[61 PA. CODE CHS. 101, 103 and 155] Personal Income and Corporate Taxes [27 Pa.B. 4436] The Department of Revenue (Department), under the authority contained in sections 354, 408 and 603 of the Tax Reform Code of 1971 (TRC) (72 P. S. §§ 7354, 7408 and 7603), proposes to amend §§ 101.1, 103.12 and 155.30 (relating to definitions; net profits; and regulated investment companies), to read as set forth in Annex A.
Explanation of Regulatory Requirements
Section 101.1 is proposed to be amended by replacing the existing definitions of ''employe'' and ''employer'' with new definitions consistent with the requirements of Act 110 of 1989 (72 P. S. § 7301(g) and (h)).
The definition of ''income'' is being expanded to implement the provisions of section 602(f)(2)(A) of the code (72 P. S. § 7602(f)(2)(A)) and to reflect the holdings of the Commonwealth Court in Morgan v. Commonwealth, 400 A.2d 1384 (Pa. Cmwlth. 1979) and Wettach v. Commonwealth, 620 A.2d 730 (Pa. Cmwlth. 1993). The revisions provide that the term ''income'' includes income received by a taxpayer directly or through partnerships, associations, Pennsylvania S corporations or estates or trusts. The revisions also specify that:
(1) The taxable income of a partnership or Pennsylvania S corporation is to be computed in the same way and on the same basis as the taxable income of an individual.
(2) The taxable income of an individual is the total of the eight classes of income enumerated and classified in section 303 of the TRC, each class computed without setoff between or among any other class and, unless a net taxable class, without deductions.
Section 103.12 is also proposed to be amended to reflect the holdings in Morgan and Wettach.
The definition of ''personal income tax income'' set forth in § 155.30(b)(4) is proposed to be amended to provide that the term means income computed in the same manner and on the same basis as the income of an individual under Article V (relating to Personal Income Tax).
Affected Parties
Regulated investment companies that are subject to the capital stock/foreign franchise tax and business owners, investors and tax practitioners may be affected by the proposed amendments.
Fiscal Impact
The Department has determined that the proposed amendments will have no fiscal impact on the Commonwealth.
Paperwork
The proposed amendments will not generate additional paperwork for the public or the Commonwealth.
Effectiveness/Sunset Date
The proposed amendments will become effective upon final publication in the Pennsylvania Bulletin. These proposed amendments are scheduled for review within 5 years of final publication. No sunset date has been assigned.
Contact Person
Interested persons are invited to submit in writing comments, suggestions or objections regarding the proposed amendments to Anita M. Doucette, Office of Chief Counsel, Department of Revenue, Dept. 281061, Harrisburg, PA 17128-1061, within 30 days after the date of the publication of this notice in the Pennsylvania Bulletin.
Regulatory Review
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), the Department submitted a copy of these proposed amendments on August 20, 1997, to the Independent Regulatory Review Commission (IRRC) and to the Chairpersons of the House Committee on Finance and the Senate Committee on Finance. In addition to submitting the proposed amendments, the Department has provided IRRC and the House and Senate Finance Committees with a copy of a detailed Regulatory Analysis Form prepared by the Department in compliance with Executive Order 1996-1, ''Regulatory Review and Promulgation.'' A copy of this material is available to the public upon request.
If IRRC has objections to any portion of the proposed amendments, it will notify the agency within 10 days of the close of the Committees' comment period. The notification shall specify the regulatory review criteria that have not been met by the portion. The Regulatory Review Act specifies detailed procedures for review of objections raised, prior to final publication of the regulation, by the Department, the General Assembly and the Governor.
ROBERT A. JUDGE, Sr.,
SecretaryFiscal Note: 15-381. No fiscal impact; (8) recommends adoption.
Annex A TITLE 61. REVENUE PART I. DEPARTMENT OF REVENUE Subpart B. GENERAL FUND REVENUES ARTICLE V. PERSONAL INCOME TAX CHAPTER 101. GENERAL PROVISIONS § 101.1. Definitions.
