RULES AND REGULATIONS
DEPARTMENT OF REVENUE
[61 PA. CODE CHS. 101, 103, 109, 113, 117,
121 AND 155]
Personal Income Tax; Definitions; Net Profits and Regulated Investment Companies
[29 Pa.B. 6249]
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), by this order amends §§ 101.1, 101.6, 103.12, 109.3--109.5, 109.7, 109.8, 113.1, 117.15, 121.10, 121.11, 121.14 and 155.30.
Purpose of the Amendments
The amendments will bring existing regulatory provisions into conformity with the laws of this Commonwealth and make them consistent with current Federal requirements. It will also provide a concise and nontechnical definition of ''income'' and ''net profits'' that will help business owners, investors, tax practitioners and regulated investment companies properly classify and compute their income, losses and deductions.
Explanation of Regulatory Requirements
Section 101.1 (relating to definitions) is amended by replacing the existing definitions of ''employe'' and ''employer'' with new definitions consistent with section 301(g) and (h) of the TRC (72 P. S. § 7301(g) and (h)). In addition, definitions for ''casual employe'' and ''casual employer'' have been added. The addition of the definitions of ''casual employe'' and ''casual employer'' required amendments to §§ 101.6(a), (c)(7) and (d); 109.3; 109.4; 109.5(c)(2)(i); 109.7; 109.8; 117.15(h); 121.10(c)(6); 121.11(b) and the deletion of § 121.14.
The definition of ''income'' is expanded to implement section 602(f)(2)(A) of the TRC (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 (72 P. S. § 7303), each class computed without setoff between or among any other class and, unless a net taxable class, without deductions.
Section 103.12 (relating to net profits) is amended to reflect the holdings in Morgan and Wettach.
Section 113.1 (relating to employers required to withhold tax) is amended to bring it into conformity with section 301 of the TRC.
The definition of ''Personal Income Tax income'' in § 155.30(b)(4) (relating to regulated investment companies) is 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).
Regulated investment companies that are subject to the Capital Stock/Foreign Franchise Tax and business owners, investors and tax practitioners may be affected by these amendments.
Comment and Response Summary
Notice of proposed rulemaking was published at 27 Pa.B. 4436 (August 30, 1997). This proposal is being adopted with changes as set forth in Annex A.
The Department received one comment from the public during the public comment period. The Department also received comments from the Independent Regulatory Review Commission (IRRC). No comments were received from the House and Senate Finance Committees.
Amendments to the proposed rulemaking in response to comments are as follows:
(1) In its comments, IRRC stated that it believed the proposed definitions for ''employe'' and ''employer'' were more expansive than the statutory definitions and could include instances when an employer is not required to withhold Federal Income Tax. IRRC recommended that the Department delete the proposed definitions and adopt the statutory definitions. The Department recognizes IRRC's concern with the proposed definitions and has adopted the statutory definitions of ''employe'' and ''employer'' in § 101.1.
However, it must also be recognized that not every individual who performs services for another individual or an entity and earns taxable compensation therefor does so as an ''individual from whose wages an employer is required under the Internal Revenue code to withhold Federal income tax.'' For example, remuneration paid for domestic service in a private home is excluded from the definition of ''wages'' in section 3401(a)(3) of the Internal Revenue Code (IRC) (26 U.S.C.A. § 3401(a)(3)); and, as a consequence, no individual who only earns compensation for these services can be such an individual. Also, for example, certain sales persons are excluded from the definition of ''employee'' in section 3508 of the IRC (26 U.S.C.A. § 3508) and, as a consequence, also cannot be such an individual.
It is the Department's position that an item of remuneration received for services is taxable as compensation whether or not the services were rendered as, or the item is received by, an ''employe.'' That is why ''compensation'' has always been defined so it ''includes'' (and is thus not limited to) ''items of remuneration received by an employe.'' See 61 Pa. Code §§ 101.6(a) and 101.8(e) (relating to compensation; and income from sources within this Commonwealth).
