PA Tax Law News

January 2008

IN THIS ISSUE: Surprises Lurk: Beware of PA Appeals Process Changes Effective January 1st | "Base of Operations" Requirement Eliminated for Business Privilege Taxes on Local Activities |Department of Revenue Updates on Realty Transfer Tax Regulations

Surprises Lurk
Beware of PA Appeals Process Changes Effective January 1st

by James L. Fritz

A number of changes to Pennsylvania appeal procedure, adopted in Act 119 of 2006, took effect January 1, 2008. While the intent of the changes was to simplify procedure, and while the overall effect has been to simplify procedure, we are hearing of some possible administrative interpretations that raise concern. Even without such complications, the changes made by Act 119 require some adjustments in thinking by taxpayers and representatives who had become accustomed to working within Pennsylvania’s antiquated settlement process.

“Settlements” Eliminated – Watch Your Refund Limitations Periods. The most significant change made by Act 119 was to eliminate Pennsylvania’s centuries-old “settlement” process for Corporate Net Income Tax, Capital Stock Tax, Franchise Tax and other corporate taxes. Effective January 1, the Department issues notices of assessment when the Department believes corporate taxes have been underreported. Unlike notices of “settlement,” which were issued whether an adjustment was made or not, the Department now is required to issue a notice of assessment only when increasing the tax.

One of the outgrowths of this change is that taxpayers will now need to pay more attention to their refund statutes of limitations. In the past, some taxpayers and practitioners would use the issuance of a settlement notice as an opportunity to revisit the issues in the return, and would not only file appeals contesting any adjustments made by the Department but also would raise issues in those appeals to make other adjustments in the taxpayer’s favor, or would file separate protective refund claims on issues involved in court litigation by other taxpayers. Now there may never be a notice of assessment, and if taxpayers do not track their three-year refund periods, the opportunity to file refund claims may be lost.

Furthermore, the ability to file a refund claim may be lost even if a notice of assessment is issued. Unless there has been an audit assessment (which would extend the refund statute to six months from the mailing date of the audit assessment notice), the refund statute is generally three years from the date of payment. Taxes paid prior to the due date are considered to have been paid on the due date. Under Act 119, the Department has three years from the report filing date (due date if filed early) to issue an assessment. The taxpayer then has 90 days to file a petition for reassessment. If the Department does not issue an assessment until the end of the three-year assessment period, the three-year refund limitations period may expire before the taxpayer prepares the appeal. If one waits until that point to consider possible refund claims, it could be too late to file them.

A refund petition is required even when no refund is sought? One of the more surprising positions we have heard advanced by some representatives of the Pennsylvania Department of Revenue would have taxpayers filing refund petitions even when the taxpayer seeks no refund! They say that a taxpayer may file a petition for reassessment only to contest specific adjustments made by the Department. If the taxpayer wants to change some element of the tax calculation that was not adjusted by the Department, they say the taxpayer would have to file a refund petition – whether or not the taxpayer seeks to reduce the tax to a net amount less than reported.

Take, for example, a situation where the Department makes a sales factor adjustment increasing Corporate Net Income Tax by $10,000 and a payroll factor adjustment increasing the tax by $20,000. Assume that the taxpayer agrees with the sales factor adjustment but disagrees with the payroll adjustment and has a new issue that would have a $5,000 impact. Under the position espoused by some in the Department of Revenue, the taxpayer would have to file a reassessment petition contesting the payroll factor adjustment and a refund petition raising the new issue, even though they agree that no net refund is due and that they owe an additional $5,000.

We have expressed to the Department our belief that this interpretation makes no sense and is in no way required by the language of Act 119. We are hopeful that this has been “nipped in the bud.” However, if you find yourself in this position and had intended to file your own petition, please check with us for the latest.

No more Sales Tax “notice of intention to petition.” Act 119 will have little effect on procedure for Personal Income Tax and Sales & Use Tax appeals. In both instances, assessments for $300 or more will be mailed by certified mail and an explanation of the basis for the assessment will be included in the notice or will accompany the notice. The prior practice of filing a “notice of intention to petition for reassessment” of a sales or use tax assessment within 30 days is eliminated. Now, a petition for reassessment is filed within 90 days of the assessment date.

