PRINTER'S NO. 1725
No. 1378 Session of 2007
INTRODUCED BY LEVDANSKY, DeWEESE, McCALL AND D. EVANS, MAY 29, 2007
REFERRED TO COMMITTEE ON FINANCE, MAY 29, 2007
AN ACT 1 Amending the act of March 4, 1971 (P.L.6, No.2), entitled "An 2 act relating to tax reform and State taxation by codifying 3 and enumerating certain subjects of taxation and imposing 4 taxes thereon; providing procedures for the payment, 5 collection, administration and enforcement thereof; providing 6 for tax credits in certain cases; conferring powers and 7 imposing duties upon the Department of Revenue, certain 8 employers, fiduciaries, individuals, persons, corporations 9 and other entities; prescribing crimes, offenses and 10 penalties," further providing, in corporate net income tax, 11 for definitions, for reports and payment and for consolidated 12 reports; and further providing, in general provisions, for 13 underpayment of estimated tax. 14 The General Assembly of the Commonwealth of Pennsylvania 15 hereby enacts as follows: 16 Section 1. Section 401(3)1(a) and (b), 2(a) and 4(c) and (5) 17 of the act of March 4, 1971 (P.L.6, No.2), known as the Tax 18 Reform Code of 1971, amended or added December 23, 1983 19 (P.L.370, No.90), July 1, 1985 (P.L.78, No.29), August 4, 1991 20 (P.L.97, No.22), May 12, 1999 (P.L.26, No.4), June 22, 2001 21 (P.L.353, No.23), June 29, 2002 (P.L.559, No.89) and July 12, 22 2006 (P.L.1137, No.116) are amended, clause (3)2 is amended by 23 adding a phrase and the section is amended by adding clauses to
1 read: 2 Section 401. Definitions.--The following words, terms, and 3 phrases, when used in this article, shall have the meaning 4 ascribed to them in this section, except where the context 5 clearly indicates a different meaning: 6 * * * 7 (3) "Taxable income." 1. (a) In case the entire business 8 of the corporation is transacted within this Commonwealth, for 9 any taxable year which begins on or after January 1, 1971, 10 taxable income for the calendar year or fiscal year as returned 11 to and ascertained by the Federal Government, or in the case of 12 a corporation participating in the filing of consolidated 13 returns to the Federal Government or that is not required to 14 file a return with the Federal Government, the taxable income 15 which would have been returned to and ascertained by the Federal 16 Government if separate returns had been made to the Federal 17 Government for the current and prior taxable years, subject, 18 however, to any correction thereof, for fraud, evasion, or error 19 as finally ascertained by the Federal Government. 20 (b) Additional deductions shall be allowed from taxable 21 income on account of any dividends received from any other 22 corporation but only to the extent that such dividends are 23 included in taxable income as returned to and ascertained by the 24 Federal Government. For tax years beginning on or after January 25 1, 1991, additional deductions shall only be allowed for amounts 26 included, under section 78 of the Internal Revenue Code of 1986 27 (Public Law 99-514, 26 U.S.C. § 78), in taxable income returned 28 to and ascertained by the Federal Government and for the amount 29 of any dividends received from a foreign corporation included in 30 taxable income to the extent such dividends would be deductible 20070H1378B1725 - 2 -
1 in arriving at Federal taxable income if received from a 2 domestic corporation. For taxable years beginning on or after 3 January 1, 2009, if not otherwise allowed as a deduction, an 4 additional deduction is allowed for all dividends paid by one to 5 another of the included corporations of a unitary business to 6 the extent those dividends are included in business income of a 7 corporation that is required to determine its business income 8 pursuant to paragraph (1) of phrase (e) of subclause (2). 9 * * * 10 2. In case the entire business of any corporation, other 11 than a corporation engaged in doing business as a regulated 12 investment company as defined by the Internal Revenue Code of 13 1986, is not transacted within this Commonwealth, the tax 14 imposed by this article shall be based upon such portion of the 15 taxable income of such corporation for the fiscal or calendar 16 year, as defined in subclause 1 hereof, and may be determined as 17 follows: 18 (a) Division of Income. 19 (1) As used in this definition, unless the context otherwise 20 requires: 21 (A) "Business income" means income arising from transactions 22 and activity in the regular course of the taxpayer's trade or 23 business and includes income from tangible and intangible 24 property if either the acquisition, the management or the 25 disposition of the property constitutes an integral part of the 26 taxpayer's regular trade or business operations. The term 27 includes all income which is apportionable under the 28 Constitution of the United States. 29 (B) "Commercial domicile" means the principal place from 30 which the trade or business of the taxpayer is directed or 20070H1378B1725 - 3 -