To resolve this issue, the Department has added a definition of ''casual employe'' and ''casual employer'' to § 101.1 and has inserted the terms in the following sections: 101.6(a), (c)(7) and (d); 109.3; 109.4; 109.5(c)(2)(i); 109.7; 109.8; 117.15(h); 121.10(c)(6); 121.11(b). Section 121.14 was deleted because the section is obsolete.
(2) In response to IRRC's request that the Department consider amending § 113.1 (relating to employers required to withhold tax) because it contains a definition of ''employer,'' the Department has amended the section to make it consistent with the current statutory definition of ''employer.''
(3) In the proposed definition of ''income,'' the Department used the phrases ''allowable unreimbursed business expense,'' ''allowable costs of goods sold'' and ''allowable costs of acquisition, expenses of sale and collection expenses;'' however, the regulation did not establish what would be considered ''allowable.'' Although the Department explained to IRRC that a future regulation would address what would be considered allowable, IRRC suggested in its comments that the Department either proceed with the other rulemaking expeditiously so that it would tract with the subject regulation or the phrases should be deleted to avoid confusion. The Department agrees with IRRC's suggestion, and has deleted the term ''allowable'' from these phrases.
An amendment to the proposed rulemaking in response to a public comment received outside the public comment period is as follows:
Proposed § 103.12(b)(1) described that net profits are different from other classes of personal income in that 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. The comment requested that the Department add the phrase ''from the active conduct of a securities trade or business,'' to paragraph (1).
In response to the comment, the Department has added a new subsection (e) to § 103.12. This new subsection details ''marketing of a product or service to customers'' for participants in the securities or commodities market. The standards in paragraphs (1)--(5) come from Morgan.
The Department has also added a new subsection (f) to § 103.12 to clarify that a taxpayer may operate as an investor or trader with respect to a portion of the tax payer's securities transactions and as a business person with respect to the rest of the taxpayer's securities transactions. Only the latter count toward the taxpayer's net profits. The former count toward the taxpayer's interest, dividends, and gains or losses from disposition of property.
A comment that did not result in an amendment to the proposed rulemaking is as follows:
IRRC and the public comment objected to the provisions of § 103.12 that require a regulated investment company (RIC) to classify its Personal Income Tax income within the eight classes of income subject to tax under section 303 of the TRC. IRRC and the public comment indicated that the nature of a RIC is as a commercial enterprise conducted for profit. Therefore, IRRC and the public comment concluded that regulated investment companies should be allowed to classify their undistributed Personal Income Tax income only as net profits.
The objection overlooks the special nature of RICs as investment agents for their shareholders, and the resulting special Federal tax treatment afforded RICs. RICs invest in securities and distribute the income earned as dividends to their shareholder investors. The Federal government recognizes the regulated investment company as the alter ego of the shareholders by allowing the RIC a deduction for dividends paid to their shareholders. See 26 U.S.C.A. § 852. Consequently, a RIC may completely escape Federal corporate income taxation by distributing all of its income.
RICs are highly regulated by the IRC. At least 90% of the income of a RIC must consist of dividends, interest and gain or other income from stocks or securities (including foreign currencies). See 26 U.S.C.A. § 851. A RIC's income retains its character when distributed to its shareholders. If the income was earned by the RIC as interest, it is classified as interest for the shareholder.
RICs organized as corporations automatically receive the benefit of this special Federal tax treatment for Commonwealth Corporate Net Income Tax purposes. This results from the fact that the Commonwealth taxable income of a corporation is its Federal taxable income. However, the Capital Stock Franchise Tax is not based upon Federal taxable income. Therefore, the General Assembly enacted special Capital Stock Franchise Tax rules for RICs that recognize their special character as the alter ego of their shareholders.