Board of Finance and Revenue policy changes re deferral pending litigation. Although not mandated by Act 119, the Board of Finance and Revenue seems to be taking the occasion of the implementation of Act 119 to change some of its historical practices regarding the deferral of cases pending the outcome of court cases involving the same issue. Historically, the Board has liberally granted taxpayer requests to defer consideration of taxpayer cases until a case already in court on the same issue is decided. Act 119 provides the Board with specific authority to continue deferrals, at the Board’s discretion, but does impose a new requirement for the Board to render a decision within six months after the lead court case is finally decided. Over the past few months, the Board has begun to scrutinize deferral requests more closely. Based on recent discussions with the Secretary of the Board and Board counsel, we understand that the Board will insist on more detailed information from the taxpayer, to more clearly establish that the issue(s) in the Board appeal are, in fact, the same as in the lead court case cited by the taxpayer requesting deferral. Furthermore, the Board will be giving greater attention to whether the Board believes the lead court case is likely to be resolved in a way that will facilitate resolution of the Board case (most PA tax appeals taken to court are resolved by negotiated compromise and provide no binding legal precedent for other cases). For the time being, the Board has adopted no formal guidelines and is reviewing deferral requests on a case-by-case basis.

If you have any questions, please contact either Jim Fritz (717-237-5365, ) or Sharon Paxton (717-237-5393, ) for more information.

"Base of Operations" Requirement Eliminated for Business Privilege Taxes on Local Activities

by Sharon R. Paxton and James L. Fritz

The Pennsylvania Supreme Court handed some Pennsylvania municipalities and school districts a late Christmas present when, on December 27th, it upheld the City of Harrisburg’s right to impose its Business Privilege Tax on a contractor performing construction work, but not maintaining a traditional business office, in the city. The court rejected a line of Commonwealth Court decisions that had required the presence of a local “base of operations” to support a tax imposed on the “privilege of doing business” within the city. V. L. Rendina, Inc. v. City of Harrisburg and Harrisburg School District, No. 130 MAP 2005 (Pa. Supreme Court) (3 justices joining in opinion of the court, one concurring, one dissenting, two not participating).

From 1999 to 2001, Rendina constructed a major office building in Harrisburg. The company maintained the usual jobsite trailer but did not have any other office in the city. Rendina paid the city’s tax and then filed a refund claim. The city’s appeals board and the Dauphin County Court of Common Pleas held that the job trailer was a “field office” which constituted sufficient presence to support imposition of tax.

On appeal, the parties treated the tax as one imposed on the privilege of conducting business in the city, as opposed to a tax on business “transacted” in the city. Following a line of cases requiring the presence of a “base of operations” before a company could be subjected to a “privilege-based” tax, see, e.g., Township of Lower Merion v. QED, Inc., 738 A.2d 1066 (Pa. Cmwlth. 1999), appeal denied, 775 A.2d 811 (Pa. 2001), the parties focused their arguments on whether or not the job trailer should be considered a “base of operations” in the city. A divided panel of the Commonwealth Court reversed and struck the tax, holding that Rendina’s jobsite trailer was not a “base of operations.” The city then appealed to the Pennsylvania Supreme Court.

Somewhat surprisingly, the Pennsylvania Supreme Court completely side-stepped the question of whether the job trailer constituted a “base of operations.” In fact, the court suggested that whether a company has a “base of operations” in the taxing municipality is relevant only when the municipality seeks to tax income from activities outside the municipality. In Gilberti v. City of Pittsburgh, 511 A.2d 1321 (Pa. 1986) the court ruled that revenues from activities outside the city could not have been taxed by the City of Pittsburgh if its tax had been imposed on business “transactions” within the city. However, Pittsburgh’s tax was imposed on the privilege of doing business from a location within the city. Since the services provided by Gilberti were directed and controlled from Gilberti’s office or “base of operations” in the city, the court held that revenues from those services were fairly related to the exercise of the privilege of doing business in the city and could be taxed.

The Rendina court refused to require the inverse of Gilberti - to preclude a privilege-based tax in the absence of a “base of operations” in the municipality. The court noted that the Local Tax Enabling Act (“LTEA”) broadly authorizes local taxing bodies to impose taxes on “persons, transactions, occupations, privileges, subjects and personal property within the limits of such political subdivisions ....” 53 Pa. C.S. § 6902. And, the City of Harrisburg’s tax ordinance and regulations defined “business” broadly, so as to encompass local construction activities. In this light, the court held that Rendina’s presence in the city of Harrisburg for “a major long-term construction project” represented an exercise of the privilege of doing business afforded by the city. Furthermore, the court indicated that Rendina’s activities were subject to tax “regardless of whether the job site trailer was used as a ‘base of operations’ ..., or whether the three-year construction project can, in some sense, be viewed as constituting a single lengthy ‘transaction.’”