1 managed. 2 (C) "Compensation" means wages, salaries, commissions and 3 any other form of remuneration paid to employes for personal 4 services. 5 (D) "Nonbusiness income" means all income other than 6 business income. The term does not include income which is 7 apportionable under the Constitution of the United States. 8 (E) "Sales" means all gross receipts of the taxpayer not 9 allocated under this definition other than dividends received, 10 interest on United States, state or political subdivision 11 obligations and gross receipts heretofore or hereafter received 12 from the sale, redemption, maturity or exchange of securities, 13 except those held by the taxpayer primarily for sale to 14 customers in the ordinary course of its trade or business. 15 (F) "State" means any state of the United States, the 16 District of Columbia, the Commonwealth of Puerto Rico, any 17 territory or possession of the United States, and any foreign 18 country or political subdivision thereof. 19 (G) "This state" means the Commonwealth of Pennsylvania or, 20 in the case of application of this definition to the 21 apportionment and allocation of income for local tax purposes, 22 the subdivision or local taxing district in which the relevant 23 tax return is filed. 24 (2) Any taxpayer having income from business activity which 25 is taxable both within and without this State other than 26 activity as a corporation whose allocation and apportionment of 27 income is specifically provided for in section 401(3)2(b)(c) and 28 (d) shall allocate and apportion taxable income as provided in 29 this definition. 30 (3) For purposes of allocation and apportionment of income 20070H1378B1725 - 4 -
1 under this definition, a taxpayer is taxable in another state if 2 in that state the taxpayer is subject to a net income tax, a 3 franchise tax measured by net income, a franchise tax for the 4 privilege of doing business, or a corporate stock tax or if that 5 state has jurisdiction to subject the taxpayer to a net income 6 tax regardless of whether, in fact, the state does or does not. 7 (4) Rents and royalties from real or tangible personal 8 property, gains, interest, patent or copyright royalties, to the 9 extent that they constitute nonbusiness income, shall be 10 allocated as provided in paragraphs (5) through (8). 11 (5) (A) Net rents and royalties from real property located 12 in this State are allocable to this State. 13 (B) Net rents and royalties from tangible personal property 14 are allocable to this State if and to the extent that the 15 property is utilized in this State, or in their entirety if the 16 taxpayer's commercial domicile is in this State and the taxpayer 17 is not organized under the laws of or taxable in the state in 18 which the property is utilized. 19 (C) The extent of utilization of tangible personal property 20 in a state is determined by multiplying the rents and royalties 21 by a fraction, the numerator of which is the number of days of 22 physical location of the property in the state during the rental 23 or royalty period in the taxable year and the denominator of 24 which is the number of days of physical location of the property 25 everywhere during all rental or royalty periods in the taxable 26 year. If the physical location of the property during the rental 27 or royalty period is unknown or unascertainable by the taxpayer, 28 tangible personal property is utilized in the state in which the 29 property was located at the time the rental or royalty payer 30 obtained possession. 20070H1378B1725 - 5 -
1 (6) (A) Gains and losses from sales or other disposition of 2 real property located in this State are allocable to this State. 3 (B) Gains and losses from sales or other disposition of 4 tangible personal property are allocable to this State if the 5 property had a situs in this State at the time of the sale, or 6 the taxpayer's commercial domicile is in this State and the 7 taxpayer is not taxable in the state in which the property had a 8 situs. 9 (C) Gains and losses from sales or other disposition of 10 intangible personal property are allocable to this State if the 11 taxpayer's commercial domicile is in this State. 12 (7) Interest is allocable to this State if the taxpayer's 13 commercial domicile is in this State. 14 (8) (A) Patent and copyright royalties are allocable to 15 this State if and to the extent that the patent or copyright is 16 utilized by the payer in this State, or if and to the extent 17 that the patent copyright is utilized by the payer in a state in 18 which the taxpayer is not taxable and the taxpayer's commercial 19 domicile is in this State. 20 (B) A patent is utilized in a state to the extent that it is 21 employed in production, fabrication, manufacturing, or other 22 processing in the state or to the extent that a patented product 23 is produced in the state. If the basis of receipts from patent 24 royalties does not permit allocation to states or if the 25 accounting procedures do not reflect states of utilization, the 26 patent is utilized in the state in which the taxpayer's 27 commercial domicile is located. 28 (C) A copyright is utilized in a state to the extent that 29 printing or other publication originates in the state. If the 30 basis of receipts from copyright royalties does not permit 20070H1378B1725 - 6 -
