PASBO Annual Meeting March 16, 2011 Act 32 Earned Income Tax Consolidation Update: The Good, the...

PASBO Annual Meeting

March 16, 2011

Act 32 Earned Income TaxConsolidation Update:

The Good, the Bad, and the Ugly

Clarence C. Kegel, Jr., Esq.Jason T. Confair, Esq.

KEGEL KELIN ALMY & GRIMM LLP24 North Lime Street Lancaster, PA 17602 TEL 717-392-1100 FAX 717-392-4385 www.kkaglaw.com

Topics• Where Are We Now?

• New EIT Tax Enactments

• Act 32 Transition Plan

• Outreach Plan

• DCED Issues/Regulations

• TCC Tax Regulations

• TCC Information Exchange Agreement

• Looking Forward: Oversight/Bureaus/ Management

• Issues You Are Experiencing/Questions

KEGEL KELIN ALMY & GRIMM LLP

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PASBO Work• Act 32 Task Force (Chair Rick Vensel)• Many programs• TCC Infrastructure

Bylaws Tax Collection Agreement Employer outreach video/forms

• Input to DCED• Assistance to TCCs on DCED issues• Regionalization of Earned Income Tax Collection

Under Act 32 of 2008: A Detailed Legal Analysis (technical assistance document prepared by Kegel Kelin Almy & Grimm LLP for the PASBO Act 32 Task Force) (April 2009)

• Much more


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Act 32 Overarching Purposes

County-wide EIT collection – reduce number of collectors

State-wide uniformity (except Philadelphia)

Avoid delay and loss of tax funds

Build expertise in EIT and other tax collection oversight – maximize revenue/minimize cost


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560 69Every county (except Phila. and

Allegheny) will select a single collector

67 Counties (w/Phila.)

Allegheny County split – 4 TCCs

Actual collector number will be 18!

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New Act 32 Rules• Universal non-resident withholding – every employer must

withhold tax from every employee subject to EIT and remit to the Tax Collector for the employment place – eliminates most current withholding loopholes – precludes direct payment to place of residence. Non-resident vs. resident withholding (employer remits one

place vs. multiple places) Substantial new employer duties Philadelphia exception – not part of consolidation and

uniformity DCED will need address Philadelphia issues in regulations

• Multi-site employer option – multi-site employers may elect to file combined return for all counties and remit in only one Pennsylvania county (Wal-Mart Amendment).


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One Tax Collection Agreement

• Major change – one master Tax Collection Agreement between Tax Collector and TCC – TCC enters contract for all taxing authorities

• Instead of prior individual Tax Collection Agreements between Tax Collector and each taxing authority


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Major Statewide Issues• Tax collector capacity• Employer compliance

Everywhere – including employers located in areas where no EIT and where employers have not previously withheld EIT

• Perfect storm – substantial new employer duties + technology issues + estimated distribution prohibition = funds flow disruption?

• PA Department of Revenue – will not collect EIT … but state tax form instructions and website should provide information on and warn taxpayers of duty to pay local EIT (as done by other state revenue departments)


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Miscellaneous Issues• Most TCCs moving from TC appointment to Act 32

collection transition• 2011 early implementation experiences• Northumberland County weighted vote litigation• Pike County – no EIT/no TCC/employer “workaround”• Hanna single SD in TCD legislation

Would affect Allegheny Central (Pittsburgh), Cameron, Clinton, Forest, Juniata, Mifflin, Sullivan, and Warren

SD may assume complete responsibility for tax collection; municipal advisory committee


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All TCCsShould Now Have Basics

• Officers• Solicitor• Bylaws• Committees• Management

structure

• “Tax facts” compiled

• Bank, PLGIT, or other account

• Budget + auditor

• Insurance

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All TCCsShould Now Have Basics

• Ethics Act filings

• Tax Appeal Board appointments

• Act 32 Tax Collection Agreement

• Deposit and Investment Policy (funds held by Tax Collector or TCC)

• Tax Records Policy

• Right-to-Know Records Policy

• Detailed Timeline/Action Plan

• D-Day = 01/01/12

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Annual Organization Steps

• May 1 each year – Ethics Act filings• July 1 each year – TCC reweight delegate votes

(if TCC uses weighted votes)• December each year – SDs/munis make annual

delegate appointment• December each year – TCC advertise next year

meeting schedule• TCC annual organization meeting/notify DCED of

new officers (see Bylaws)

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Before Long• New EIT tax enactments (if not done in 2010) – see

below• Act 32 Tax Collection Startup Steps – see below• TCC Tax Regulations, Policies, and Procedures

