ACT 32 – Earned Income Tax

ACT 32 – Earned Income Tax

Is your School District or

Municipality Ready?

Governor’s Center for Local Government Services and the PA Local Government

Training PartnershipCounty Commissioners Association of Pennsylvania

Pennsylvania League of Cities and Municipalities

Pennsylvania Municipal Authorities Association

Pennsylvania State Association of Boroughs

Pennsylvania State Association of Township Commissioners

Pennsylvania State Association of Township Supervisors

Mitch Hoffman, Policy Manager

Michael Foreman, Policy Specialist

Marita Kelley, Policy Specialist

Sean Sanderson, Policy Specialist

DCED

David Blain, Principal

Samuel BowerCraft, Sr. Manager

McKonly & Asbury, LLP

Speakers

• Local Tax Enabling Act – Act 511 of 1965• Broad authority results in different taxes and collectors• 560 local earned income tax collectors • Almost $2 billion in annual revenues (2006)• Over 2,400 municipalities & 465 school districts impose

the tax• Complex, fragmented, inefficient & confusing system• Interdependent but uncoordinated

Local Income Tax Collection

• 2004 - DCED Report– Collection system is complex, fragmented & inefficient– Recommendation: State or countywide collection

• 2006– House Bill 1427 (PN 4641)– Senate and House Hearings held

• 2007-08– Pennsylvania Economy League study - $237 million uncaptured funds– House Bill 1550, (PN 2300) & Senate Bill 1063 (PN 2229)– Senate Policy Committee Hearing 9/13/07– Passed by Senate (41 – 8) on 4/28/08 – Passed House 6/25/08 (171-29)– Senate Concurrence on House Amendments (40-10) on 6/28/08– Signed by Governor 7/2/08

Reform of Current EIT Collection System

• A significant administrative burden to business

• Loss of $millions by municipalities and school districts

• A burden to taxpayers

Impact of Current EIT Collection System

Administrative Burden on Business

Withholding• Multitude of collectors• Different rules,

requirements, rates, forms & codes

• Increases cost of doing business

• More time consuming than federal & state requirements together

Employer

MunicipalTax Collector

(Home)

School DistrictTax Collector

(Home)

MunicipalTax Collector

(Work)

School DistrictTax Collector

(Work)

RequiredOptional

“Courtesy Withholding”

Withholding

Fragmentation = Loss of $millions annually

• Taxes under-withheld or never withheld Why? • Tax monies not uniformly withheld-hinders compliance

• Taxes lost in distribution process Why?

• Lack of coordination between collectors for work and residence and $ sent to wrong collector by employer/collector

• Lack of tracking, recordkeeping, accountability, oversight and enforcement (resources & capacity issue)

• Compliance is confusing & time consuming (employee domicile & resident & nonresident withholding)

• Two collectors at state & local level

• Three collectors in over 10% of municipalities (290) within same school districts

• Potential for large lump sum tax payments (quarterly or end of yr; when not withheld by employer as nonresident employee at workplace)

Burden on Taxpayers

• Amendment to Act 511 of 1965

• 69 countywide tax collection districts (Allegheny will have 4)

• Uniform withholding, remittance, distribution & reporting, rules, forms and codes

• Increased Oversight, Enforcement and Accountability

• All other Act 511 taxes remain in place as enacted

Act 32 of 2008Comprehensive EIT Collection

Reform

• Reduced Burden on Business

• Reduced Burden on Taxpayers

• More Revenues for Municipalities and

School Districts

• Countywide Tax Collection Districts

• Uniform Withholding, Remittance, Distribution & Reporting, Rules & Forms

• Increased Oversight & Enforcement

Major Provisions of Act 32

• 65 Countywide “Tax Collection Districts” (TCD)• 4 Districts in Allegheny County• School Districts that cross county lines (greatest

share of population)

– Kept whole with component municipalities

• Municipalities with existing Countywide systems– Lancaster County provision – One Action 7/1/09

• County’s role - Facilitator for first meeting

Structure of New System

• “Tax Collection Committee” (TCC)• Weighted Vote (each political subdivision)

– 50% on proportional population– 50% on proportional income tax revenues

• Organization – First meeting by 11/15/09; Public Notice 9/15/09 – By-Laws approved by 4/15/10– Tax Officer Appointment by 9/15/10