1 allocation to states or if the accounting procedures do not 2 reflect states of utilization, the copyright is utilized in the 3 state in which the taxpayer's commercial domicile is located. 4 (9) (A) Except as provided in subparagraph (B): 5 (i) For taxable years beginning before January 1, 2007, all 6 business income shall be apportioned to this State by 7 multiplying the income by a fraction, the numerator of which is 8 the property factor plus the payroll factor plus three times the 9 sales factor and the denominator of which is five. 10 (ii) For taxable years beginning after December 31, 2006, 11 all business income shall be apportioned to this State by 12 multiplying the income by a fraction, the numerator of which is 13 the sum of fifteen times the property factor, fifteen times the 14 payroll factor and seventy times the sales factor and the 15 denominator of which is one hundred. 16 (B) For purposes of apportionment of the capital stock - 17 franchise tax as provided in section 602 of Article VI of this 18 act, the apportionment fraction shall be the property factor 19 plus the payroll factor plus the sales factor as the numerator, 20 and the denominator shall be three. 21 (10) The property factor is a fraction, the numerator of 22 which is the average value of the taxpayer's real and tangible 23 personal property owned or rented and used in this State during 24 the tax period and the denominator of which is the average value 25 of all the taxpayer's real and tangible personal property owned 26 or rented and used during the tax period but shall not include 27 the security interest of any corporation as seller or lessor in 28 personal property sold or leased under a conditional sale, 29 bailment lease, chattel mortgage or other contract providing for 30 the retention of a lien or title as security for the sales price 20070H1378B1725 - 7 -
1 of the property. 2 (11) Property owned by the taxpayer is valued at its 3 original cost. Property rented by the taxpayer is valued at 4 eight times the net annual rental rate. Net annual rental rate 5 is the annual rental rate paid by the taxpayer less any annual 6 rental rate received by the taxpayer from subrentals. 7 (12) The average value of property shall be determined by 8 averaging the values at the beginning and ending of the tax 9 period but the tax administrator may require the averaging of 10 monthly values during the tax period if reasonably required to 11 reflect properly the average value of the taxpayer's property. 12 (13) The payroll factor is a fraction, the numerator of 13 which is the total amount paid in this State during the tax 14 period by the taxpayer for compensation and the denominator of 15 which is the total compensation paid everywhere during the tax 16 period. 17 (14) Compensation is paid in this State if: 18 (A) The individual's service is performed entirely within 19 the State; 20 (B) The individual's service is performed both within and 21 without this State, but the service performed without the State 22 is incidental to the individual's service within this State; or 23 (C) Some of the service is performed in this State and the 24 base of operations or if there is no base of operations, the 25 place from which the service is directed or controlled is in 26 this State, or the base of operations or the place from which 27 the service is directed or controlled is not in any state in 28 which some part of the service is performed, but the 29 individual's residence is in this State. 30 (15) The sales factor is a fraction, the numerator of which 20070H1378B1725 - 8 -
1 is the total sales of the taxpayer in this State during the tax 2 period, and the denominator of which is the total sales of the 3 taxpayer everywhere during the tax period. 4 (16) Sales of tangible personal property are in this State 5 if the property is delivered or shipped to a purchaser, within 6 this State regardless of the f.o.b. point or other conditions of 7 the sale. 8 (17) Sales, other than sales of tangible personal property 9 and sales set forth in paragraphs (17.1) and (17.2), are in this 10 State if: 11 (A) The income-producing activity is performed in this 12 State; or 13 (B) The income-producing activity is performed both in and 14 outside this State and a greater proportion of the income- 15 producing activity is performed in this State than in any other 16 state, based on costs of performance. 17 (17.1) Sales of services are in this State if sales are 18 derived from customers within this State. If part of the sales 19 with respect to a specific contract or other agreement to 20 perform services is derived from customers from within this 21 State, sales are in this State in proportion to the sales 22 derived from customers within this State to total sales with 23 respect to that contract or agreement. 24 (17.2) In order to determine sales in this State of any 25 railroad, truck, bus, airline, pipeline, natural gas or water 26 transportation company that is required to determine its 27 business income pursuant to paragraph (1) of phrase (e) of this 28 subclause such company must convert the relevant fraction set 29 forth in phrase (b), (c) or (d) of this subclause to gross 30 receipts. Sales in this State are the result of multiplying 20070H1378B1725 - 9 -
