of 1971 to collect sales tax on its sales of malt or brewed beverages to any person for any purpose except sales to importing distributors or distributors.  72 P.S. § 7201(k)(10).  The Department realized that confusion will occur since a manufacturer is required to collect sales tax on each individual sale of its own product to the public for on-premise or off-premise consumption, while other licensees, not selling their own product but in all other respects acting in a similar capacity, do not collect sales tax.  Accordingly, the Department will provide manufacturer’s the following two options for collecting and remitting sales tax:

1.  Include the sales tax in the advertised price of their product; or

2.  Separately state and charge sales tax on each individual sale.

Under Option #1, the sales tax shall be computed by the following formula:  (Total receipts from the sale of its own products ÷ 1.06) X .06 = Sales Tax Due.  Please note that a manufacturer that elects to collect tax using this method must display a sign at the location where its prices are displayed noting that the displayed purchase price includes sales tax.  Additionally, a manufacturer must pay sales tax when it purchases products other than its own to sell to the public for consumption on-premises.  The Department will not require a manufacturer to collect sales tax on sales of other manufacturers’ products to the public (similar to how a bar or restaurant operates).

Under Option #2, the manufacturer must collect and remit sales tax on each individual sale of its own product, whether the sale is for on-premises or off-premises consumption.  Additionally, if a manufacturer sells the products of other manufacturers, it must collect the sales tax on the purchase price of those sales as well.  The manufacturer should provide the other manufacturer with an exemption certificate claiming a sale for resale exemption.  A manufacturer claiming the resale exemption must collect sales tax when its sells the property to its customers.  If the manufacturer does not provide an exemption certificate to the other manufacturer when making a purchase and pays sales tax on items that it later resells to customers and charges sales tax, the manufacturer may claim a Taxes-Paid-Purchases Resold credit on  its sales tax return.

For manufacturers that sell its malt or brewed beverages under a retail license there are special rules because sales tax is not charged on the sale to the ultimate consumer of the malt or brewed beverage.  In these type of situations, the Department requires the manufacturer to use a constructive purchase price for its own products in order to determine the proper tax base upon which to remit sales tax to the Commonwealth.  The Department considers the actual retail price of the malt or brewed beverages sold to consumers to best reflect the constructive purchase price.  In this scenario, the Department will allow a manufacturer to calculate its tax owed using the Option #1 method mentioned above.

Please note that the Department’s guidance is applied prospective only, beginning with the effective date of January 1, 2019.

If you have any questions regarding this Tax Bulletin, please call Paul Morcom (717-237-5364), Sharon Paxton (717-237-5393) or Randy Varner (717-237-5464) to discuss.

 

 

The annual assessment appeal deadline for tax year 2019 real estate taxes just passed on August 1, 2018 for 19 of Pennsylvania’s 67 counties.  The next annual assessment appeal deadlines are as follows:

  • Berks County – August 15, 2018
  • Wyoming County – August 31, 2018

The majority (44 out of 67) of Pennsylvania’s counties have an annual assessment appeal deadline of September 1, 2018 for tax year 2019.  Those counties are:

  • Armstrong
  • Beaver
  • Bedford
  • Blair
  • Bradford
  • Cameron
  • Carbon
  • Centre
  • Clarion
  • Clearfield
  • Clinton
  • Columbia
  • Crawford
  • Cumberland
  • Elk
  • Forest
  • Fulton
  • Greene
  • Huntington
  • Jefferson
  • Juniata
  • Lackawanna
  • Lebanon
  • Lycoming
  • McKean
  • Mercer
  • Mifflin
  • Montour
  • Northumberland
  • Perry
  • Pike
  • Potter
  • Schuylkill
  • Snyder
  • Somerset
  • Sullivan
  • Susquehanna
  • Tioga
  • Union
  • Venango
  • Warren
  • Washington
  • Wayne
  • Westmoreland

The appeal deadline for Philadelphia County is the first Monday of October, which is October 1, 2018 this year.

Allegheny County is the only county that has a deadline, March 31, that is actually during the year that you are appealing. Thus, the appeal deadline for tax year 2019 in Allegheny County is March 31, 2019.

