With the November 4th election of Democrat Tom Wolf as Pennsylvania’s next Governor, Pennsylvania corporate taxpayers face an interesting budget season in 2015.  During the campaign, Wolf advocated for a severance or extraction tax on Marcellus Shale natural gas mining activities.  He also asserted that further action should be taken to “close the Delaware loophole,” beyond the addback provisions scheduled to take effect in 2015 under Act 52 of 2013 - presumably combined reporting.

While one might anticipate a stalemate between the new Democrat governor and enlarged Republican majorities in the PA House and Senate, we are mindful that both parties will have to deal with serious public policy challenges potentially requiring additional revenues.  A $50 billion pension fund deficit has contributed to multiple debt rating downgrades and the General Assembly and Governor sooner or later are going to have to stop “kicking the can down the road.”  And, both Governor-elect Wolf and many legislators on both sides of the aisle seem committed to eliminating or reducing local school property taxes - requiring replacement revenues from other tax sources.  Add these factors to the Independent Fiscal Office’s recent report that the Commonwealth faces a nearly $2 billion shortfall for FY 2015-16, and one would anticipate a very active budget season upcoming.

Turning from the political front to tax compliance and appeals, taxpayers experience continuing issues with the Department of Revenue’s new computer system (numerous confusing computer-generated notices), await guidance from the Department on the application of new sales factor sourcing rules effective for the current year under Act 52 of 2013 and continue to deal with the usual spread of legal issues in corporate tax appeals.

All we can say about the Department’s computer system is that we have little optimism for a quick fix and are thankful for the helpfulness of certain staff at the Department who will spend time on the phone resolving these issues.

On the sales factor sourcing front, we note that a confidential draft notice was circulated to practitioner organizations for comment some time ago and we are hopeful that the Department will (make a number of revisions and) issue final guidance soon.

On the appeals front, we note that the Pennsylvania Supreme Court will hear oral argument in the spring on Verizon’s Gross Receipts Tax appeal.  Argument will be limited to whether receipts from nonrecurring charges (installation, repairs, etc.) should be excluded, as was held below by the Commonwealth Court.  No argument will be heard on the issues of receipts from private lines and directory assistance, which were held taxable below.

Otherwise, we are seeing the usual issues.  See our September 2013 newsletter for an extensive listing of such issues.  Here are some issues from corporate tax decisions recently published by the Board of Finance and Revenue (many of which are now before the Commonwealth Court):

Corporate Net Income Tax

• Nonbusiness Income.  Whether patent royalties constitute nonbusiness income even though derived from transactions in which the company regularly engages?
• Unrelated Assets/Multiformity.  Whether income from patent royalties and other intangible sources should be excluded as income from Unrelated Assets or as income from a Multiform division operating separately from the company’s Pennsylvania activities?
• Equitable Apportionment.  Whether a taxpayer is entitled to Equitable Apportionment in order to reflect the proper attribution of income (including royalties and other intangibles income) to Pennsylvania?
• Withholding Credit.  Whether a corporate partner’s receipt of Schedule NRK-1 showing withholding credit should be sufficient for the partner to receive credit where the Revenue Department is not able to locate documentation definitively transferring credit to the partner?
• Sales Factor - Futures Contracts.  Whether receipts from sales of futures contracts should be included in the sales factor denominator?
• Nexus.  Whether a corporation has nexus with Pennsylvania as a result of an ownership interest in a Delaware statutory trust owning an undivided interest in a Pennsylvania power plant?
• Costs of Performance.  Whether sale of a statutory trust ownership interest is subject to income-producing activity/costs of performance analysis as a sale of intangibles?

Franchise Tax

• Unconstitutional Distortion-Factor Representation.  Whether a taxpayer is entitled to factor representation where dividends from subsidiaries are included in book income and the value of subsidiaries is included in net worth, but the property, payroll and sales of the subsidiaries are not reflected in the apportionment factors?
• Equitable Apportionment.  Whether special apportionment is required to fairly reflect value attributable to Pennsylvania where dividends from subsidiaries are included in book income and the value of subsidiaries is included in net worth but the property, payroll and sales of the subsidiaries are not reflected in the apportionment factors?
• Multiformity/Unrelated Assets.  Whether a taxpayer is entitled to exclude value attributable to investments in subsidiaries and various intangible assets where the investment assets are managed by a multiform division or are otherwise unrelated to the company’s Pennsylvania business activities?
• Manufacturing, Processing, R&D.  Whether production of specialized inks, dyes, coatings and chemicals for use in dye sublimation printing ribbons and bar code ribbons is manufacturing?  (granted by BF&R)  Whether finishing of plastics constitutes exempt “processing”?  (granted by BF&R)  Whether lab activities developing such products constitutes exempt R&D?  (granted by BF&R)

Gross Receipts Tax (Telecom)

Whether the following types of revenues are from the transmission of messages and thereby taxable:

Directory Advertising (Granted by BOA Dkt. No. 1310191)

•    Universal Service Fund
•    Wire Maintenance
•    Customer Premise Equipment
•    Caller ID
•    Local Number Portability
•    Call waiting
•    Voicemail
•    Suspension/Restoral
•    Bad Check Fees
•    Finance Charges
•    Service Order Fees
•    Installation
•    Direct Inward Dialing
•    Paper Bill Fees
•    Carrier Line Charges
•    Cost Recovery Fees
•    Remote Call-forwarding
­•    Toll Free Numbers
•    PICC
•    FEC Subscriber Line Charges
•    Bad Debts

Procedure

• Whether the existence of a debit account balance bars filing of a refund claim to the extent of tax actually paid?  (jurisdiction granted by BF&R.)