2008 PA Local Services Tax SEPA Chapter Meeting November 14, 2007 Dorothy Laskey, CPP Vertex, Inc.

2 Local Services Tax (LST) Senate Bill 218 was signed into law on June 21, 2007 and named Act 7 of 2007 Act 7 amends the Local Tax Enabling Act to make major changes to the Emergency and Municipal Services Tax (EMST) LST is effective 1/1/2008

3 Major Changes Exemptions from LST Proration of LST Restart Withholding and Catch-Up Provision Standardized Forms Local Ordinance Changes

4 Unchanged Regulations $52 statewide maximum LST Income = earned income + net profits Priority of claims to collect LST

5 Role of DCED Standardize forms Provide technical assistance to facilitate the administration of the LST Reduce the burden of implementation, accounting and compliance Maintain the Local Tax Register

6 What Act 7 means to employees Before Act 7After Act 7 $52 one time deduction in the beginning of the year $2* deduction per pay No tax withheld until earnings exceeded $12,000 LST is deducted unless low income exemption certificate was filed with the employer Paid the tax while on active military duty Exempt from LST while on active duty (with filed exemption form) Paid the tax as a disabled veteran Exempt from LST (with filed exemption form) *for employees paid bi-weekly and working in a $52 LST jurisdiction

7 What Act 7 means to employers Act 7 requires employers to: 1.Determine whether to withhold prorated or lump sum LST. 2.Treat each political subdivision separately for low income exemption and limits 3.Treat all exemptions (low income, military, and non-primary employer) 4.Catch up withholding 5.Monitor YTD earnings per locality and verify that earnings are within the low income limits. 6.Track pay periods and localities in which employees worked

8 Priority of claim LST shall be withheld for the primary place of employment. The priority of claim to collect the LST is as follows: (1) Where the individual maintains his or her principal office or is principally employed; (2) Where the individual resides and works; and (3) Where the individual is employed that is nearest in miles to the individual’s home.

9 Scenario: Primary work location Do you owe LST to different jurisdictions if you work in multiple locations in PA?

10 Example: Primary place of employment WeekWork locationsPrimary work 1 A – Corporate office B – Customer (same locality as home) C – Customer (different from home) A- Corporate Office 2 B – Customer (same locality as home) C – Customer (different from home) B - Customer (same locality as home) 3 C – Customer (different from home) D – Home D - Home 4 E – Company’s office in NJ No LST liability

11 Example: Tax liability per week (weekly pay schedule) WeekPrimary workLST RateLST Withheld 1A$52$1.00 2B$26$0.50 3D$15$0.28 4No LST liability$0$0.00

12 Before and After Act 7 WeekPrimary workEMST RateEMST Withheld 1 A $52$ B $26$0 3 D $15$0 4 No LST liability $0 WeekPrimary workLST RateLST Withheld 1A$52$1.00 2B$26$0.50 3D$15$0.28 4No LST liability$0$0.00 Before Act 7 After Act 7

13 Exemptions from LST 1. Military Exemption 2. Low Income Exemption 3. Non-primary Employment

14 1.Military Exemption Exempts 1. Members of the armed forces called to active duty 2. Honorably discharged disabled veterans Does not exempt Reservists called for training duty Form Exemption Certificate Back up documentation Military paperwork Exemption coverage Statewide *file exemption for each locality employed

15 Question: Military Exemption Clarification of “Any time during the taxable year” -Page 3, line 15 of SB 218, PN 1056

16 2.Low Income Exemption Exempts Earned less than the low income exemption within the jurisdiction for the previous year and expect to earn less than the low income exemption amount within the jurisdiction Does not exempt Received total income greater than the low income exemption amount within the jurisdiction or did not receive income for the previous year Form Exemption Certificate Back up documentation W2 or last pay stubs from the previous year Exemption coverage Political subdivision in which the exemption was filed

17 2.Low Income Limits School District OR Municipality Tax Rate Exemption Rules Exemption Limits $10 or less Optional to have a low income exemption. Low income limit = any amount up to $12,000 greater than $10 Mandatory to have low income exemption Low income limit = $12,000

18 Exception from Enacting Low Income Exemption in 2008 A municipality that reduced its real estate property tax by at least 25 percent can delay implementing the low income exemption until 2009

19 Low Income Exemptions by Political Subdivision Individual expects to receive income greater than $9,000 but less than $12,000 LST Amount Low Income Exemption Limit Low income Exemption Filed? School District portion of LST $ 5.00 $ 9,000.00NO Municipality portion of LST $ $ 12,000.00YES Combined LST $ LST Deduction per pay School District LST Prorated LST (combined LST >$10) Municipal LST NONE

