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Pennsylvania sets 10-year tax collection limit

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On Nov. 27, 2019, Pennsylvania Gov. Tom Wolf approved legislation instituting a general 10-year limitation period during which the Pennsylvania Department of Revenue (Department) may collect all assessed taxes, excluding inheritance taxes. The legislation generally limits criminal prosecutions to a three-year period after the commission of an offense, with certain exceptions. Finally, the legislation creates a sales and use tax exclusion for the purchase of canned computer software directly used by financial institutions in the business of banking, and requires financial institutions to make reasonable efforts to report delinquent taxpayers to the Department.1

Statute of limitations provisions Ten-year limitation on department collections Effective Jan. 1, 2021, the Department will generally be limited to a 10-year time period under which it may collect all assessed taxes, excluding inheritance taxes.2 The 10-year period will run from the date a settlement, determination, or assessment of tax becomes final.3 For non-filed returns, the Department will be required to induce the filing of a return, or settle, determine or assess the tax liability of a non-filed tax period within 10 years of the tax return due date.4

The legislation provides several safeguards designed to prevent taxpayers from willfully avoiding or evading the payment of taxes or filing returns. Specifically, the 10-year limitation period on Department collections will not apply to the following:

  • A taxpayer that has collected or withheld taxes on trust funds (including sales and use tax or withholding tax), and intentionally, grossly negligently, or refused to remit those taxes
  • A taxpayer filing a false or fraudulent tax return or report, or intentionally failing to file a tax return or report
  • A taxpayer attempting to evade or defeat a tax
  • A tax offense for which a taxpayer has been criminally charged and convicted, and where tax liabilities remain unpaid
  • Liabilities for eligible taxes that are unknown to the Department and have not been extinguished prior to the commencement of a subsequently enacted or approved tax amnesty program5

The 10 year-limitation may be tolled under the following specific circumstances (for the period of time in which the event is pending, plus one year):

  • Bankruptcy proceedings
  • The period during which a taxpayer’s offer-in-compromise is under consideration by the Department
  • The duration of an installment agreement or deferred payment plan between the taxpayer and the Department
  • The duration of a tax appeal proceeding before an administrative tribunal or court in which the taxpayer has filed a lawsuit against the Department
  • The duration of a taxpayer’s military service for which the taxpayer has received a federal extension
  • For a period of time as the taxpayer and Department agree to extend the expiration date of a collection6

Time limitation on criminal tax prosecutions Effective immediately, the act institutes a three-year limitations period for criminal tax prosecutions.7 Under this new rule, the Commonwealth may only prosecute, try, or punish a person for an offense under a Pennsylvania tax statute if instituted within three years of the commission of the offense.8

Exceptions to the three-year limitation include the following offenses:

  • Fraud or breach of fiduciary obligation within one year after the discovery of the offense
  • Willful attempt to evade or defeat a tax or a payment of a tax9

Financial institution provisions Sales tax exclusion on bank purchases of canned software A new sales and use tax exclusion became effective on Nov. 27, 2019, for the purchase of canned computer software by financial institutions directly utilized in conducting the business of banking.10 The legislation defines a “financial institution” as any institution doing business in Pennsylvania that is subject to the state’s Bank and Trust Company Shares Tax or the Mutual Thrift Institutions Tax.11

The legislation defines “directly utilized” within the context of the business of banking as the purchase of canned computer software by a financial institution to be used in transactions with customers and service providers.12 The law enumerates that holding companies or subsidiaries of any financial institution are not included within the scope of the exclusion.13 It is unclear whether the Department will issue further guidance regarding examples of software that will be considered to be directly used in the business of banking and thus eligible for the exclusion.

Financial institution obligor reports Effective Jan. 27, 2020, financial institutions doing business in Pennsylvania must make reasonable efforts to provide detailed reports to the Department containing identifying information of any obligors (delinquent taxpayers) that are subject to a Pennsylvania tax lien of at least $1,000 via a mechanism known as a Financial Institution Data Match (FIDM).14 The legislation requires the Department to notify the obligor that the Department has ordered a financial institution to attach the amount of a tax lien to their bank account within five days of notifying the institution. An “obligor” is defined as any entity engaged in a business, a sole proprietor, a shareholder, member or partner of a pass-through entity, or a corporate officer of a corporate employer that has been assessed trust fund taxes that are subject to the state’s tax lien of at least $1,000.15

