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PASBO Annual Meeting March 16, 2011 Act 32 Earned Income Tax Consolidation Update: The Good, the Bad, and the Ugly Clarence C. Kegel, Jr., Esq. Jason T.

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Presentation on theme: "PASBO Annual Meeting March 16, 2011 Act 32 Earned Income Tax Consolidation Update: The Good, the Bad, and the Ugly Clarence C. Kegel, Jr., Esq. Jason T."— Presentation transcript:

1 PASBO Annual Meeting March 16, 2011 Act 32 Earned Income Tax Consolidation Update: The Good, the Bad, and the Ugly Clarence C. Kegel, Jr., Esq. Jason T. Confair, Esq. KEGEL KELIN ALMY & GRIMM LLP 24 North Lime Street Lancaster, PA TEL FAX

2 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 2

3 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 KEGEL KELIN ALMY & GRIMM LLP 3

4 4 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

5 KEGEL KELIN ALMY & GRIMM LLP  69 Every 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! 5

6 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 ). KEGEL KELIN ALMY & GRIMM LLP 6

7 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 KEGEL KELIN ALMY & GRIMM LLP 7

8 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) KEGEL KELIN ALMY & GRIMM LLP 8

9 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 KEGEL KELIN ALMY & GRIMM LLP 9

10 All TCCs Should Now Have Basics Officers Solicitor Bylaws Committees Management structure “Tax facts” compiled Bank, PLGIT, or other account Budget + auditor Insurance 10 KEGEL KELIN ALMY & GRIMM LLP

11 All TCCs Should 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 11 KEGEL KELIN ALMY & GRIMM LLP

12 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) 12 KEGEL KELIN ALMY & GRIMM LLP

13 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) KEGEL KELIN ALMY & GRIMM LLP 13

14 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) 14 KEGEL KELIN ALMY & GRIMM LLP

15 TCC Audit or 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 funds  Review and comment on TC financial statements/internal controls KEGEL KELIN ALMY & GRIMM LLP 15

16 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” KEGEL KELIN ALMY & GRIMM LLP 16

17 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 mandate  But existing resolutions and ordinances generally inconsistent with Act 32  Uniform TCC tax enactment form benefits!  Statewide uniformity? KEGEL KELIN ALMY & GRIMM LLP 17

18 New EIT Tax Resolutions/ Tax Ordinances 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/form  3 weeks – newspaper general circulation  Legal journal advertising – 45 Pa.C.S.A. § 301 et seq.? KEGEL KELIN ALMY & GRIMM LLP 18

19 New EIT Tax Resolutions/ Tax Ordinances 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? KEGEL KELIN ALMY & GRIMM LLP 19

20 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 20 KEGEL KELIN ALMY & GRIMM LLP

21 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 KEGEL KELIN ALMY & GRIMM LLP 21

22 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 KEGEL KELIN ALMY & GRIMM LLP 22

23 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 KEGEL KELIN ALMY & GRIMM LLP 23

24 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! KEGEL KELIN ALMY & GRIMM LLP 24

25 Outreach Plan Critical importance – 2011 early implementation experience Audiences  Employers  Payroll services  CPAs/tax preparers  Individual taxpayers  Other collectors No “one size fits all” – adapt to your area Primary responsibility – new collector KEGEL KELIN ALMY & GRIMM LLP 25

26 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 Videos o Employer Instructions o Centre County TCC Transition Steps KEGEL KELIN ALMY & GRIMM LLP 26

27 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 KEGEL KELIN ALMY & GRIMM LLP 27

28 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 below KEGEL KELIN ALMY & GRIMM LLP 28

29 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 KEGEL KELIN ALMY & GRIMM LLP 29

30 DCED Regulations DCED 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 employers o May file where payroll operations located o May file elsewhere only if payroll operations outside PA; then file only per DCED specific advance approval KEGEL KELIN ALMY & GRIMM LLP 30

31 DCED Regulations DCED 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 KEGEL KELIN ALMY & GRIMM LLP 31

32 Who’s on First? Chaos and bedlam ? KEGEL KELIN ALMY & GRIMM LLP 32

33 What Should TCC 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 location o Employee who works from home KEGEL KELIN ALMY & GRIMM LLP 33

34 What Should TCC 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 KEGEL KELIN ALMY & GRIMM LLP 34

35 Looking Forward: Tax Collector Oversight Tax fund safety items Tax revenue oversight items KEGEL KELIN ALMY & GRIMM LLP 35

36 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 KEGEL KELIN ALMY & GRIMM LLP 36

37 Tax Revenue Oversight Items Tax revenue trends/prior year comparisons Investment earnings (where applicable) Tax return processing times Enforcement steps  Nonfiler identification steps and numbers  Claims against other tax collectors  Taxpayer audits  Delinquent tax collection amounts  Civil legal proceedings  Criminal prosecutions  Wage attachments KEGEL KELIN ALMY & GRIMM LLP 37

38 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 KEGEL KELIN ALMY & GRIMM LLP 38

39 KEGEL KELIN ALMY & GRIMM LLP 39 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 duplicate o $100 new revenue outweighs $10 extra cost o Identify and prosecute nonfilers o Audit questionable returns o Delinquent tax collection steps o Employer compliance o Other steps to maximize revenue  Avoid third party vendor capacity concern

40 KEGEL KELIN ALMY & GRIMM LLP 40 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)

41 Looking Forward: TCC Management Big job for volunteer! Leader duties include:  Make recommendations on key TCC decisions  Ensure mandated Act 32 steps occur  Liaison with legal counsel, auditor, and tax collector  Financial 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 insurance  Right-to-Know Law compliance/serve as Open Records Officer KEGEL KELIN ALMY & GRIMM LLP 41

42 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 plan  Oversee tax appeal board operation  Coordinate TCC involvement in DCED mediation process (to the extent appropriate)  Calculate new weight for delegate votes each year  Maintain required TCC records  Tax collector oversight  Oversee all other aspects of TCC operations KEGEL KELIN ALMY & GRIMM LLP 42

43 Looking Forward: TCC Management No “one size fits all” Alternatives to perform duties include:  Full time Executive Director  Part time Executive Director (retired SD or muni business administrator?)  Executive Director shared with another TCC  Executive assistant or clerical employee perform some or all operations duties  School district, municipality, IU, county, or other employee serve as Executive Director, or by contract perform specified duties and report to TCC Chairperson KEGEL KELIN ALMY & GRIMM LLP 43

44 Looking Forward: TCC Management  No 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) KEGEL KELIN ALMY & GRIMM LLP 44

45 KEGEL KELIN ALMY & GRIMM LLP 45 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!

46 Questions & Answers KEGEL KELIN ALMY & GRIMM LLP 46

47 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 LLP 24 North Lime Street Lancaster, PA TEL FAX


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