• Tax Collection Committee Duties and Responsibilities– Governing Body of TCD– May employ Director & Employees

– Adopt policies/procedures & regulations – Create a Tax Bureau and provide for collection &

administration (In-house) 9/15/10– Appoint a Tax Officer (third party) 9/15/10– Set compensation– Establish Bond Amount


• Tax Collection Committee Duties & Responsibilities

– Adopt Annual Budget– Enter into Contracts/Agreements– Retain Counsel, Auditors and Consultants/Advisors– Appoint Appeals Board – 6/1/10– Acquire, Lease, Rent and/or Dispose of Real/Personal Property– Enter into Agreements with other TCC to form Multi-County TCC– Accept grants, borrow money and incur indebtedness


• Tax Collection Committee Cost Allocation– Cost of Operation Based on Proportional Income Tax Revenues

• Bylaws– DCED will provide sample to TCC– Govern & manage TCC– Rules of procedure– Quorum requirements– Voting rights– List of officers, including terms, powers & process of election


• Bylaws– Meetings– Process for adopting & amending– Procedure for addition of new political subdivisions to become

member of TCC– TCC adopts no later than 4/15/10; prior written notice to

delegates; notify DCED within 30 days– May be amended to provide for manner in which majority vote is

determined


• Tax Collection Committee Audit– Annual Audit of Tax Officer by CPA by 9/1 – Report Elements

• Financial Statement• Reconciliation of Monthly Reports• Summary of Collection Fees Charged• Tax Officer Compliance/ Findings of Non-Compliance

(DCED & Auditor General)• Auditor’s Opinion Letter• Management Letter, if issued


• Appeals Board– TCC appoint consisting of 3 delegates by 6/1/10 – county

residents– Joint Appeals Board with another TCC– No member may be tax officer, employee, agent or attorney for

tax officer– All appeals conducted in accordance with Local Taxpayers Bill of

Rights except those through mediation


• Mediation and Appeals of Tax Collector Actions– Dispute among political subdivisions and tax officer involving

10% or greater variation from taxes received in previous year subject to mandatory mediation

– Dispute involving less than 10% variation subject to voluntary mediation

– Political subdivision gives written notice to TCC & DCED to mediate dispute

– Regulations and guidelines adopted by DCED – appealable?– Costs incurred by DCED for mandatory mediation are equitably

assessed against parties; not appealable


• Appointment By 9/15/10 (Resolution)– One for each Tax Collection District– Two or more TCDs may appoint same Tax Officer

• Standards– No Fraud, Extortion or Dishonesty Felony Convictions– Conduct is one of Credibility, Honesty and Integrity– Able to Obtain Requisite Bonding– Meet Qualification/Educational Requirements established by DCED

• Compensation– Reasonable Compensation as Determined by TCC– May withhold from Collections provided clear accounting is provided

Tax Officer

• Duties– Collect, Reconcile, Administer/Enforce Income Taxes Imposed

(Residents & Nonresidents)– Receive and Distribute Income Taxes and to enforce Withholding

by employers from/to other TCDs– Invest Income Taxes and Distribute as determined by TCC – Provide Monthly Reports within 20 Days of Month End of all

income taxes Received & Distributed to political subdivisions within own TCD and Distributed to other TCD

Tax Officer

• Duties– Maintain tax records of all income taxes received & distributed &

other info required by DCED– Examine or Audit income tax records of (Local Taxpayers Bill of

Rights):• Employers• Taxpayers

– Enter into Agreements with Department of Revenue for exchange of information for collection of EIT

– Revenue to establish procedures to make info available no later than one year after deadline for filing return – collection; reconciliation & enforcement

Tax Officer

• Identification of Tax Collection Districts– Publication in PA Bulletin– Preparation of Map

• FAQ Document• Act 32 Advisory Committee• Develop By-Laws for Tax Collection Committees• DCED Study of Best Practices

– Procedures, Agreements, RFP format for Tax Officer and software and regulations

• Develop weighted vote formula• Develop Education/Training Program

DCED Provisions

Action Deadline

DCED releases list and map of each Tax Collection District (TCD) and provides it to the Legislative Reference Bureau for publication in PA Bulletin on 1/28/09