(12/31/11 deadline) (Act 32 § 508(d)(2) directed DCED to provide sample regulations by 12/31/09; § 505(a.1)(7) authorizes TCC to implement)

• Tax Appeal Board organization structure/policies/procedures/ appeal forms (12/31/11 deadline) (§ 505(j) mandates)

• TCC General Records Policy (records other than tax records) (12/31/11 deadline)


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Before Long• TCC Unidentified Funds Policy (12/31/11 deadline)

(§ 513(a)(4) mandates)• TCC Interest Payment/Claim Policy (12/31/11

deadline) (§ 513(b)(2), § 510 necessitates) • Delinquent Taxpayer Interest and Penalty Abatement

Policy (12/31/11 deadline) (Act 32 § 509(i)(2) directs DCED to provide guidelines for use in developing policy; requires TCC to adopt)

• TCC Information Exchange Agreement between TCC and Department of Revenue (Act 32 § 509(g) – 12/31/11 deadline)

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TCC Auditor• TC auditor audits TC business funds• Tax Collection Agreement determines

whether TC auditor or TCC auditor audits TC tax fund collections

• TCC needs auditor in any event:Audit TCC fundsReview and comment on TC financial

statements/internal controls


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We Already Have Tax Bureau !?Cannot opt out of Act 32 – TCC requirements still apply:• Option 1 – 2 organizations (same or separate

governance of bureau vs. TCC)• Option 2 – 1 organization (TCC takes over existing

bureau)• Option 3 – dissolve tax bureau; retain third party

vendor• Issues

PSERS? Compensate “prior owners”? Many others

• Fact sensitive – no “one size fits all”


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New EIT Tax Resolutions/Tax Ordinances

• Very important – most important 2011 action! (if not done in 2010)

• Get started now! Time of essence!• Is a new tax resolution/ordinance required?

Act 32 does not expressly mandateBut existing resolutions and ordinances generally

inconsistent with Act 32Uniform TCC tax enactment form benefits!Statewide uniformity?


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• Adoption issues Nonresident tax for municipalities “Special” tax terms – like a municipal open space tax Exemptions – age, low income, or other? Exemption or credit for out-of-state residents –

complex issues

• Advertisement requirements/form3 weeks – newspaper general circulationLegal journal advertising – 45 Pa.C.S.A. § 301 et seq.?


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• Timing for adoption?December 1 deadline to notify DCED (plus certified

copy)But note substantial advance planning/advertising

required – get started now!

• Consult solicitor!• Cost sharing?


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Tax Collection Agreement

Tax Collection Agreement Purposes• Act 32 and other law compliance• Change balance: from TC-oriented document to TA-

protection document• New transparency to TC activities/performance• Ensure you collect maximum revenue / least cost• Protect taxing authorities against loss• Improve/enhance tax collection process – raise the

bar on effective / cost efficient tax collection


Tax Collection Agreement Startup Steps

• 3 initial TCC TCA startup steps Familiarize – TCC officers familiar with key

TCA terms Transition plan – TCC/tax collector develop

plan/ timetable for transition to Act 32 collection – see below

Calendar – calendar listing deadlines for TCC/tax collector action under TCA


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Transition Plan – One Part of Startup• July 1 deadline – but get started now!• Tax facts compiled• New EIT tax enactments• New collector deliver financial statements/initial year CPA

approval• TCC approve tax collector bank/financial institution• New collector deliver bond/certificate of insurance –

acceptable terms? TCC review/approval!• TCC adopt policies listed on slides 14,15• Outreach plan / outreach plan / outreach plan!• Plan for collection of pre-Act 32 out-of-jurisdiction

amounts/delinquent tax


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Transition Plan – One Part of Startup• TCC notify new collector of TCC budget shares owed by

SDs and munis and to be deducted from tax revenue• PA Department of Revenue Information Exchange

Agreement• LST/other tax collection steps – see below• Old collector closeout steps

Final reports/payments Transfer unidentified/future funds Monitor open legal proceedings Final year financial statements See old tax collection agreement

• See ACT 32 TAX COLLECTION AGREEMENT STARTUP STEPS: KKAG Checklist of TCC/Tax Collector Steps Under Act 32 Tax Collection Agreement


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LST/Other Tax Collection Decisions

• Related steps:Taxing Authority Contract for Collection of Tax Other

than EIT?New tax levy resolutions or ordinances?

• Consult solicitor!


