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Philadelphia Tax Changes and Updates

As a result of the Philadelphia City Council adopting several ordinances including the authorization of a budget for the city’s 2016 fiscal year last week, there are numerous tax rate changes for various Philadelphia taxes.  All of the changes are effective as of July 1, 2015 or for the 2015 tax year.  Below is a summary of the changes.  


In addition to the tax rate changes, there have been significant events that impact Philadelphia taxpayers.  These events potentially provide opportunities that may be pursued.  After the summary of rate changes, there are descriptions of the events and potential opportunities.

TAX RATE CHANGES

Wage Tax and Earnings Tax:
  
Resident rate is decreased to 3.9102% (previously, 3.92%)
Nonresident rate is decreased to 3.4828% (previously, 3.4915%)
  Change is effective as of July 1, 2015

Net Profits Tax:  

Resident rate is decreased to 3.9102% (previously, 3.92%)
Nonresident rate is decreased to 3.4828% (previously, 3.4915%)
 Change is effective for the 2015 Tax Year

School Income Tax:  

Resident rate is decreased to 3.9102% (previously, 3.92%)
Nonresident are not subject to the School Income Tax. 
 Change is effective as of July 1, 2015

Use & Occupancy Tax:

The tax rate is increased to 1.21% (previously, 1.13%).
The basic exemption is decreased to $165,300 (previously, $177,000)
 Change is effective as of July 1, 2015

Parking tax (for off-street/garage parking):

The tax rate is increased to 22.5% (previously, 20%)
 Change is effective as of July 1, 2015

Real Estate Tax:

The total tax rate is increased to 1.3998% (previously, 1.34%)
  Change is effective for the 2016 Tax Year

The incremental reductions to the Wage, Earnings, Net Profits, and School Income taxes are a continuation of reductions over numerous years. 

The increases in the Use & Occupancy, Real Estate and Parking taxes are specifically targeted to help fund the Philadelphia School District’s budget.  

OTHER EVENTS IMPACTING PHILADELPHIA TAXES

Credits are not the same as refunds

For several years, the Philadelphia Department of Revenue has administered taxpayer overpayments and credits similarly to potential taxpayer refunds and applied a three-year statute of limitations.  Thus, if a taxpayer did not request a refund of an overpayment and/or credit on its account within the three-year statute of limitations for a refund, the statute of limitations was deemed to have closed by the Department for the taxpayer to “request” the overpayment and/or credit.  The Department would then take the overpayment and/or credit from the taxpayer’s account and essentially take the funds into the Department’s income. 

Last week, the Tax Review Board published three decisions on this practice by the Department concerning the Business Income and Receipts Tax and the Wage Tax.  In all three decisions, the Board held that overpayments and credits are separate and distinct from “refunds” and thus are not subject to the three-year statute of limitations per Sec. 19-1703.  Similar cases are pending in the judicial system as the City continues to defend its position.  Taxpayers that may have lost overpayments or credits as a result of the Department’s practice should consider the merits of taking legal action to reobtain the lost funds. 

Maryland Comptroller v. Wynne – possible refund opportunity for Philadelphia Residents

Last month, the U.S. Supreme Court issued its ruling in Comptroller of the Treasury of Maryland v. Wynne, holding that Maryland’s income tax scheme violated the Commerce Clause as internally inconsistent, and thus unconstitutional on its face.  The key issue of the Wynne case was that Maryland residents were not provided a credit for taxes paid to other jurisdictions against their the local portion of the Maryland income tax.  The Court held the lack of a credit mechanism created the imposition of a tariff that resulted in unconstitutional double taxation.  It would appear that Philadelphia Net Profits, Wage, and School Income taxes have a similar issue because Philadelphia residents are not permitted a credit for taxes paid to other jurisdictions. 

Any Philadelphia residents who paid taxes on their net profits or wages to state or local jurisdictions other than Philadelphia may want to consider filing refund claims with the Tax Review Board.  Likewise, businesses such as partnerships that pay a significant amount of taxes to other jurisdictions, with significant Philadelphia resident ownership, may also want to consider filing refund claims. 
The Wynne case involved some unique facts.  The Philadelphia Department of Revenue is still considering the impact of the decision.  Thus, taxpayers should understand the application of the Wynne decision to Philadelphia taxes is not free from doubt.  At this point, any claim for refund will likely be denied and may require appeals through the administrative and judicial systems. 

Please contact your tax professional if you have any questions.

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