If you own or lease commercial or industrial properties in Pennsylvania, please make sure that you are aware of these appeal deadlines. Additionally, if you are not sure if you should file an appeal on your property, please contact either Paul Morcom at 717-237-5364 or Randy Varner at 717-237-5464 to determine if an appeal is warranted for tax year 2019.

After enactment of the Federal Tax Cuts and Jobs Act last year (which allowed taxpayers to claim bonus depreciation for the full cost of eligible property placed in service after September 27, 2017), the Pennsylvania Department of Revenue issued Corporation Tax Bulletin 2017-02. In Bulletin 2017-02, the Department concluded that corporate taxpayers were required to add back the 100% bonus depreciation amount to Pennsylvania taxable income and that no depreciation deductions would be allowed on 100% bonus depreciation property until the year in which the taxpayer disposed of the property.

In response to the proposed disallowance of all cost recovery for Pennsylvania corporate net income tax (“CNI”) purposes, the General Assembly passed Act 72 of 2018, which was signed into law by Governor Wolf on June 28. Under Act 72, for property placed in service after September 27, 2017, Pennsylvania corporate taxpayers taking advantage of the new 100% bonus depreciation rules for Federal tax purposes may use Federal depreciation rules, other than bonus depreciation, for CNI purposes. This essentially places taxpayers in the same position they would have been without the Federal bonus depreciation.

Corporation Tax Bulletin 2018-03, issued July 6, supersedes Bulletin 2017-02. In Bulletin 2018-03, the Department of Revenue clarified that it will continue to allow depreciation deductions under Corporation Tax Bulletin 2011-01 for property placed in service before September 28, 2017. For property placed in service after September 27, 2017, Act 72 allows an additional deduction which is limited to the depreciation amounts under the Modified Accelerated Depreciation System (MACRS). The taxpayer can deduct any unused bonus depreciation in the tax year in which the asserts are sold or otherwise disposed of.

Taxpayers who have already filed 2017 CNI returns which include assets subject to Act 72 may filed amended returns to claim an additional deduction for the amount of deprecation allowed under MACRS.

The annual assessment appeal deadline of August 1, 2018 for tax year 2019 is quickly approaching for the following Pennsylvania Counties:

Adams, Bucks, Butler, Cambria, Chester, Dauphin, Delaware, Erie, Fayette, Franklin, Indiana, Lancaster, Lawrence, Lehigh, Luzerne, Monroe, Montgomery, Northampton and York.

The annual assessment appeal deadline of September 1, 2018 for tax year 2019 is on the horizon for the following Pennsylvania Counties:

Armstrong, Beaver, Bedford, Blair, Bradford, Cameron, Carbon, Centre, Clarion, Clearfield, Clinton, Columbia, Crawford, Cumberland, Elk, Forest, Fulton, Greene, Huntington, Jefferson, Juniata, Lackawanna, Lebanon, Lycoming, McKean, Mercer, Mifflin, Montour, Northumberland, Perry, Pike, Potter, Schuylkill, Snyder, Somerset, Sullivan, Susquehanna, Tioga, Union, Venango, Warren, Washington, Wayne and Westmoreland.

There are a few oddball counties that have to be different and thus the annual assessment appeal deadline for Berks County is August 15, 2018 and Wyoming County is August 31, 2018. Philadelphia County is not a specific date, but instead the annual appeal deadline is the first Monday in October. Allegheny County is the only county that has a deadline, March 31, that is actually during the year that you are appealing. Thus, the appeal deadline for tax year 2019 in Allegheny County is March 31, 2019.

Each county has its own separate set of local rules pertaining to assessment appeals that need to be navigated in order to successfully file an annual assessment appeal.  If you own or lease commercial or industrial properties in Pennsylvania, please make sure that you are aware of these appeal deadlines. Additionally, if you are not sure if you should file an appeal on your property, please contact either Paul Morcom at 717-237-5364 or Randy Varner at 717-237-5464 to determine if an appeal is warranted for tax year 2019.

SB 1056, amends the Tax Reform Code to align state law with the federal law’s 100% bonus depreciation. Signed in the House and the Senate on June 22, 2018.

SB 735, would amend the Real Estate Tax Sale Law to establish an optional County Demolition and Rehabilitation Fund in certain counties, funded by the fee assessed for properties sold for delinquent taxes. The fund would be used for the demolition or rehabilitation of dilapidated buildings on blighted properties. Authorizes fee no greater than 10% of the assessed value of the property being sold for delinquent taxes. Final Passage in the Senate on June 22, 2018.