Accordingly, the Capital Stock Franchise Tax uses Personal Income Tax income as one component of a formula for determining the Capital Stock Franchise Tax liability of a RIC. Section 602(f)(2)(A) of the TRC (72 P. S. § 7602(f)(2)(A)) specifically provides:
(A) Personal Income Tax income means income to the extent enumerated and classified in section 303 of the TRC.
Section 303 of the TRC defines eight classes of income that are subject to tax. Those classes include: compensation; net profits; net gains from the disposition of property; net gains from rents, royalties patents and copyrights; dividends; interest; gambling and lottery winnings; and net gains or income from estates or trusts. The comments suggest the definition of Personal Income Tax income results in all income earned by a RIC being reclassified only as net profits, including the dividends and interest earned by the RIC.
The reclassification of the RICs interest and dividends as net profits is contrary to the special Federal tax treatment of RICs and their shareholders. It is also contrary to the rules of statutory construction.
The rules of statutory construction provide that ''[e]very statute shall be construed, if possible, to give meaning and effect to all of its provisions.'' See 1 Pa.C.S. § 1921(a) (relating to legislative intent controls). If the General Assembly had meant for all Personal Income Tax income of a RIC to be classified as net profits, section 602(f)(2)(A) of the TRC would simply state that Personal Income Tax income is net profits as enumerated in section 303(a)(2) of the TRC. However, Personal Income Tax income is defined as ''income to the extent enumerated and classified in section 303.'' See 72 P. S. § 7602(f)(2)(A). The plain reading of the statute does not limit Personal Income Tax income to only one of the eight classes of income enumerated in section 303 of the TRC.
The objection also ignores the fact that other business entities that are subject to Article III of the TRC (72 P. S. §§ 7301--7361) do not classify their interest and dividends as net profits. Section 307.9(a) of the TRC (72 P. S. § 7307.9(a)) provides that ''[e]ach shareholder of a Pennsylvania S Corporation shall take into income such shareholder's pro rata share of the income or loss in each applicable class of income received by the corporation . . .'' See 72 P. S. § 7307.9(a).
For over 25 years, the Department's regulations have also provided that every partner's share of the income of the partnership shall be reported within the eight classes of Personal Income Tax income ''depending upon which class it shall fall within.'' See 61 Pa. Code § 107.1 (relating to general taxibility of partners and members). Accordingly, the Personal Income Tax income of Pennsylvania S Corporations, partnerships and other business entities is classified in the same manner and on the same basis as the income of a natural individual.
In addition, it is a presumption that ''the General Assembly does not intend a result that is absurd, impossible of execution or unreasonable.'' See 1 Pa.C.S. § 1922(1) (relating to presumptions in ascertaining legislative intent). RICs are required to distribute at least 90% of their income. In practice, their expenses are ordinarily greater than their undistributed income. Under the interpretation as proposed by IRRC and the public comment, the regulated investment companies would not have Personal Income Tax income to report. Accordingly, an interpretation that classifies a RIC's income as only net profits may produce a result where it would be exceptional for a RIC to have Personal Income Tax income.
For all of the previously stated reasons, Personal Income Tax income must be interpreted as ''income to the extent enumerated and classified under section 303.'' See 72 P. S. § 7602(f)(2)(A). The amendments as drafted interprets the statute exactly in that manner.
The Department has determined that the amendments will have no fiscal impact on the Commonwealth.
The amendments will not generate additional paperwork for the public or the Commonwealth.
The amendments will become effective upon final publication in the Pennsylvania Bulletin. The amendments are scheduled for review within 5 years of final publication. No sunset date has been assigned.
The contact person for an explanation of the amendments is Anita M. Doucette, Office of Chief Counsel, PA Department of Revenue, Dept. 281061, Harrisburg, PA 17128-1061.