1 total gross receipts from relevant transportation activities by 2 the decimal equivalent of the relevant fraction set forth in 3 phrase (b), (c) or (d) of this subclause. 4 (18) If the allocation and apportionment provisions of this 5 definition do not fairly represent the extent of the taxpayer's 6 business activity in this State, the taxpayer may petition the 7 Secretary of Revenue or the Secretary of Revenue may require, in 8 respect to all or any part of the taxpayer's business activity: 9 (A) Separate accounting; 10 (B) The exclusion of any one or more of the factors; 11 (C) The inclusion of one or more additional factors which 12 will fairly represent the taxpayer's business activity in this 13 State; or 14 (D) The employment of any other method to effectuate an 15 equitable allocation and apportionment of the taxpayer's income. 16 In determining the fairness of any allocation or apportionment, 17 the Secretary of Revenue may give consideration to the 18 taxpayer's previous reporting and its consistency with the 19 requested relief. 20 * * * 21 (e) Corporations That are Members of a Unitary Business. 22 (1) Notwithstanding any contrary provisions of this article, 23 for taxable years that begin on or after January 1, 2009, 24 business income of a corporation that is a member of a unitary 25 business that consists of two or more corporations, at least one 26 of which does not transact its entire business in this State, is 27 determined by combining the business income of either all 28 corporations, other than as set forth below, that are water's- 29 edge basis members or all corporations, other than as set forth 30 below, that are worldwide members of the unitary business. 20070H1378B1725 - 10 -
1 Business income from an intercompany transaction between 2 included corporations of a unitary business shall be deferred in 3 the manner set forth under 26 CFR 1.1502-13 (relating to 4 intercompany transactions) in determining the business income of 5 a corporation that is a member of that unitary business. 6 Business income of the following corporations is not included in 7 the determination of combined business income: 8 (i) any corporation subject to taxation under Article VII, 9 VIII, IX or XV; 10 (ii) any corporation specified in the definition of 11 "institution" in section 701.5 that would be subject to taxation 12 under Article VII were it located, as defined in section 701.5, 13 in this State; 14 (iii) any corporation commonly known as a title insurance 15 company that would be subject to taxation under Article VIII 16 were it incorporated in this State; 17 (iv) any corporation specified as an insurance company, 18 association or exchange in Article IX that would be subject to 19 taxation under Article IX were its insurance business transacted 20 in this State; 21 (v) any corporation specified in the definition of 22 "institution" in section 1501 that would be subject to taxation 23 under Article XV were it located, as defined in section 1501, in 24 this State; or 25 (vi) any corporation that is a small corporation, as defined 26 in section 301(s.2), or a qualified Subchapter S subsidiary, as 27 defined in section 301(o.3). 28 (2) Notwithstanding any contrary provisions of this article, 29 all corporations that are required to compute business income 30 under paragraph (1) are entitled to apportion such business 20070H1378B1725 - 11 -
1 income when one corporation of the same unitary business is 2 entitled to apportion such business income. Notwithstanding any 3 contrary provisions of this article, for taxable years that 4 begin on or after January 1, 2009, the denominator of the 5 apportionment fraction of a corporation that is required to 6 compute its business income under paragraph (1) shall be 7 computed on a combined basis for all included corporations of 8 the unitary business. Gross receipts from an intercompany 9 transaction between included corporations of a unitary business 10 are eliminated unless the gross receipts are derived from 11 transactions that are deferred in the manner set forth under 26 12 CFR 1.1502-13 in computing the numerator and denominator of the 13 apportionment fraction of a corporation that is required to 14 compute its business income under paragraph (1). Gross receipts 15 from transactions that had been deferred in the manner set forth 16 in 26 CFR 1.1502-13 are included in a corporation's 17 apportionment fraction during the same taxable year that it 18 realizes business income that had been deferred due to the 19 transaction. The apportionment fraction of the following 20 corporations is not included in the determination of the 21 combined apportionment fraction: 22 (i) any corporation subject to taxation under Article VII, 23 VIII, IX or XV; 24 (ii) any corporation specified in the definition of 25 "institution" in section 701.5 that would be subject to taxation 26 under Article VII were it located, as defined in section 701.5, 27 in this State; 28 (iii) any corporation commonly known as a title insurance 29 company that would be subject to taxation under Article VIII 30 were it incorporated in this State; 20070H1378B1725 - 12 -