The following words and terms, when used in this article, have the following meanings, unless the context clearly indicates otherwise:
* * * * * Employe-- [Every individual performing services if the relationship between him and the person for whom he performs the services is the legal relationship of employer and employe as determined by the usual common law rules. Generally, the relationship of employer and employe exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which the result is accomplished. That is, an employe is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is not an employe.
(i) The definition of ''employe'' for Pennsylvania Personal Income Tax purposes is the same as that for Federal income tax withholding purposes. Consequently, an individual who is issued a Form W-2 indicating Federal income tax withheld, is an employe unless he can affirmatively prove that the Federal withholding was not required, that is, that an employer-employe relationship does not exist and the withholding was done merely as a convenience. In addition, the remuneration paid for certain types of services is not subject to Federal income tax withholding regardless of whether an employer-employe relationship exists. In these cases, the failure to withhold does not indicate nonemploye status and a determination must be made based on the particular facts of the relationship. The remuneration referred to is cited at section 3401(a) of the IRC and includes, inter alia, that paid:
(A) For agricultural labor.
(B) For domestic service in certain circumstances.
(C) For services performed by an ordained, commissioned or licensed minister of a church in the exercise of his ministry.
(D) For services performed by an individual under the age of 18 in the delivery or distribution of newspapers.
(ii) Generally, F.I.C.A. employe tax is only withheld on individuals who are ''employes'' within the common law meaning. Consequently, an individual who is issued a Form W-2 indicating F.I.C.A. employe tax withheld, will be considered an employe unless he can affirmatively prove:
(A) That he is among the classes of individuals cited at section 3121(d) of the IRC who are employes for F.I.C.A. purposes only.
(B) That no employer-employe relationship otherwise exists. The classes of individuals referred to are:
(I) Certain agent-drivers or commission drivers.
(II) Full-time life insurance salesmen.
(III) Certain home workers.
(IV) Certain traveling or city salesmen.
(ii) Generally, evidence of payment of Federal Self-Employment Tax is conclusive proof that an individual is not an employe. However, this does not apply to certain classes who are subject to Self-Employment Tax regardless of whether an employer-employe relationship exists. In these cases, the payment of Self-Employment Tax does not indicate nonemploye status and a determination must be made based on the particular facts of the relationship. The classes referred to are cited at section 1.1402(c)-3 of the IRC and include, inter alia:
(A) Certain newspaper vendors.
(B) Certain sharecroppers.
(C) Employes of foreign governments.
(D) Ministers and members of religious orders unless exempt.
(E) State and local government employes compensated on fee basis.
(iv) Where the presence or absence of an employer-employe relationship cannot be determined on the basis of Federal income tax withholding, F.I.C.A. employe tax withholding or payment of Self-Employment Tax, the following factors are considered, in addition to the elements enumerated in subparagraph (i) in making the determination. No one factor is conclusive; rather, the test is one of the totality of the following circumstances:
(A) Whether the individual is required by his principal, or by the person from whom remuneration is received, to work fixed hours, follow a prescribed routine or perform prescribed duties.
(B) Whether the individual participates in pension, unemployment, disability or hospitalization plans offered by the principal.
(C) Whether the individual is guaranteed an amount of remuneration by the principal.
(D) Whether the individual is either reimbursed for expenses or receives an expense allowance.
(E) Whether the individual represents only one principal.] The term includes any individual who performs any service, of whatever nature, for any other individual or any entity and earns or receives remuneration therefor. For the purpose of Chapter 113 (relating to withholding of tax), the term has the same meaning as when used in Chapter 24 of the IRC (26 U.S.C.A. §§ 3401--3406) (relating to collection of income tax at source on wages).
Employer--[An individual, partnership, association, corporation, governmental body or unit or agency, or another entity employing one or more persons for compensation. A person required under the Internal Revenue Code, as amended, to withhold Federal income tax from compensation of an employe is prima facie deemed to be an employer.] The term means any person for whom an individual performs any service, of whatever nature, provided that:
(i) If the person for whom the individual performs the service does not have the payment of the remuneration for the service, the term means the person having the payment of the remuneration.
(ii) For the purpose of Chapter 113 (relating to withholding of tax), the term has the same meaning as when used in 26 U.S.C.A. Chapter 24 of the IRC.