Under section 5(a) of the Regulatory Review Act (71 P. S. § 745.5(a)), on August 20, 1997, the Department submitted a copy of the notice of proposed rulemaking, published at 27 Pa.B. 4436, to IRRC and the Chairpersons of the House Committee on Finance and the Senate Committee on Finance for review and comment. In compliance with section 5(c) of the Regulatory Review Act the Department also provided IRRC and the Committees with copies of the comments received, as well as other documentation.
In preparing these final-form regulations, the Department has considered the comments received from IRRC, the Committees and the public.
These final-form regulations were deemed approved by the Committees on October 18, 1999, and were approved by IRRC on October 21, 1999, in accordance with section 5.1(e) of the Regulatory Review Act (71 P. S. § 745.5a(e)).
The Department finds that:
(1) Public notice of intention to amend the regulations has been given under sections 201 and 202 of the act of July 31, 1968 (P. L. 769, No. 240) (45 P. S. §§ 1201 and 1202) and the regulations thereunder, 1 Pa. Code §§ 7.1 and 7.2.
(2) The amendments are necessary and appropriate for the administration and enforcement of the authorizing statute.
The Department, acting under the authorizing statute, orders that:
(a) The regulations of the Department, 61 Pa. Code Chapters 103, 109, 113, 117, 121 and 155, are amended by amending §§ 101.1, 101.6, 103.12, 109.3--109.5, 109.7, 109.8, 113.1, 117.15, 121.10, 121.11 and 155.30 and by deleting § 121.14 to read as set forth in Annex A, with ellipses referring to the existing text of the regulations.
(b) The Secretary of the Department shall submit this order and Annex A to the Office of General Counsel and the Office of Attorney General for approval as to form and legality as required by law.
(c) The Secretary of the Department shall certify this order and Annex A and deposit them with the Legislative Reference Bureau as required by law.
(d) This order shall take effect upon publication in the Pennsylvania Bulletin.
ROBERT A. JUDGE, SR.,
(Editor's Note: The amendment of §§ 101.6, 103.12, 109.3--109.5, 109.7, 109.8, 113.1, 117.15, 121.10, 121.11 and the deletion of § 121.14 were not included in the proposal at 27 Pa.B. 4436 (August 30, 1977). For the text of the order of the Independent Regulatory Review Commission relating to this document, see 29 Pa.B. 5777 (November 6, 1999).)
Fiscal Note: Fiscal Note 15-381 remains valid for the final adoption of the subject regulations.
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:
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Casual employe--An individual who performs, or by agreement, refrains from performing, a service of whatever nature and is not an employe.
Casual employer--A person for whom a casual employe performs, or refrains from performing, any service, provided that, if the person does not make the payment of remuneration, the term also includes the person making payment.
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Employe--An individual from whose wages an employer is required under the IRC to withhold Federal Income Tax. For the purpose of this definition, the terms ''employe,'' ''employer'' and ''wages'' have the same meanings as 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 any other entity who or that is required under the IRC to withhold Federal Income Tax from wages paid to an employe. For the purpose of this definition, the terms ''employe,'' ''employer'' and ''wages'' have the same meanings as in Chapter 24 of the IRC.
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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 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. For example, an individual's net profit from manufacturing toys is $100, his net loss from the business of selling garden supplies 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 income, against which he may not set off his losses on rentals.
(ii) A deduction is not 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) Unreimbursed employe business expenses.
(B) Costs of goods sold and expense incurred in the operation of a business.
(C) 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) The distributive income of a Pennsylvania S corporation, partnership or other association, trust or estate is classified, 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 shall 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 income, against which he may not set off his wife's business losses.
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§ 101.6. Compensation.
(a) Compensation includes items of remuneration received by an employe or casual employe, directly or through an agent, in cash or in property, based on payroll periods or piecework, for services rendered as an employe or casual employe, agent or officer of an individual, partnership, but not guaranteed payments to a partner for services rendered to the partnership, business or nonprofit corporation, or government agency. These items include salaries, wages, commissions, bonuses, stock options, incentive payments, fees, tips, termination or severance payments, rewards, vacation and holiday pay, tax assumed by the employer or casual employer and other remuneration received for services rendered.