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Outreach Plan• Critical importance – 2011 early implementation

experience• Audiences

EmployersPayroll servicesCPAs/tax preparers Individual taxpayersOther collectors

• No “one size fits all” – adapt to your area• Primary responsibility – new collector


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Outreach Plan• Advertisements• Mailings• Direct personal contact/presentations to major employers• Chamber of Commerce• Service group luncheons• Resources

New tax collector PICPA website PASBO website

o Employer Training Videoso Employer Instructionso Centre County TCC Transition Steps


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Department of Revenue Information Exchange Agreement

• Act 32 directs TCCs to obtain countywide information from PA Department of Revenue

• Replaces prior fragmented system requiring each SD and muni to have agreement with Dept. of Revenue

• Dept. of Revenue is currently revising forms to accommodate

• Not yet completed


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DCED Issues• Where to start?• Many issues

Tax collection agreement No legal counsel needed Legislative testimony 2011 early implementation resistance Frequent position changes

• Forms/employer and tax collector electronic reporting formats Certificate of Residence Other forms not yet completed

• DCED Tax Register – for some addresses, accurately shows resident tax and nonresident tax; for others, Tax Register does not work

• Regulations – see belowKEGEL KELIN ALMY & GRIMM LLP

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DCED Regulations• What is DCED mandate?

Quarterly estimated tax return rules Multi-site employers – rules on where may file Info TC must transmit with funds sent other TCs DCED mediation rules TC bond and financial security guidelines Tax penalty and interest abatement rules Lancaster County opt out rules Philadelphia issues?

• Substantive tax regulations § 508(d)(2) directs DCED to provide “sample” regulations

by 12/31/09 § 505(a.1) directs TCCs to adopt tax regulations


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DCED RegulationsDCED Regulation Status• Initial draft

Long, detailed substantive tax regulations Many rules contrary to law 2% of revenue TC bond rule

• Latest draft Still many issues + unnecessary provisions that simply repeat

Act 32 provisions TCC may waive quarterly estimates if income less than $400

($4 tax)o PA PIT rule = $8,000 income ($246 tax)

Multi-site employerso May file where payroll operations locatedo May file elsewhere only if payroll operations outside PA; then

file only per DCED specific advance approval


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DCED RegulationsDCED Regulation Status

TCC borrowing rules – does Local Government Unit Debt Act apply?

Tax appeal board rules – too detailed and restrictive DCED mediation rules TC bond rules – “max amount on hand” unless TCC

agrees to lower amount based on assessment of TC financial strength, fiscal controls, and insurance

TC fiscal control rules – much too detailed – need refocus on TCC auditor review and a few key issues

Procurement rules – competitive bidding goods and services – 7 pages


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Who’s on First?

Chaos and bedlam ?

What ShouldTCC Tax Regulations Address?

• Cross-reference Pennsylvania PIT law and regulations – also Pennsylvania Personal Income Tax Guide

• Address income level that will trigger requirement for individuals to file quarterly estimated tax returns (subject to DCED established parameters)

• Address delinquent tax collection costs TC is permitted to assess against taxpayer

• Address differences from PA PIT, including: What is a “workplace”? This concept is inapplicable to PIT,

but controls whether an employer is obligated to withhold. For example, consider:o Employee with no fixed work locationo Employee who works from home


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What ShouldTCC Tax Regulations Address?

Individual residence determination Subchapter S corporation income – generally reported to PA

as “net income from operation of business or profession,” but not subject to EIT unless shareholder provides services and has artificially low salary

Individual who manages multiple rental properties and reports income to PA as “rents” rather than “net income from operation of business or profession”

Individual who reports income from “writing” to PA as “royalties” instead of “net income from operation of business or profession”

Credit for tax paid to Philadelphia or place of residence Other-state resident exemptions or credits against PA

municipality nonresident EIT


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Looking Forward:Tax Collector Oversight

• Tax fund safety items

• Tax revenue oversight items


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Tax Fund Safety Items• Initial tax collector bond form – proper amount and

terms!• Tax collector annual audited financial statements –

proper terms!• TCC approve tax collector auditor• TCC monitor tax revenue vs. bond amount• TCC monitor tax collector insurance• TCC monitor tax collector bank selection, investment

permissibility, and collateralization• TCC monitor tax collector financial strength• TCC monitor tax collector compliance with Act 32 + Tax

Collection Agreement


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Tax Revenue Oversight Items• Tax revenue trends/prior year comparisons• Investment earnings (where applicable)• Tax return processing times• Enforcement steps

Nonfiler identification steps and numbersClaims against other tax collectorsTaxpayer auditsDelinquent tax collection amountsCivil legal proceedingsCriminal prosecutionsWage attachments


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How Does TCC Perform Oversight?