1 (iv) any corporation specified as an insurance company, 2 association or exchange in Article IX that would be subject to 3 taxation under Article IX were its insurance business transacted 4 in this State; 5 (v) any corporation specified in the definition of 6 "institution" in section 1501 that would be subject to taxation 7 under Article XV were it located, as defined in section 1501, in 8 this State; 9 (vi) any corporation that is a small corporation, as defined 10 in section 301(s.2), or a qualified Subchapter S subsidiary, as 11 defined in section 301(o.3). 12 (3) A corporation that is required to compute its business 13 income under paragraph (1) shall apportion such combined 14 business income by multiplying such combined business income by 15 a fraction which is the combined apportionment fraction set 16 forth in paragraph (2). 17 (4) Nonbusiness income of a corporation that is required to 18 compute business income under paragraph (1) shall be allocated 19 as provided in paragraphs (5) through (8) of phrase (a) of 20 subclause 2 of the definition of "taxable income." 21 (5) Each corporation that is a member of a unitary business 22 that consists of two or more corporations determines its tax 23 liability based on its apportioned share of the combined 24 business income of the unitary business plus its nonbusiness 25 income or loss allocated to this State, minus its net loss 26 deduction. 27 (6) If any provision of this phrase operates so that an 28 amount is added to or deducted from taxable income for a taxable 29 year for any corporation of a unitary business that previously 30 had been added to or deducted from taxable income of any 20070H1378B1725 - 13 -
1 corporation of the same unitary business, an appropriate 2 adjustment shall be made for the taxable year in order to 3 prevent double taxation or double deduction. If this adjustment 4 is not made by the appropriate corporation of the unitary 5 business, the Secretary of Revenue is authorized to make this 6 adjustment. 7 (7) The Secretary of Revenue has the authority and 8 responsibility to make adjustments to insure that a corporation 9 does not incur an unfair penalty nor realize an unfair benefit 10 because it is required to compute its business income under 11 paragraph (1). Fairness shall be measured by whether the 12 corporation's income allocated and apportioned to this State 13 fairly reflects the corporation's share of the unitary business 14 conducted in this State in the taxable year. 15 * * * 16 4. * * * 17 (c) (1) The net loss deduction shall be the lesser of: 18 (A) (I) For taxable years beginning before January 1, 2007, 19 two million dollars ($2,000,000)[;] or the amount of the net 20 loss or losses which may be carried over to the taxable year or 21 taxable income as determined under subclause 1 or, if 22 applicable, subclause 2; 23 (II) For taxable years beginning after December 31, 2006, 24 the greater of twelve and one-half per cent of taxable income as 25 determined under subclause 1 or, if applicable, subclause 2 or 26 three million dollars ($3,000,000)[; or] or the amount of the 27 net loss or losses which may be carried over to the taxable year 28 or taxable income as determined under subclause 1 or, if 29 applicable, subclause 2; or 30 (B) The amount of the net loss or losses which may be 20070H1378B1725 - 14 -
1 carried over to the taxable year or taxable income as determined 2 under subclause 1 or, if applicable, subclause 2. 3 (1.1) In no event shall the net loss deduction include more 4 than five hundred thousand dollars ($500,000), in the aggregate, 5 of net losses from taxable years 1988 through 1994. 6 (2) (A) A net loss for a taxable year may only be carried 7 over pursuant to the following schedule: 8 Taxable Year Carryover 9 1981 1 taxable year 10 1982 2 taxable years 11 1983-1987 3 taxable years 12 1988 2 taxable years plus 13 1 taxable year 14 starting with the 15 1995 taxable year 16 1989 1 taxable year plus 17 2 taxable years 18 starting with the 19 1995 taxable year 20 1990-1993 3 taxable years 21 starting with the 22 1995 taxable year 23 1994 1 taxable year 24 1995-1997 10 taxable years 25 1998 and thereafter 20 taxable years 26 (B) The earliest net loss shall be carried over to the 27 earliest taxable year to which it may be carried under this 28 schedule. The total net loss deduction allowed in any taxable 29 year shall not exceed: 30 (I) Two million dollars ($2,000,000) for taxable years 20070H1378B1725 - 15 -
1 beginning before January 1, 2007. 2 (II) The greater of twelve and one-half per cent of the 3 taxable income as determined under subclause 1 or, if 4 applicable, subclause 2 or three million dollars ($3,000,000) 5 for taxable years beginning after December 31, 2006. 6 (3) The amount of unused net loss from all taxable years 7 that begin prior to January 1, 2009, that may be carried over to 8 any taxable year that begins on or after January 1, 2009, is 9 limited to two million dollars ($2,000,000) per taxable year and 10 may only be used by the corporation that realized the net loss. 11 If a corporation is required to determine its business income 12 pursuant to paragraph (1) of phrase (e) of subclause 2, it may 13 only use such loss in a year to the extent that it has taxable 14 income before use of such loss determined as if it were a 15 separate company. 16 (4) Any net loss realized for a taxable year that begins on 17 or after January 1, 2009, by one corporation of a unitary 18 business may be used by other corporations of the same unitary 19 business, provided that the corporation that realized the net 20 loss must first use the portion of such net loss to reduce its 21 taxable income to zero. Other corporations of the same unitary 22 business that have insufficient net losses of their own to 23 reduce their tax liabilities to zero may then use the remainder 24 of such net loss in proportion to their remaining taxable 25 incomes before the application of such loss. 26 (5) Any net loss realized for a taxable year that begins on 27 or after January 1, 2009, unused by a corporation which 28 subsequently becomes a member of another unitary business may 29 only be used by that corporation. 30 * * * 20070H1378B1725 - 16 -