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(c) Compensation does not mean or include any of the following:
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(7) The value of meals and lodging furnished for the convenience of an employer or casual employer does not constitute compensation. Payments made to an Individual Retirement Account, as provided by the Employee Retirement Income Security Act of 1974 (ERISA), the act of September 2, 1974 (Pub. L. No. 93-406, 88 Stat. 829), are not excludable in computing income which is subject to tax under this article.
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(d) The Department may require the submission of a statement from an employer or casual employer with respect to its employes or casual employes regarding the verification or substantiation of unreimbursed and reimbursed business expenses. The statement of the employer or casual employer should verify that the expenses were required by the employer or casual employer. The statement shall set forth the types of expenses such as travel, meals, hotel and so forth that the employer or casual employer specifically requires the employe or casual employe to incur and to what extent, if any, the expenses are reimbursed. If the employer or casual employer requires the employe or casual employe to maintain an office, or office-in-home, a statement by the employer or casual employer to this effect should also be included. The Department does not require the employer or casual employer to specifically list the amount expended or to verify each expense incurred by the employe or casual employe.
CHAPTER 103. IMPOSITION AND DETERMINATION OF TAX
Subchapter B. 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. They shall be determined either on a cash or accrual basis in accordance with accepted accounting principles and practices.
(b) To constitute net profits, all of the following must apply:
(1) The gross profits shall be derived from one of the following:
(i) The marketing of a product or service to customers on a commercial basis or from securities employed as working capital in the business operations.
(ii) Accounts and notes receivable from sales of products or services sold in the ordinary course of the business operations.
(iii) Assets which serve an operational function in the ordinary course of business operations.
(2) The marketing activity shall be conducted with the manifest objective of achieving profitable operations.
(3) The marketing activity shall be conducted with regularity and continuity and may not be limited or exclusive.
(c) In computing net profits, a deduction will not be allowed for any item of cost, expense or liability derived or incurred in connection with, or attributable to any of the following:
(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.
(e) For purposes of this section, only the following participants in the stock, securities, options, derivatives, futures or commodities market are engaged in marketing of a product or service to customers:
(1) Those who maintain or provide a market place or facilities for bringing together purchasers and sellers of these financial investment products.
(2) Those who are licensed to act as their customer's agents and charge a negotiated commission for executing transactions and do not take title to the particular positions they buy or sell.
(3) Those who devote managerial attention to the financial investment products holdings of others, or who employ other persons to assist them in that management, in the capacity of a licensed investment advisor.
(4) Licensed dealers, including financial investment product specialists and market makers, if the conditions in subparagraphs (i)--(iv) are met:
(i) The dealer maintains an inventory of financial investment products with the objective of reselling his inventories at a profit to customers or operates as a specialist or market maker.
(ii) The dealer makes market by quoting the bid and asked prices at which he is willing to buy and sell the financial investment products and by buying directly from or selling directly to customers.
(iii) The dealer's profit is determined in whole or in part by a markup based on cost.
(iv) The dealer elects to inventory securities held for resale to customers or uses the mark-to-market system of accounting.
(5) Underwriters who facilitate initial sales of financial investment products by acting either as licensed dealers in a principal capacity or as brokers in an agency capacity.
(f) When a person operates as an investor or trader with respect to a portion of that person's activities and as a market establishment, broker, investment counselor or dealer with respect to the rest, this section applies only to the operations as a market establishment, broker, investment counselor or dealer.
CHAPTER 109. NONRESIDENT INDIVIDUALS
§ 109.3. Business carried on wholly within this Commonwealth.