1/16/09

Municipality Imposes an EIT – Delegate is voting member 6/30/09

Taxing Bodies in counties with existing consolidated collection to adopt uniform resolutions designating said collection entity as their TCC

7/1/09

DCED Provides weighted vote for each Tax Collection Committee (TCC)

9/1/09

TCC delegates named by each political subdivision. 9/15/09

Key Implementation Deadlines

Action Deadline

Public Notice and notice to DECD of the First Meeting 9/15/09

First meeting held by each Tax Collection Committee (TCC) 11/15/09

DCED Completes EIT System Study and provides to all TCCs 12/31/09

DCED Promulgates Regulations

Bylaws approved by TCC 4/15/10

Appeals boards appointed by TCC 6/1/10


Action Deadline

Tax Officers for 2012 appointed by TCC 9/15/10

Notify DCED of the appointment within 10 days of appointment 9/25/10

Determine whether Tax Officer will collect 2011 income taxes 11/1/10

Notify DCED of this determination 12/1/10

Transition plans from old to new collector completed 7/1/11

Full Implementation (New withholding rules and 69 Tax Officers

Transfer of all documents and responsibilities to Tax Officer 6/30/12

Legislative Budget/Finance Committee completes evaluation 12/31/16


Planning for the Next Steps

• Quick Review of Act

• Short Term Steps

• Long Term Steps

• Items to Consider for Migration to New Collector

Income Tax Law ChangesIn a Nut Shell

• Restates some provisions of current law.– ACT 511

• Broadens Local Tax Enabling Act (LTEA) to include personal income tax (PIT) on investment income.

• Mandates new rules for filers.

Income Tax Law ChangesIn a Nut Shell (cont.)

• Creation of an independent tax appeal board.

• Provides DCED mediation authority over taxing authorities and tax collectors.

• Changes in audit requirements.


• Major changes in employers withholding and tax collector distribution rules.

– Tax Collection Distribution:• Required distribution within 30 days in-county and 60 days out of

county.

• Dollar for Dollar reconciliations monthly.

• Distributions based upon estimates or “formulas” is prohibited.


• Major changes in employers withholding and tax collector distribution rules.

– Employer Withholding.• Employers must determine applicable tax rate for all employees

subject to tax. Withhold at the highest rate for non-residents.

• Make timely payments to tax collector of Tax Collection District even if owed out of county.

New Government Entity:Tax Collection Committee (TCC)

• Purpose of the TCC.

– Implement County Wide Collection – Three Options:• Creation of a tax collection bureau.

• Appointment of a third party tax collection agency.

• Join other county(s) under a cooperative arrangement.

New Government Entity: Tax Collection Committee (TCC)

Stage One – 2009 through 2012• Appointments:

• Chairperson– One of the most important decisions.

– Qualifications to Chair:

» Background.

» Understanding of the tax collection process.

» Ability to build consensus.

– Service.

» Time commitment.

» Leadership qualities.

• Auditor, legal counsel, officers.

(cont.)


Stage One – 2009 through 2012

• Employee determination• Governance and by-law adoption.• Financial matter discussion• Insurance determination.• Discussion: Single or Multi-County TCC. *• LST and other additional taxes – collection plan.

(cont.)



• Policy adoption.• Appointment of new collector:

– Create a new tax bureau.– Appoint third party collector.

• Development of a transition plan.• Appointment of tax appeal board.

(cont.)



• Key Stage One Items.– Appointment of TCC Chairperson is very important.

– Voting establishment (initial):• Weighted voting based on:

– 50% population.– 50% income tax revenue.

• Weighted voting methodology may be changed or eliminated by a TCC-adopted bylaw.

(cont.)


Stage Two – 2012 and Beyond

• Annual officer appointments.• Annual budgeting.• Audit.• Tax oversight board.• Tax appeal operations.

(cont.)

Your Responsibilities - What To Do Today?

• Consider appointment of representative to the TCC.

– Individual with clear understanding of the tax collection process.

– Qualified with regard to knowledge and leadership.

– Someone who can build consensus towards one tax collector.


• Begin to collaborate with school districts and municipalities.

– Who are the other tax collectors within the Tax Collection District (TCD)?

– What is the direction of other political subdivisions?

