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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 Partnership County Commissioners Association of Pennsylvania Pennsylvania League of Cities and Municipalities

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ACT 32 – Earned Income Tax

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  1. ACT 32 – Earned Income Tax Is your School District or Municipality Ready?

  2. Governor’s Center for Local Government Services and the PA Local Government Training Partnership County 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

  3. Speakers 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

  4. 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

  5. 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

  6. A significant administrative burden to business Loss of $millions by municipalities and school districts A burden to taxpayers Impact of Current EIT Collection System

  7. Optional “Courtesy Withholding” Employer Required Municipal Tax Collector (Home) School District Tax Collector (Home) School District Tax Collector (Work) Municipal Tax Collector (Work) 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 Withholding

  8. 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)

  9. 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

  10. 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 2008 Comprehensive EIT Collection Reform

  11. 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

  12. 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

  13. “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 Structure of New System

  14. 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 Structure of New System

  15. 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 Acceptgrants, borrow money and incur indebtedness Structure of New System

  16. 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 Structure of New System

  17. 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 Structure of New System

  18. 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 Structure of New System

  19. 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 Structure of New System

  20. 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 Structure of New System

  21. 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

  22. 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

  23. 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

  24. 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

  25. Key Implementation Deadlines

  26. Key Implementation Deadlines

  27. Key Implementation Deadlines

  28. Planning for the Next Steps • Quick Review of Act • Short Term Steps • Long Term Steps • Items to Consider for Migration to New Collector

  29. 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.

  30. 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.

  31. Income Tax Law ChangesIn a Nut Shell (cont.) • 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.

  32. Income Tax Law ChangesIn a Nut Shell (cont.) • 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.

  33. 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.

  34. New Government Entity: Tax Collection Committee (TCC) (cont.) 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.

  35. New Government Entity:Tax Collection Committee (TCC) (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.

  36. New Government Entity:Tax Collection Committee (TCC) (cont.) Stage One – 2009 through 2012 • 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.

  37. New Government Entity:Tax Collection Committee (TCC) (cont.) Stage One – 2009 through 2012 • 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.

  38. New Government Entity:Tax Collection Committee (TCC) (cont.) Stage Two – 2012 and Beyond • Annual officer appointments. • Annual budgeting. • Audit. • Tax oversight board. • Tax appeal operations.

  39. 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.

  40. Your Responsibilities - What To Do Today? (cont.) • 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.

  41. Your Responsibilities - What To Do Today? (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.

  42. Your Responsibilities - What To Do Today? (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?

  43. Your Responsibilities - What To Do Today? (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?

  44. Your Responsibilities - What To Do Today? (cont.) • Begin to assess collectors and their ability to meet ACT 32 requirements. (cont.) • Litigation of historical findings. • Any litigation with political subdivisions? Extent of that Litigation? • Reputation of collector within the industry • References

  45. Your Responsibilities - What To Do Today? (cont.) • Begin to assess collectors and their ability to meet ACT 32 requirements. (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?

  46. Your Responsibilities - What To Do Today? (cont.) • Begin to assess collectors and their ability to meet ACT 32 requirements. (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.

  47. 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.

  48. Your Responsibilities - What To Do Today? (cont.) 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.

  49. Your Responsibilities - What To Do Today? (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.

  50. Your Responsibilities - What To Do Today? (cont.) Review/Audit current collector(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.

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