A business, trade, profession or occupation, as distinguished from personal services as an employe or casual employe, is carried on by a nonresident wholly within this Commonwealth, if the activities described in § 101.8 (relating to income from sources within this Commonwealth) are carried on solely within this Commonwealth and none of the activities are carried on outside of this Commonwealth though the nonresident or his representative travels outside of this Commonwealth for purpose of buying, selling, financing or performing duties in connection with the business, and even though sales may be made to, or services performed for, or on behalf of, persons or corporations located outside of this Commonwealth. If a nonresident individual carries on a business, trade, profession or occupation wholly within this Commonwealth, all his items of income, gain, loss and deduction attributable to the business shall be deemed from sources within this Commonwealth.
§ 109.4. Business carried on partly within and partly without this Commonwealth.
A business, trade, profession or occupation, as distinguished from personal services as an employe or casual employe, is carried on partly within and partly without this Commonwealth if one or more of the activities described in § 101.8 (relating to income from sources within this Commonwealth), is systematically and regularly carried on within this Commonwealth and one or more of the activities is systematically and regularly carried on outside of this Commonwealth or if one or more of the activities is systematically and regularly carried on both within and without this Commonwealth.
§ 109.5. Apportionment and allocation of income from a business carried on partly within and partly without this Commonwealth.
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(c) If the books and records of the business do not disclose to the satisfaction of the Department the proportion of the net amount of the items of income, gain, loss and deduction attributable to the activities of the business carried on in this Commonwealth, the proportion shall, except as provided in § 109.6 (relating to rentals and gains from sale or exchange of real property), be determined by multiplying the net amount of the items of income, gain, loss and deduction of the business by the average of the following percentages:
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(2) Payroll percentage. The payroll percentage shall be determined as follows:
(i) The percentage computed by dividing the total wages, salaries and other personal service compensation paid or incurred during the taxable year to employes or casual employes in connection with the business carried on within this Commonwealth, by the total of all wages, salaries and other personal service compensation paid or incurred during the taxable year to employes or casual employes in connection with the business carried on both within and without this Commonwealth.
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§ 109.7. Earnings of salesmen.
If the commission for sales made or other compensation for services performed by a nonresident traveling salesman, agent or other employe or casual employe depends directly upon the volume of business transacted by him, his items of income derived from or connected with Commonwealth sources include that proportion of the amount of the items attributable to the business which the volume of business transacted by him within this Commonwealth bears to the total volume of business transacted by him within and without this Commonwealth.
§ 109.8. Earnings of nonresident employes or casual employes and officers.
If a nonresident employe or casual employe, including corporate officers but excluding employes or casual employes provided for in § 109.7 (relating to earnings of salesmen) performs services for an employer or casual employer both within and without this Commonwealth, his income derived from Commonwealth sources includes that proportion of the employe's total compensation for services rendered as an employe or casual employe which the total number of working days employed within this Commonwealth bears to the total number of working days employed both within and without this Commonwealth. However, any allowance claimed for days worked outside of this Commonwealth shall be based upon the performance of services which, of necessity, obligate the employe or casual employe to perform out-of-State duties in the service of his employer or casual employer. In making the allocation provided for in this section, no account may be taken of nonworking days, including Saturdays, Sundays, holidays, days of absence because of illness or personal injury, vacation or leave with or without pay.
CHAPTER 113. WITHHOLDING OF TAX
§ 113.1. Employers required to withhold tax.
An individual, partnership, association, corporation, organization, fiduciary, governmental body, unit, agency or other entity who is an employer, makes payment of compensation and maintains an office or transacts business within this Commonwealth is subject to this chapter, whether or not a paying agency is maintained within this Commonwealth.
(1) The phrase ''transacting business within this Commonwealth'' includes having or maintaining within this State, directly or indirectly, an office, distribution house, sales house, warehouse or other place of business, or operating within this Commonwealth by any agent or other representative under the authority of the employer or its subsidiary, irrespective of whether the place of business or agent or other representative is located in this Commonwealth permanently or temporarily, or whether the employer is licensed to do business in this Commonwealth.