SB 653, would amend the Local Tax Enabling Act, to further consolidate the collection of local, non-real estate taxes at the county regional level, as was done with the collection of Earned Income Taxes under Act 32.

HB1511, would amend the Tax Reform Code, in hotel occupancy tax applying the state sales and the local hotel occupancy tax to the full price paid by the consumer at the point of sale for booking a hotel room (not the lower price paid by on line travel companies such as Orbitz, Travelocity, Expedia to hotels). Establishes the Hotel Tourism Fund, into which tax collected by intermediaries would be deposited and disbursed upon appropriation for tourism. Voted favorably as amended from House Finance Committee, first consideration in House. Re-referred to House Rules.

SB1214, was introduced and referred to the Senate Finance committee on Friday. SB1214 would amend the Film Tax Credit (FTC) Program within the Tax Reform Code.   The legislation proposes to create additional incentives for related Pennsylvania companies to utilize film tax credits without having to transfer or sell those credits to an unrelated business.  It would allow a corporate taxpayer who receives film tax credits to allocate those credits among its parent or sister companies that are part of the same consolidated federal income tax group.

Also, on Friday,the Senate Finance Committee unanimously voted out the nomination of Paul Gitnik to the Board of Finance and Revenue. The nomination now moves to the Rules and Executive Nomination Committee. Mr. Gitnik’s bio is shown, below.

PAUL J. GITNIK

Paul J. Gitnik is an Energy attorney with Pittsburgh law firm Keevican, Weiss, Bauerle and Hirsch. In 2011, Mr. Gitnik founded ShaleEnergyUSA.com, Inc. With its three interconnected websites – www.ShaleEnergyUSA.com, www.MarcellusUSA.com and www.UticaUSA.com – ShaleEnergyUSA.com provides resources and tools, including the recorded oil-gas leases, royalty percentages, dates, documents, instruments, permits, well dates, records, regulations and information about Shale Oil-Gas in the Appalachian Basin.

Earlier in his career, in 1991, Mr. Gitnik founded SOCRATES, INC., which provided claims recovery outsourcing, technology and consulting services and solutions to the health payor industry which he sold in 2007. Mr. Gitnik stewarded the development of SOCRATES, INC.’s proprietary Subrogation Outsourcing Case Review and Tracking Empowerment System (“SOCRATES”) and the MY SOCRATES family of proprietary software programs.
Mr. Gitnik was on the adjunct faculty of Duquesne University School of Law, where he taught Business Planning; Mercyhurst College, where he taught Estate Planning; and Penn State Continuing Education for Accountants, where he taught Choice of Business Entities.

Active in the community, Mr. Gitnik is or has been a member of numerous nonprofit boards, including the Allegheny County Bar Foundation, Allegheny Regional Asset District Board, Animal Friends, Phipps Conservatory and Botanical Gardens, Pittsburgh Opera, Pittsburgh Mercy Foundation, Diocese of Pittsburgh Foundation Advisory Board, Hamot Health Foundation, St. Vincent Health Center, Preservation Pennsylvania, Erie Art Museum and Jefferson Health System.

Quick Links: The Department of Revenue has published in The Pennsylvania Bulletin the real estate valuation factors which are to be used for Pennsylvania Realty Transfer Tax purposes from July 1, 2018 to June 30, 2019.

 

In a widely anticipated decision in the state tax world, the United States Supreme Court, in South Dakota v. Wayfair (June 21, 2018), has struck down the sales tax physical presence standard set forth in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), and National Bellas Hess, Inc. v. Department of Rev. of Ill., 386 U.S. 758 (1967). Under Quill, an out-of-state seller’s liability to collect and remit sales tax to the consumer’s state depended on whether the seller had a physical presence in the state. After Wayfair, there is no longer a physical presence standard.

 

In Wayfair, the underlying issue was a statute passed by South Dakota which required sellers that deliver more than $100,000 worth of goods or services into the state on an annual basis, or engage in 200 or more separate transactions for the delivery of goods and services into the state on an annual basis, to collect and remit sales tax. Top online retailers filed an action challenging the statute.