* * * * * Income--The total of the classes enumerated under Chapter 103 Subchapter B (relating to the determination of tax) received by a taxpayer directly, or through partnerships, associations or Pennsylvania S corporations and the amount of each class derived by the taxpayer through estates or trusts[. There may be no setoff between or among the classes.] determined and computed in accordance with the requirements of this article relating to the taxation of a natural individual's personal income, including the requirements that:
(i) There is no setoff between, or among, any different classes of personal income tax income.
(ii) No deduction is allowed for expenses, whether paid or incurred for the production or collection of income or for the management, conservation or maintenance of property, except:
(A) Allowable unreimbursed employe business expense.
(B) Allowable costs of goods sold and expense incurred in the operation of a business.
(C) Allowable costs of acquisition, expenses of sale and collection expenses.
(D) Expenses necessary to the production or collection of rents and royalties or for the management, conservation or maintenance of rents, royalties, patents or copyrights.
(iii) In the case of a Pennsylvania S corporation, partnership or other association, trust or estate, the distributive income of the same is classed, determined and computed in the same way and on the same basis as the taxable income of a natural individual; and, in the case of a Pennsylvania S corporation, partnership or other association, each shareholder, partner or member take into income the shareholder's, partner's or member's pro rata share of the income or loss in each applicable class of income received by the Pennsylvania S corporation, partnership or other association.
(iv) Married persons may not compute their tax as if they were one person; and no setoff between married persons is permitted. For example, an individual's net profit from manufacturing toys is $100, his net loss from the business of selling garden supplies is $20, his wife's loss from a business she operates is $20, and his net loss from passive ownership of investment rental properties is $10. His total net business profits are $80 which is his [total] income, against which he may not set off his losses on rentals or his wife's business losses.
* * * * * CHAPTER 103. IMPOSITION AND DETERMINATION OF TAX § 103.12. Net profits.
(a) Net profits shall be the net income from the operation of a business, profession or other activity after provision for all costs and expenses incurred in the conduct thereof [are]. They shall be determined either on a cash or accrual basis in accordance with accepted accounting principles and practices [but without deduction of taxes based on income].
(b) Net profits are different from other classes of personal income in that:
(1) The profits are derived from the marketing of a product or service to customers on a commercial basis; from securities employed as working capital in the business operations; from accounts and notes receivable from sales of products or services sold in the ordinary course of the business operations; or from assets which serve an operational function in the ordinary course of business operations.
(2) The marketing activity is conducted with the manifest objective of achieving profitable operations.
(3) The marketing activity is conducted with regularity and continuity and is not limited or exclusive.
(c) Net profits shall be computed wholly without reference to any item of revenue, cost, expense or liability derived or incurred in connection with, or attributable to:
(1) The ownership or disposition of assets that are held for investment purposes or otherwise serve an investment function.
(2) The trading in securities for personal purposes and not for the accounts of customers.
(3) The sale, discontinuation or abandonment of a business or segment thereof.
(4) Any tax imposed on, or measured by, gross or net earned or unearned income.
(5) An isolated or nonrecurring transaction which is not a normal or routine business activity.
(d) Choosing to form a partnership or other entity or to associate with others, receiving and reporting income or gain as the income of the partnership, entity or associates or dividing the same among its partners, beneficial owners or associates or the trading in securities for the benefit of shareholders, partners, members or associates does not of itself make the income of the partnership, entity or associates net profits.
CHAPTER 155. CAPITAL STOCK TAX AND FOREIGN FRANCHISE TAX § 155.30. Regulated investment companies.
* * * * * (b) Definitions. The following words and terms, when used in this section, have the following meanings, unless the context clearly indicates otherwise:
* * * * * (4) Personal Income Tax Income. [The term includes compensation, net profits from the operation of a business, profession or farm, interest income, dividends received, net gains or income from the sale, exchange or disposition of property, rents, royalties, patents and copyrights income from estates and trusts and gambling winnings.] The term means income computed in the same manner and on the same basis as the income of an individual under Article V (relating to Personal Income Tax).
[Pa.B. Doc. No. 97-1392. Filed for public inspection August 29, 1997, 9:00 a.m.]
