Pennsylvania Governor Tom Ridge signed into law on May 24, 2000 the largest tax cut in the history of the Commonwealth, dramatically reducing taxes for businesses and individuals. A few of the more significant changes, as passed in the legislation, are as follows:
Capital Stock and Foreign Franchise Taxes
The Pennsylvania capital stock and franchise tax, which is widely regarded as Pennsylvania's most non-competitive business tax, will be phased out through a 2-mill reduction of the tax rate, retroactive to January 1, 2000, a 1.5-mill reduction for the taxable year 2001 and a 1-mill reduction thereafter of the tax rate each year until the tax is eliminated (a 0.49-mill reduction in the last year). The tax rate was 10.99 mills. The phaseout will take nine years, such that the tax rates will be as follows:
Taxable Year Tax Rate
January 1, 2000 to December 31, 2000 8.99 mills
January 1, 2001 to December 31, 2001 7.49 mills
January 1, 2002 to December 31, 2002 6.49 mills
January 1, 2003 to December 31, 2003 5.49 mills
January 1, 2004 to December 31, 2004 4.49 mills
January 1, 2005 to December 31, 2005 3.49 mills
January 1, 2006 to December 31, 2006 2.49 mills
January 1, 2007 to December 31, 2007 1.49 mills
January 1, 2008 to December 31, 2008 .49 mills
January 1, 2009 & each taxable year thereafter no tax
The minimum annual tax of $200 will be eliminated for taxable years beginning after December31, 1999.
The legislation further retains the manufacturing exemption for the life of the capital stock and franchise tax. Generally, a corporation calculates its capital stock and franchise tax obligation utilizing either a single-factor formula or a three-factor formula. Under the three-factor formula, the amount subject to tax is generally computed by multiplying the value of the corporation's capital stock by an apportionment factor, which is the average of the ratios of Pennsylvania tangible personal property, payroll and sales, to worldwide tangible personal property, payroll and sales, respectively. Previously, the franchise tax statute permitted a corporation to reduce its tax liability by excluding from the numerators of the fractions the value of the corporation's property, payroll and sales used in the administration of manufacturing in Pennsylvania. This exclusion was referred to as the manufacturing exemption. The manufacturing exemption was subsequently found by the Supreme Court of Pennsylvania to be unconstitutional. Reacting to this determination, lawmakers adopted Act 1999-63, which retained the manufacturing exemption for property and payroll, but eliminated the exemption for sales. Moreover, Act 1999-63, by its terms, had a sunset provision such that it applied only for taxable years beginning after December 31, 1998 and beginning before January 1, 2001. The most recent legislation makes the temporary fix for the manufacturing exemption adopted in Act 1999-63 permanent for the life of the capital stock and franchise tax.
Sales and Use Taxes
In an effort to encourage Pennsylvanians to use computers in their homes, lawmakers passed legislation allowing for 2 weeks of tax-free computer purchases. Purchases of personal computers and associated equipment by individuals for non-business use will be exempt from the 6% state sales tax and the 1% local sales tax in Philadelphia and Allegheny Counties, during two separate one week periods: August 6 to August 13, 2000 and February 18 to February 25, 2001.
The term personal computer is defined to mean a laptop, desktop, or tower computer system, including all computer hardware and software sold together in the same sale at retail, where the computer system includes, at a minimum, a central processing unit, random access memory, a storage drive, a display monitor and a keyboard, except that the term shall not include mini computers, main frame computers, network servers, local area network hubs, routers and cabling, hardware, word processors, personal digital assistants, graphical calculators, hand-held computers, game consoles, internet TV devices, network operating systems, multiple-user licensed software and hardware, separate sales at retail or use of internal or external components and separate sales of add-on components.
Property Taxes
The legislation generally establishes a one-time, $100 homeowner's tax relief payment. The $100 rebate is provided on account of 1999-2000 school property taxes. Owners of a homestead as of July 1, 1999 who: (1)occupied the homestead during the tax year; (2)paid school real property tax on the homestead; and (3)apply to the Department of Revenue as prescribed will receive the rebate. Checks are required to be mailed by October 20, 2000. The Department of Revenue is instructed to establish the appropriate application procedures and deadlines necessary to implement and administer this legislation.
Inheritance Taxes
The legislation provides for changes for estates of decedents who die after June 30, 2000. For such estates, the rate of inheritance tax on transfers to lineal descendants, parents and grandparents is reduced from the current 6% to 4.5%. Transfers to siblings will be taxed at 12%, a reduction from the current 15% rate, and transfers to a parent from a child who is under 21 years of age will be taxed at 0% as opposed to the current 6%.
The legislation also closes a loophole which allowed avoidance of the Pennsylvania inheritance tax when a surviving spouse made a disclaimer of assets more than six months after the date of his or her spouse's death or six months from the date of probate, whichever was later. This loophole was caused by a discrepancy between the provisions governing Pennsylvania inheritance tax and the Pennsylvania Probate, Estates and Fiduciaries Code (the "PEF Code"). Previously, for a disclaimer to be effective for inheritance tax purposes, it was required to be made within nine months of the decedent's date of death, except in the case of a surviving spouse, when the disclaimer was required to be made within six months from the date of death or the date of probate, whichever was later. The PEF Code, however, does not provide for a time limit for making a disclaimer, so long as it was made before the property to be disclaimed is accepted. Furthermore, a disclaimer must be made within nine months from the decedent's death to be valid for Federal estate tax purposes.
Thus, before the current legislation, it was possible for a surviving spouse to wait more than the six-month period and make a disclaimer that was valid for Federal estate tax and property law purposes, but not for inheritance tax purposes. This meant that the disclaimed property could pass to other family members as a result of the disclaimer, yet for inheritance tax purposes remain taxed at a zero rate as though it were distributed to the surviving spouse. The legislation closes this loophole by requiring that a surviving spouse make the disclaimer within nine months after the death of the decedent.
Buchanan Ingersoll's Tax Group advises publicly held and private business entities, affluent individuals and families, and key executives in a full range of tax, employee benefits and dispute resolution matters at federal, state and local levels. We also counsel clients in the areas of wealth preservation and business succession planning. For more information, contact Tax Group Chairman Francis A. Muracca, II, at 412-562-3950 or by email at muraccafa@bipc.com.