Justice Baer, in a concurring opinion, indicated that the Majority Opinion unnecessarily blurred the lines between the local taxation of “privileges” and of “transactions.” He would adhere to the requirement of a “base of operations” to support imposition of a privilege-based tax, and would not view a jobsite trailer as a “base of operations.” However, he also opined that, under the LTEA, a local government was permitted to adopt a “hybrid tax” on both the exercise of a privilege to do business and on transactions within the taxing jurisdiction. In his opinion, Harrisburg had adopted a “hybrid tax.”

Justice Cappy dissented, indicating that he agreed with the reasoning of the Commonwealth Court majority, that the contractor’s job trailer did not constitute a “base of operations” within the taxing jurisdiction and that the tax could not be upheld in the absence of a “base of operations.” Justice Baldwin and former Justice Newman did not participate in the decision of the case.

In light of the Rendina decision, we believe the following general principles now apply to local business privilege taxes in Pennsylvania: 
    1.    Pursuant to Rendina, a “privileged-based” tax may be imposed on revenues from significant activities carried on within the taxing jurisdiction, whether or not the taxpayer has an office or other “base of operations” in the jurisdiction. Whether tax may be imposed for an isolated activity seems unlikely. 

    2.    Pursuant to Gilberti and its progeny, a properly-drafted ordinance or resolution may impose a “privilege-based” tax on intrastate gross receipts attributable to activities carried on outside the jurisdiction but managed and controlled from a “base of operations” within the jurisdiction. 

    3.    Under a “transaction-based” tax, the taxing jurisdiction may not tax revenues from business transacted outside the jurisdiction. However, the Rendina majority’s reluctance to draw clean lines and the willingness of the concurrence to view a tax as both a “privilege-based” and “transaction-based” tax may encourage municipalities and school districts to argue that their tax ordinances and resolutions are both “privilege-based” and “transaction-based.” We’ll be faced with sorting out often imprecise or conflicting language in tax ordinances and resolutions. 

    4.    A Pennsylvania municipality or school district must fairly apportion receipts derived from interstate operations, even when the taxpayer’s only permanent place of business is located within the municipality.

Please address any questions to Jim Fritz (717-237-5365, ) or Sharon Paxton (717-237-5393, ).

Department of Revenue Updates Realty Transfer Tax Regulations

Comprehensive amendments to PA Realty Transfer Tax regulations (61 Pa. Code, Chapter 91) took effect on December 15, 2007. The updated regulations address numerous statutory changes enacted since the regulations were last amended in 1988 and bring the regulations into conformity with Department of Revenue policies on various issues. In its December 2007 Pennsylvania Tax Update, the Department stated that the Realty Transfer Tax amendments were not intended to create a greater tax burden on real estate transfers and provided responses to several questions raised by tax practitioners and the business community during the regulatory process concerning application of some of the amendments.

The updated regulations amend the definitions of “association” and “financing transaction” and add new definitions for “child,” “conservancy,” “conversion,” “corporation,” “debt,” “entity,” “living trust,” “ordinary trust,” “settlor,” and “testamentary trust.” The regulations also implement statutory changes relating to family farm corporations and partnerships and living and ordinary trusts, and contain rules explaining when a document that evidences the change in a business entity’s name or form is considered to be merely a confirmatory deed. Other topics addressed by the amendments include timber sales, documents that evidence the transfer of real estate by operation of law, the treatment of qualified intermediaries and exchange accommodation titleholders in Section 1031 exchanges, sale and leaseback transactions, transfers in bankruptcy proceedings and the Department’s application of the Pennsylvania Supreme Court’s decision in Baehr Bros. v. Commonwealth. On January 3, 2008, in response to questions received from the public, the Department published Realty Transfer Tax Bulletin 2008-01 to provide more detailed guidance regarding application of the “substance over form” rule adopted in Baehr Bros. to various factual scenarios.

Companies planning real estate transfers can obtain a copy of the updated Realty Transfer Tax amendments at Realty Transfer Tax Bulletin 2008-01 is available at: For additional guidance, please contact Sharon Paxton (717- 237-5393, ) or Jim Fritz (717-237-5365, ).

© 2008 McNees Wallace & Nurick LLC. PA Tax Law is presented with the understanding that the publisher does not render specific legal, accounting, or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers, or the publisher be liable for any damage, whether direct, indirect, or consequential, claimed to result from the use of this material.