– Consider establishment of an advanced planning committee.

(cont.)

• Determine Weighted Vote percentage.

– Research DCED Website to determine your political sub-divisions weighted vote.

– Compare your sub-division’s weight as a percentage of total vote in TCD.

– Assess impact of vote.


(cont.)

• Begin to assess collectors and their ability to meet ACT 32 requirements.

– Review their current financial audit assessments.

• Is the opinion “Unqualified”?

• Does the audit provide an opinion over collections and distributions by political subdivision?

• Was the audit conducted by a reputable, qualified Public Accounting firm?

• What is the content and status of any internal control findings or management letter recommendations?


(cont.)

• Begin to assess collectors and their ability to meet ACT 32 requirements. (cont.)

– Current audit assessments – SAS70 Reports.

• Report over the internal controls of key operating systems.

• Is the opinion “Unqualified”.

• Have Significant Deficiencies/Material Weaknesses been identified?


(cont.)


– Litigation of historical findings.

• Any litigation with political subdivisions? Extent of that Litigation?

• Reputation of collector within the industry

• References


(cont.)


– Technology.• Can they provide ACT 32 reporting currently?

– Ability to distribute in-county monies every 30 days.– Ability to distribute out of county monies every 60 days.– Dollar for Dollar reporting on a monthly and quarterly basis.

• Platform considerations:– What type of system are they using? – Is it sustainable, useful, secure and robust?


(cont.)


– Technology. (cont.)

• Collection/Distribution process.– Manual versus automated.– Ability to file on-line for Employers and Employees.– Access to information:

» Online capabilities.» Real time capabilities.» Reconciliation and audit function.


(cont.)

Act 32 Audit Requirements

TCD Audit Requirements

• Every year.• Audit of all records relating to the cash basis receipt and

disbursement of all public money by the tax officer.• Reconciliation of the monthly reports and all receipts and

disbursements.• Analysis of the bond amount required by section 509(d).• Analysis of the collection fees charged to the tax

collection committee.

Review/Audit current collector

• Important to ensure that all monies due and owed have been received.

– Continue to work with current collector until transition.– Old collector’s distribution model: Estimated Distribution or dollar

for dollar? – Consider analysis of collector through 3rd party data extraction

and analysis.


(cont.)

Review/Audit current collector (cont.)

• Consider analysis of collector through 3rd party data extraction and analysis.

– Department of Revenue information.

• Gross Revenue Data Evaluation.– Wage income.

– Other business income.

• Determination of approximate expected tax revenues.


(cont.)


• Consider analysis of collector through 3rd party data extraction and analysis.– Act 80: Identify existence and accuracy of taxpayers.

• School district census data.

• Confirmation process with individuals.

– Obtain taxpayer records from DOR and perform analysis.


(cont.)


• Consider analysis of collector through 3rd party data extraction and analysis.

– Compare actual disbursements to 3rd party calculated disbursements.

• Use independent information to determine accuracy of collection.

• Possible tax collector record audit.


(cont.)

• Review/Audit current collector. (cont.)

– Consider their ability to meet Act 32 compliance.– Technology and platform considerations and transition to new

collector.– Operations and management structure of current collector.

• Is staffing adequate?• Continuous upgrades to technology?• Ability to compete within new tax collection environment?


(cont.)


• Review Audit opinions

– “Unqualified”? • Was the audit comprehensive?

• Were there issues?

– Status of management letter and internal control comments – what was their resolution?


(cont.)

What To Do Today?

• Begin the planning process now.• Set meetings for TCC member selection.• Set meetings for TCC development.

• Begin discussion of TCO determination.• Evaluate current collection environment.

• Discuss direction to achieve Act 32 compliance.• Begin development of plan for TCD collection.

• Consider capability, service, cost, and technology.

• Mitch Hoffman, Policy Manager, DCED– (888) 223-6837– www.newpa.com

• David Blain, Principal, McKonly & Asbury, LLP– [email protected]– www.ACT32INFO.com

• Samuel BowerCraft, Senior Manager, McKonly & Asbury, LLP– [email protected]– www.ACT32INFO.com

Want to Learn More?(cont.)

http://www.newpa.com/



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ACT 32 – Earned Income Tax

Documents

Transcript of ACT 32 – Earned Income Tax