1 (5) "Taxable year." [The] 1. Except as set forth in 2 subclause 2, the taxable year which the corporation, or any 3 consolidated group with which the corporation participates in 4 the filing of consolidated returns, actually uses in reporting 5 taxable income to the Federal Government[.], or which the 6 corporation would have used in reporting taxable income to the 7 Federal Government had it been required to report its taxable 8 income to the Federal Government. With regard to the tax imposed 9 by Article IV of this act (relating to the Corporate Net Income 10 Tax), the terms "annual year," "fiscal year," "annual or fiscal 11 year," "tax year" and "tax period" shall be the same as the 12 corporation's taxable year, as defined in this [paragraph.] 13 subclause or subclause 2. 14 2. All corporations of a unitary business shall have a 15 common taxable year for purposes of computing tax due under this 16 article. The taxable year for such purposes is the common 17 taxable year adopted, in a manner prescribed by the department, 18 by all corporations of a unitary business. The common taxable 19 year must be used by all corporations of that unitary business 20 in the year of adoption and all future years unless otherwise 21 permitted by the department. 22 * * * 23 (8) "Tax haven." A jurisdiction that at the beginning of a 24 taxable year is a tax haven as identified by the Organization 25 for Economic Co-operation and Development, plus the 26 sovereignties of Bermuda, the Cayman Islands, the Bailiwick of 27 Jersey and the Grand Duchy of Luxembourg. 28 (9) "Unitary business." A single economic enterprise that 29 is made up of separate parts of a single corporation, of a 30 commonly controlled group of corporations, or both, that are 20070H1378B1725 - 17 -
1 sufficiently interdependent, integrated and interrelated through 2 their activities so as to provide a synergy and mutual benefit 3 that produces a sharing or exchange of value among them and a 4 significant flow of value to the separate parts. A unitary 5 business includes only those parts and corporations which may be 6 included as a unitary business under the Constitution of the 7 United States. 8 (10) "Water's-edge basis." A system of reporting that 9 includes the business income and apportionment factor of certain 10 corporations of a unitary business, described as follows: 11 1. The business income and apportionment factor of any 12 member incorporated in the United States or formed under the 13 laws of any state of the United States, the District of 14 Columbia, any territory or possession of the United States or 15 the Commonwealth of Puerto Rico. 16 2. The business income and apportionment factor of any 17 member, regardless of the place incorporated or formed, if the 18 average of its property, payroll and sales factors within the 19 United States is twenty per cent or more. 20 3. The business income and apportionment factor of any 21 member which is a domestic international sales corporation as 22 described in sections 991, 992, 993 and 994 of the Internal 23 Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. §§ 991, 992, 24 993 and 994); a foreign sales corporation as described in former 25 sections 921, 922, 923, 924, 925, 926 and 927 of the Internal 26 Revenue Code of 1986 (26 U.S.C. §§ 921, 922, 923, 924, 925, 926 27 and 927); or any member which is an export trade corporation, as 28 described in sections 970 and 971 of the Internal Revenue Code 29 of 1986 (26 U.S.C. §§ 970 and 971). 30 4. Any member not described in subclauses 1, 2 and 3 shall 20070H1378B1725 - 18 -
1 include the portion of its business income derived from or 2 attributable to sources within the United States, as determined 3 under the Internal Revenue Code of 1986 without regard to 4 Federal treaties, and its apportionment factor related thereto. 5 5. Any member that is a "controlled foreign corporation" as 6 defined in section 957 of the Internal Revenue Code of 1986 (26 7 U.S.C. § 957), to the extent the business income of that member 8 is income defined in section 952 of the Internal Revenue Code of 9 1986 (26 U.S.C. § 952), Subpart F income, not excluding lower- 10 tier subsidiaries' distributions of such income which were 11 previously taxed, determined without regard to Federal treaties, 12 and the apportionment factor related to that income; any item of 13 income received by a controlled foreign corporation and the 14 apportionment factor related to such income shall be excluded if 15 the corporation establishes to the satisfaction of the Secretary 16 of Revenue that such income was subject to an effective rate of 17 income tax imposed by a foreign country greater than ninety per 18 cent of the maximum rate of tax specified in section 11 of the 19 Internal Revenue Code of 1986 (26 U.S.C. § 11). The effective 20 rate of income tax determination shall be based upon the 21 methodology set forth under 26 CFR 1.954-1 (relating to foreign 22 base company income). 23 6. The business income and apportionment factor of any 24 member that is not described in subclause 1, 2, 3, 4 and 5 and 25 that is doing business in a tax haven. The business income and 26 apportionment factor of a corporation doing business in a tax 27 haven shall be excluded if the corporation establishes to the 28 satisfaction of the Secretary of Revenue that its income was 29 subject to an effective rate of income tax imposed by a country 30 greater than ninety per cent of the maximum rate of tax 20070H1378B1725 - 19 -