(2) The term ''agent'' is broader than the term employe and includes anyone acting under the authority of the principal in an agency capacity. It does not matter that an agent may engage in business on his own account, for other persons or as an independent contractor acting as an agent.
CHAPTER 117. RETURN AND PAYMENT OF TAX
§ 117.15. Records.
(a) In general. Except as provided in subsection (b), a person subject to tax under this article, or a person required to file a return of information with respect to income, shall keep permanent books of account or records, including inventories, sufficient to establish the amount of gross income, deductions allowable, credits or other matters required to be shown by the person and any return of the tax or information.
(b) Wage earners. Individuals whose gross income include salaries, wages or similar compensation for personal services rendered shall be required, with respect to the income, to keep the records to enable the Department to determine the correct amount of income subject to tax. It is not necessary, with respect to the income, that an individual keep the books of account or records required by subsection (a).
(c) Notice of Department requiring returns, statements or the keeping of records. The Department may require a person, by notice served upon him, to make returns, render a statement or keep specific records as will enable the Department to determine whether or not the person is liable to tax under this article.
(d) Retention of records. The books of records required by this section shall be kept at all times available for inspection by authorized personnel of the Department, and shall be retained so long as the contents thereof may become material in the administration of the tax imposed under this article.
(e) Form of records. The records required by this section shall be kept accurately, but no particular form is required for keeping the records. The forms and systems of accounting shall be used as will enable the Department to ascertain whether liability for taxes incurred exists and, if so, the amount thereof.
(f) Copies of returns, schedules and statements. A person who is required, by this section or by instructions applicable to any form prescribed, to keep any copy of any return, schedule, statement or other document shall keep the copy as part of his records.
(g) Records of claimants. A person (including an employe) who, under this chapter, claims a refund, credit or abatement shall keep a complete and detailed record with respect to the tax, interest, addition to the tax, additional amount or assessable penalty to which the claim relates.
(h) Records of employes or casual employes. While not mandatory, except in the case of claims, it is advisable for each employe or casual employe to keep permanent, accurate records showing the name and address of each employer or casual employer for whom he performs services as an employe or casual employe, the dates of beginning and termination of the services, the information with respect to himself which is required by this chapter to be kept by employers or casual employers and the receipts furnished him by an employer or casual employer.
(i) Place and period for keeping records. The records required by this article shall be kept, by the person required to keep them, at one or more convenient safe locations accessible to authorized personnel of the Department, and shall at all times be available for inspection by the personnel. Every person required by this article to keep records in respect of a tax, whether or not the person incurs liability for the tax, shall maintain the records for at least 4 years after the due date of the tax for the return period to which the records relate, or the date the tax is paid, whichever is later. The records of claimants shall be maintained for at least 3 years after the date the claim is filed.
CHAPTER 121. FINAL RETURNS
§ 121.10. Reporting income.
(a) Under the law, only certain classes of income are subject to tax. Therefore, that income not included in any of the eight categories is exempt from the tax.
(b) Examples of income subject to the tax which shall be reported are the following:
(1) Wages, salaries, commissions, bonuses, incentive payments and tips.
(2) Net profits from business or profession.
(3) Profits from a partnership or association.
(4) Net gains from sales or exchanges of real estate, autos, securities and other property.
(5) Rents and royalties from property, patents and copyrights.
(6) Gambling and lottery winnings.
(7) Interest on bank deposits, bonds and notes.
(8) Interest on net gain on bonds or obligations of other states or countries.
(9) The taxpayer's share of income from estates or trusts.
(10) Dividends except dividends paid in the form of stock distributed by a corporation to its stockholders if the distribution is not treated as personal income for Federal Income Tax purposes.
(c) Examples of income not subject to the tax which should not be reported are the following:
(1) Pensions and annuities.
(2) Government payments made to veterans and their families.