20 Example: LST withholding with low income exemption Exempt from paying $47 Municipal LST Liable for $5 SD LST School District LST Pay ScheduleLST Withholding $5.00Weekly (52 pays)$0.09 $5.00Biweekly (26 pays)$0.19

21 3.Non-primary Employment Exempts Individuals are not subject to LST withholding by a non-primary employer if a primary employer is withholding LST Does not exempt Individuals whose primary employer is not withholding LST Form Employment Certificate Back up documentation Recent pay stub from the primary employer Exemption coverage Statewide *file exemption for each locality employed

22 New LST Provision: Proration Proration depends on the provisions of the combination of the school district and municipality: Combined LST RateProration vs. Lump Sum $10 or less May prorate or withhold at lump sum greater than $10Prorate LST

23 Proration Formula ( Combined LST Rate divided by the total number of pay periods established by the employer for the calendar year ) rounded down to the nearest 100th of a dollar [penny].

24 Scenarios: LST Proration Divide by a different pay schedule (ex. Quarterly) Employee authorizes a lump sum withholding Total LST withheld for an employee who worked from week 11 to week 52

25 Example LST Prorations Combined LST Rate Number of Pays LST deduction per pay Annual LST $5252$1$52 $4726$1.80$46.80 ($0.20 short) $3512$2.91$34.92 ($0.08 short)

26 New LST Provision: Restart Withholding Employers must restart withholding when a low income exemption becomes invalid.

27 Questions: Proration How does it affect cash flow for jurisdictions? How do jurisdictions reconcile each individual’s annual LST paid?

28 Possible impact of proration Loss of tax revenue due to misc. tax not withheld. Budget adjustments due to redistribution of tax revenues. Administrative burden for tax collectors. Administrative burden for employers. Increase in cost of collecting and administering tax. Could loss of revenue cause other tax increases?

29 When to Restart Withholding “Restart” withholding of the LST when a low income exemption becomes invalid due to any of the following circumstances: 1) If instructed to do so by the political subdivision levying the LST; 2) If notified by the employee that they are on longer eligible for the exemption; or 3) If the employer pays the employee more than $12,000 for the calendar year.

30 3 Steps for Restart Withholding Employers “restart” withholding of the LST by withholding: (1) A lump sum amount equal to what would have been withheld (Catch Up withholding) had the exemption not been claimed in that year (2) The prorated LST rate for the current pay. (3) For subsequent pay periods, the remaining prorated LST rate according to the employer’s pay period schedule.

31 Catch Up Withholding for Multiple Work Locations Pay Period #Local Work Jurisdiction 1Local A - liability for Local A only 2Local B - liability for Local B only 3 4Local A - liability for Local A only Catch up for Local A = Weeks 1 and 4 only Catch up for Local B = Weeks 2 and 3 only

32 Restart Withholding by Exemption Types Type of Exemption Withholding Military No Catch up prorated LST for current and subsequent pays Low Income Withhold Catch up prorated LST for current and subsequent pays Non Primary Employer No Catch up prorated LST for current and subsequent pays Withholding when the exemption becomes invalid:

33 Scenarios: Catch Up Low income exemption for 2 or more locations become invalid at the same time Military exemption goes into effect when low income exemption becomes invalid Non primary employer exemption goes into effect when low income exemption becomes invalid

34 Data to Track for Catch Up Withholding Track the following data for each political subdivision in which the employee works: Effective date of liability Effective date of low income exemption Low income exemption amount Pay periods in which the employee worked within the political subdivision

35 Due Dates for Ordinances Type of ChangeDue Date to Enact the LST Ordinance New Tax (LST) November 30, 2007 Change rate for OPT/EMST December 11, 2007 Existing EMST No change in rate but enacted a new LST or increased the rate of OPT since 12/1/04 December 31, 2007 No Change No change in rate and did not change OPT/EMST since 12/1/04 N/A- Allowed to keep OPT/EMST

36 Additional Information Forms are available on No immediate plans to publish the exemption amounts or proration provisions on the LST Register

37 Resources Local Services Taxhttp:// LST referencehttp:// Governor's Center Staff Inquiries/questions regarding the programs and services provided by the Governor’s Center for Local Government Services can be directed to: Department of Community and Economic Development Governor’s Center for Local Government Services 4th Floor, Commonwealth Keystone Building 400 North Street Harrisburg, PA CENTER ( ) For , send questions to the Customer Service Center.