• Review monthly reports; bond form; financial statements; and annual reports

• TCC auditor review and comment on financial information

• School district and municipality input/evaluation• Periodic TCC dialogue/meetings with tax

collector• Formal annual tax collector evaluation


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Looking Forward: Tax Bureaus• Advantages of tax bureau include:

Through local control, reduce risk of loss of funds Eliminate extra cost of private party profit Decouple collection decisions from profit motive Avoid India outsourcing risk Responsiveness to taxing authorities Local government control over tax collection process – in

order to maximize revenue – EIT not like real estate tax clearly defined tax duplicateo $100 new revenue outweighs $10 extra costo Identify and prosecute nonfilerso Audit questionable returnso Delinquent tax collection stepso Employer complianceo Other steps to maximize revenue

Avoid third party vendor capacity concern


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Looking Forward: Tax Bureaus

• Potential disadvantages include: Start-up cost and complexity to create (and achieve high

performance level) Public official or employee time involved in bureau

governance Unless cover large geographic area, difficult to achieve

economies of scale Some third party vendors might achieve “state-of-the-art”

sooner Third party vendors generally bid lower % collection cost –

but is this a savings?• Tax bureau = big topic (for another day)

Looking Forward: TCC Management• Big job for volunteer!• Leader duties include:

Make recommendations on key TCC decisionsEnsure mandated Act 32 steps occurLiaison with legal counsel, auditor, and tax collectorFinancial steps and oversight, including establishing

and monitoring of bank accounts, preparation and implementation of annual budget, TCC expense allocation and collection, and interface with TCC auditor

Obtain and monitor TCC insuranceRight-to-Know Law compliance/serve as Open

Records Officer


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Looking Forward: TCC Management

Ethics Act compliance, including obtaining and review of statements of financial interest

Sunshine Law compliance, including required public notices

Develop tax collector transition planOversee tax appeal board operationCoordinate TCC involvement in DCED mediation

process (to the extent appropriate)Calculate new weight for delegate votes each yearMaintain required TCC recordsTax collector oversightOversee all other aspects of TCC operations


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Looking Forward: TCC Management• No “one size fits all”• Alternatives to perform duties include:

Full time Executive DirectorPart time Executive Director (retired SD or muni

business administrator?)Executive Director shared with another TCCExecutive assistant or clerical employee perform

some or all operations dutiesSchool district, municipality, IU, county, or other

employee serve as Executive Director, or by contract perform specified duties and report to TCC Chairperson


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Looking Forward: TCC ManagementNo employees – TCC officers perform some or all

operations duties (with or without delegation or purchase of services from SD, muni, IU, or county)

Third party consultant If the TCC has an executive Director or other

employee, this raises additional complications and requirements in terms of personnel policies, payroll, and many other issues. If an employee is needed, the TCC should explore some type of joint employment relationship with an SD, muni, IU, county, or other employer in order to allow human resource functions to be performed by an entity with a pre-existing employee base and human resources capability

See § 505(a.2)(4)


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Looking Forward: TCC Compensation• May the TCC compensate tax appeal board members

or a TCC officer who performs employee operating duties?

• Act 32 § 505(a.2)(4) authorizes compensation for employees, but 505(j) is silent as to tax appeal board members and officers, and Act 32 is silent as to whether officers may serve as employees

• Pennsylvania Ethics Act issue – Is compensation prohibited if not expressly authorized? Is officer precluded from serving as employee?

• See also – 53 Pa.C.S.A. § 8430 (Local Taxpayer Bill of Rights) on compensation of members of a joint tax appeals board

• Open legal issues – exercise caution!

Questions & Answers


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Kegel Kelin Almy & Grimm LLP

Kegel Kelin Almy & Grimm LLP is a regional law firm with offices in Lancaster, Pennsylvania. KKAG is solicitor and general counsel to 17 school districts and joint school systems – and bond counsel, finance counsel, or special counsel to many others in Central and Eastern Pennsylvania. KKAG is also solicitor and general counsel to 7 Tax Collection Committees. KKAG is recognized for expertise on school district and municipal taxes. In addition, KKAG frequently serves Pennsylvania school districts for unusual and challenging problems, projects, or litigation.

KEGEL KELIN ALMY & GRIMM LLP24 North Lime Street Lancaster, PA 17602 TEL 717-392-1100 FAX 717-392-4385

www.kkaglaw.com

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PASBO Annual Meeting March 16, 2011 Act 32 Earned Income Tax Consolidation Update: The Good, the...

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