(3) Benefits paid by public retirement systems.
(4) Interest on obligations of this Commonwealth or its political subdivisions and authorities and interest on certain obligations of the United States government, its agencies or instrumentalities are not taxable if they are statutorily free from taxation. Interest on obligations of other states and countries, however, shall be subject to the Commonwealth Income Tax.
(5) Payments to reimburse actual expenses.
(6) The value of meals and lodging furnished for the convenience of the employer or casual employer.
(7) Social Security benefits.
(8) Military pay received by a United States serviceman on active duty outside of this Commonwealth.
(9) Life insurance proceeds.
(10) Workers' Compensation benefits.
(11) Payments for occupational diseases under section 108 of the Workers' Compensation Act (77 P. S. § 27.1) and section 108 of the Pennsylvania Occupational Disease Act (77 P. S. § 1208).
(12) Public assistance payments.
(13) Unemployment compensation payments.
(14) Income received for child support.
(15) Educational stipends for which no services are rendered, such as scholarships.
(16) Dividends paid in the form of stock by the distributing corporation if not treated as personal income for Federal Income Tax purposes.
§ 121.11. Partnership or similar enterprise.
(a) If a person is a member of a partnership, joint venture or similar enterprise, the person shall report his share of taxable income whether he received it or not.
(b) A taxpayer should enter his share of net profits on line two.
§ 121.14. (Reserved).
CHAPTER 155. CAPITAL STOCK TAX AND FOREIGN FRANCHISE TAX
§ 155.30. Regulated investment companies.
(a) General. Commencing with the calendar year 1985 and each year thereafter, the Capital Stock or Foreign Franchise Tax of a regulated investment company is the sum of the following products:
(1) Seventy five dollars multiplied by the quotient, rounded to the nearest whole number, produced by dividing the net asset value of the regulated investment company by 1 million.
(2) The apportioned undistributed Personal Income Tax income of the regulated investment company multiplied by the Personal Income Tax rate for the same tax year.
(b) Definitions. The following words and terms, when used in this section, have the following meanings, unless the context clearly indicates otherwise:
Apportioned undistributed Personal Income Tax income--Undistributed Personal Income Tax income multiplied by a fraction, the numerator of which is income distributed during the taxable period to shareholders who are Commonwealth resident individuals, estates or trusts and the denominator of which is income distributed during the taxable period.
Monthly net asset value--The actual market value of assets owned by the regulated investment company without exemptions or exclusions, less liabilities, debts and other obligations as of the last day of the month.
Net asset value--Determined by adding the monthly net asset values for each month during the taxable period and dividing the sum by the number of months involved.
Personal Income Tax income--Income computed in the same manner and on the same basis as the income of an individual under Article V of the TRC (relating to personal income tax).
Regulated investment company--A domestic corporation and a foreign corporation which is registered to do business in this Commonwealth, maintains an office in this Commonwealth, has filed a timely election to be taxed as a regulated investment company with the Federal government and qualified to be taxed as a regulated investment company under the IRC.
Undistributed Personal Income Tax income--Personal Income Tax income, other than Personal Income Tax income undistributed on account of the Capital Stock or Foreign Franchise Tax liability of the regulated investment company, less Personal Income Tax income distributed to shareholders.
(c) Determination of income considered to be distributed.
(1) Personal Income Tax income is deemed to be either distributed to shareholders or undistributed in the same proportion that the total income received by the regulated investment company during the taxable year is distributed to shareholders or undistributed.
(2) At the election of the regulated investment company, income distributed after the close of a taxable year, but deemed distributed during the taxable year for Federal income tax purposes, is deemed distributed during the year.
(3) If a regulated investment company in a taxable year has both current income and income accumulated from a period year, distributions made during the year shall be deemed to have been made first from current income.
[Pa.B. Doc. No. 99-2087. Filed for public inspection December 10, 1999, 9:00 a.m.]
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