The detailed reports include information such as social security numbers, federal identification numbers, or other taxpayer identification numbers.16 The legislation provides that financial institutions are designated a reimbursement of $250 per quarter to defray the cost of conducting the data matches via the FIDM.17

Commentary The enactment of tax legislation in late November is a unique development, given the fact that typically, such legislation is enacted in conjunction with the budget process. The legislation is expected to have a nominal fiscal impact on Pennsylvania’s general fund with estimated net decreases of about $2.5 million and $3.0 million in fiscal years 2020 and 2021, respectively.18

The effort to adopt a statutory 10-year tax collection window may have been in response to feedback related to Pennsylvania’s most recent tax amnesty program, during which the Department was known to mail notices that in some cases were decades old or sent to inactive businesses. The legislation conforms Pennsylvania to the collection periods of nearly 20 states, along with the Internal Revenue Code.19 The rationale for the time limit is that the Department is more unlikely to collect a tax that has been owed for a very lengthy period of time. The Department has estimated that only approximately $38 million was collected from fiscal years 2015 through 2017 from payments that were more than 10 years past due.20

The sales and use tax exclusion for canned software directly used by financial institutions in the business of banking is expected to reduce general fund collections by approximately $2.5 million and $5.0 million for fiscal years 2020 and 2021, respectively.21 A late addition to the legislation, this exclusion is a welcome development for Pennsylvania-based financial institutions, many of which have recently disagreed with the Department under audit regarding the sales tax treatment of core computer processing services used in transactions with banking customers and service providers.

As a partial offset to the canned software exemption for banks, the FIDM legislation is designed to enhance the collection of delinquent tax liabilities from bank account holders by increasing the effectiveness of the existing bank attachment mechanism allowing debtors to collect delinquent liabilities from customer bank accounts. The new FIDM program is expected to increase revenues by about $2 million in each fiscal year through increased efficiency in the collection of delinquent taxes subject to a tax lien.22


 
1 Act 90 (H.B. 17), Laws 2019.
2 Act 90, § 3, adding 72 PA. STAT. § 10003.23.
3 Act 90, § 3, adding 72 PA. STAT. § 10003.23(a)(1). Under the legislation, “tax” includes a tax, interest, addition to tax, penalty, fee or other cost, including the cost of collection. 72 PA. STAT. § 10003.23(c).
4 Act 90, § 3, adding 72 PA. STAT. § 10003.23(a)(1).
5 Act 90, § 3, adding 72 PA. STAT. § 10003.23(b)(1)(i)–(vi).
6 Act 90, § 3, adding 72 PA. STAT. § 10003.23(b)(2)(i)-(vi).
7 Act 90, § 3, adding 72 PA. STAT. § 10003.24(a).
8 Id.
9 Act 90, § 3, adding 72 PA. STAT. § 10003.24(b).
10 Act 90, § 1, adding 72 PA. STAT. § 7204(73).
11 Id.
12 Id.
13 Id.
14 Act 90, § 2, amending 72 PA. STAT. § 10003.22(a).
15 72 PA. STAT. § 10003.22(r).
16 Act 90, § 2, amending 72 PA. STAT. § 10003.22(a)(1).
17 Act 90, § 2, amending 72 PA. STAT. § 10003.22(d).
18 Fiscal Note to H.B. 17, Pa. House Committee on Appropriations, Nov. 21, 2019.
19 See I.R.C. § 6502(a). Jurisdictions having 10-year statutes of limitations for collection of assessed taxes include Alabama, Arkansas, Arizona, California, Connecticut, the District of Columbia, Delaware, Kansas, Kentucky, Massachusetts, Montana, North Carolina, Nebraska, New Jersey, New Mexico, Oklahoma, South Carolina and West Virginia.
20 Fiscal Note to H.B. 17, Pa. House Committee on Appropriations, Nov. 21, 2019. The new collection limitation is expected to have a minimal fiscal impact in the short term as implementation of the 10-year window to collect assessed taxes begins on Jan. 1, 2021. Therefore, the fiscal impact will be delayed until fiscal year 2030 at the earliest.br /> 21 Id.
22 Fiscal Note to H.B. 17, Pa. Senate Appropriations Committee, Nov. 18, 2019.




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