1 specified in section 11 of the Internal Revenue Code of 1986 (26 2 U.S.C. § 11). 3 (11) "Commonly controlled group." For a corporation, the 4 corporation is a member of a group of two or more corporations 5 and more than fifty per cent of the voting stock of each member 6 of the group is directly or indirectly owned by a common owner 7 or by common owners, either corporate or noncorporate, or by one 8 or more of the member corporations of the group. 9 (12) "Separate company." A corporation that is not a member 10 of a unitary business that consists of two or more corporations. 11 (13) "Tax." Includes interest, penalties and additions to 12 tax unless a more limited meaning is disclosed by the context. 13 Section 2. Section 403 of the act is amended by adding 14 subsections to read: 15 Section 403. Reports and Payment of Tax.--* * * 16 (a.1) (1) Each corporation subject to tax under this 17 article is required to file an annual report in accordance with 18 this section. Each corporation that is a member of a unitary 19 business that consists of two or more corporations, unless 20 excluded by the provisions of this article, shall file as part 21 of a combined annual report. The corporations of the unitary 22 business shall designate one member that is subject to tax under 23 this article to file the combined annual report and to act as 24 agent on behalf of all other corporations that are members of 25 the unitary business. Each corporation that is a member of a 26 unitary business is responsible for its tax liability under this 27 article. 28 (2) The oath or affirmation of the designated member's 29 president, vice president or other principal officer, and of its 30 treasurer or assistant treasurer shall constitute the oath or 20070H1378B1725 - 20 -
1 affirmation of each corporation that is a member of that unitary 2 business. 3 (3) The designated member shall transmit to the department 4 upon a form prescribed by the department, an annual combined 5 report under oath or affirmation of its president, vice 6 president or other principal officer, and of its treasurer or 7 assistant treasurer. Such report shall set forth: 8 (i) All corporations included in the unitary business. 9 (ii) All necessary data, both in the aggregate and for each 10 corporation of the unitary business, that sets forth the 11 determination of tax liability for each corporation of the 12 unitary business. 13 (iii) Any other information that the department may require. 14 (a.2) (1) Activities that evidence a significant flow of 15 value among commonly controlled corporations, include, but are 16 not limited to, the following: 17 (i) Assisting in the acquisition of equipment. 18 (ii) Assisting with filling personnel needs. 19 (iii) Lending funds or guaranteeing loans. 20 (iv) Interplay in the area of corporate expansion. 21 (v) Providing technical assistance. 22 (vi) Supervising. 23 (vii) Providing general operational guidance. 24 (viii) Providing overall operational strategic advice. 25 (ix) Common use of trade names and patents. 26 (2) Significant flow of value must be more than the flow of 27 funds arising out of passive investment and consists of more 28 than periodic financial oversight. 29 (a.3) (1) With respect to a commonly controlled group of 30 corporations, the presence of any of these factors creates a 20070H1378B1725 - 21 -
1 presumption of a unitary business: 2 (i) Corporations engaged in the same type of business. 3 (ii) Corporations engaged in different steps in a vertically 4 structured enterprise. 5 (iii) Strong centralized management of corporations. 6 (2) A corporation newly formed by a corporation that is a 7 member of a unitary business is rebuttably presumed to be a 8 member of the unitary business. 9 (3) A corporation that owns a controlling interest in two or 10 more corporations of a unitary business is rebuttably presumed 11 to be a member of the unitary business. 12 (4) A corporation that permits one or more other 13 corporations of a unitary business to substantially use its 14 patents, trademarks, service marks, logo-types, trade secrets, 15 copyrights or other proprietary assets or that is principally 16 engaged in loaning money to one or more other corporations of a 17 unitary business is rebuttably presumed to be a member of the 18 unitary business. This presumption only applies to a commonly 19 controlled group of corporations. 20 (a.4) As far as applicable to a specific unitary business, 21 unless there is a revision of applicable State law or unless a 22 corporation is not included under the provisions of this 23 article, there is a rebuttable presumption for all tax years 24 that begin in years 2009 and 2010 that a unitary business of two 25 or more corporations includes at least all corporations that are 26 part of a unitary business under the law of any state of the 27 United States in which the corporation files a tax report or tax 28 return of combined net income for the same tax year. 29 (a.5) Unless an election is made to use a worldwide basis of 30 accounting, a corporation that is a member of a unitary business 20070H1378B1725 - 22 -