 

The Court, in a majority opinion authored by Justice Kennedy (and joined by Justices Thomas, Ginsburg, Alito and Gorsuch), found that the physical presence rule is unsound and incorrect. First, the Court found that the physical presence rule is not a necessary interpretation of the requirement that a state tax must be “applied to an activity with a substantial nexus with the taxing State.” Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977). Second, it found that Quill creates rather than resolves market distortions. Finally, the Court concluded that Quill imposes the sort of arbitrary, formalistic distinction that the Court’s modern Commerce Clause precedents disavow.

 

In the opinion, the Court noted that when the day-to-day functions of marketing and distribution in the modern economy are considered, it becomes evident that Quill’s physical presence rule is artificial, not just “at its edges,” Quill, 504 U.S. at 315, but in its entirety. Modern e-commerce, the Court reasoned, does not align analytically with a test that relies on the sort of physical presence defined in Quill. The Court concluded that it should not maintain a rule that ignores substantial virtual connections to the state.

 

On the policy front, the Court noted that the physical presence rule was an extraordinary imposition of the judiciary on the states’ authority to collect taxes and perform public functions. Bluntly, the Court stated that helping customers evade a lawful tax unfairly shifts the tax burden to customers who purchase items from an in-state seller. By giving online retailers an arbitrary advantage over their competitors who collect sales taxes, the Court reasoned, the physical presence rule has limited the states’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field. The majority rejected arguments that stare decisis should preclude the Court from overruling National Bellas Hess and Quill, reasoning that adherence to precedent should not support the Court’s prohibition of a valid exercise of the states’ sovereign power; in fact, the Court should be vigilant in correcting such an error.

 

Justice Roberts was blunt in his dissent, arguing that stare decisis should apply due to market participants making decisions on the decades-old physical presence test. Justice Roberts also warned that the majority decision could detract from e-commerce’s “significant and vibrant part of our national economy.” He reasoned that the Court should not act on this important question of current economic policy, solely to expiate a mistake it made over 50 years ago.

Many questions now exist going forward. How far can states now go under the first prong of Complete Auto, which requires a substantial nexus with the state before the state may impose a tax? Will states attempt any “look back” assessments? What dollar threshold, or number of transactions, will trigger nexus under Complete Auto? Will states offer vendor allowances/discounts for online retailers’ collection of tax?

The McNees State and Local Tax Team will continue to monitor developments and will keep you updated.

Tax Practitioners and Finance VPs should keep an eye out this week  for significant activity coming out of the Pennsylvania  legislature  that will  align the PA tax structure with that of the feds—in some areas.

The House Finance Committee will vote on  June 19 on SB 1056, which will align PA bonus depreciation with the feds for property placed in service after September 27, 2017.

The recently enacted Federal Tax Cuts and Jobs Act makes major changes to corporate income taxes, one of which is that C-corporations will be able to deduct 100% of the cost of their capital investments (e.g. plant and equipment) immediately, for the next five years. The federal 100% bonus depreciation rule applies through 2022 and then will be phased down over the succeeding five years. In response to the new federal bonus depreciation rules, the Pennsylvania Department of Revenue issued Corporation Tax Bulletin 2017-02. The bulletin interprets certain sections of Pennsylvania tax law as requiring the amount of a 100% deduction under federal rules to be added back to Pennsylvania taxable income and provides no additional mechanism for cost recovery with respect to the qualified property until it is either sold or disposed of in some other manner. The bulletin not only “decouples” Pennsylvania from the federal rules, but it denies businesses the ability to claim depreciation deductions indefinitely. By disallowing this important deduction indefinitely, Pennsylvania would be unique among states and would create a business climate that discourages investment and spawns economic contraction rather than opportunity and expansion.

The House Finance Committee will vote on June 20 on  HB 2303, which would permit the executor or administrator of a decedent’s estate to elect to file a combined annual income tax return for an estate and revocable trust during the period the estate is open. Under federal law, the estate of a decedent who dies with a revocable trust in place can elect to file a single annual income tax return (Form 1041) that reports income earned by both entities (the estate and trust). Pennsylvania does not permit this practice so that a decedent’s estate and revocable trust are required to file separate income tax returns (Form PA 41) to report income earned by each during the year.