1 of two or more corporations must determine its business income 2 and apportionment factor upon a water's-edge basis. This basis 3 applies to all corporations of the unitary business. If an 4 election is made to use a worldwide basis of accounting, all 5 corporations of the unitary business must make the election, 6 upon a form, prescribed, prepared and furnished by the 7 department. This election binds all corporations of the unitary 8 business for the period of time that the election remains in 9 effect. An initial election is binding for a period of seven 10 years. Subsequent elections are binding for a period of five 11 years. 12 * * * 13 Section 3. Section 404 of the act is amended to read: 14 Section 404. Consolidated Reports.--The department shall not 15 permit any corporation owning or controlling, directly or 16 indirectly, any of the voting capital stock of another 17 corporation or of other corporations, subject to the provisions 18 of this article, to make a consolidated report[, showing the 19 combined net income]. 20 Section 4. Section 3003.3(d) of the act, amended October 18, 21 2006 (P.L.1149, No.119), is amended and the section is amended 22 by adding subsections to read: 23 Section 3003.3. Underpayment of Estimated Tax.--* * * 24 (d) Notwithstanding the provisions of the preceding 25 subsections, other than as set forth in subsection (d.1), 26 interest with respect to any underpayment of any installment of 27 estimated tax shall not be imposed if the total amount of all 28 payments of estimated tax made on or before the last date 29 prescribed for the payment of such installment equals or exceeds 30 the amount which would have been required to be paid on or 20070H1378B1725 - 23 -
1 before such date if the estimated tax were an amount equal to 2 the tax computed at the rates applicable to the taxable year, 3 including any minimum tax imposed, but otherwise on the basis of 4 the facts shown on the report of the taxpayer for, and the law 5 applicable to, the safe harbor base year, adjusted for any 6 changes to sections 401, 601, 602 and 1101 enacted for the 7 taxable year, if a report showing a liability for tax was filed 8 by the taxpayer for the safe harbor base year. If the total 9 amount of all payments of estimated tax made on or before the 10 last date prescribed for the payment of such installment does 11 not equal or exceed the amount required to be paid per the 12 preceding sentence, but such amount is paid after the date the 13 installment was required to be paid, then the period of 14 underpayment shall run from the date the installment was 15 required to be paid to the date the amount required to be paid 16 per the preceding sentence is paid. Provided, that if the total 17 tax for the safe harbor base year exceeds the tax shown on such 18 report by ten per cent or more, the total tax adjusted to 19 reflect the current tax rate shall be used for purposes of this 20 subsection. In the event that the total tax for the safe harbor 21 base year exceeds the tax shown on the report by ten per cent or 22 more, interest resulting from the utilization of such total tax 23 in the application of the provisions of this subsection shall 24 not be imposed if, within forty-five days of the mailing date of 25 each assessment, payments are made such that the total amount of 26 all payments of estimated tax equals or exceeds the amount which 27 would have been required to be paid on or before such date if 28 the estimated tax were an amount equal to the total tax adjusted 29 to reflect the current tax rate. In any case in which the 30 taxable year for which an underpayment of estimated tax may 20070H1378B1725 - 24 -
1 exist is a short taxable year, in determining the tax shown on 2 the report or the total tax for the safe harbor base year, the 3 tax will be reduced by multiplying it by the ratio of the number 4 of installment payments made in the short taxable year to the 5 number of installment payments required to be made for the full 6 taxable year. 7 (d.1) (1) Notwithstanding the provisions of subsections 8 (a), (b) and (c), interest with respect to any underpayment of 9 any installment of estimated corporate net income tax for any 10 tax year that begins in year 2009 or 2010 shall not be imposed 11 if the total amount of all payments of estimated corporate net 12 income tax made on or before the last date prescribed for the 13 payment of such installment equals or exceeds the amount which 14 would have been required to be paid on or before such date if 15 the estimated tax were an amount equal to the tax shown on the 16 report of the taxpayer for the safe harbor base year, if a 17 report showing a liability for tax was filed by the taxpayer for 18 the safe harbor base year. 19 (2) If the total amount of all payments of estimated tax 20 made on or before the last date prescribed for the payment of 21 such installment does not equal or exceed the amount required to 22 be paid under paragraph (1), but such amount is paid after the 23 date the installment was required to be paid, then the period of 24 underpayment shall run from the date the installment was 25 required to be paid to the date the amount required to be paid 26 under paragraph (1) is paid. 27 (3) If the total tax for the safe harbor base year exceeds 28 the tax shown on such report by ten per cent or more, the total 29 tax shall be used for purposes of this subsection. In the event 30 that the total tax for the safe harbor base year exceeds the tax 20070H1378B1725 - 25 -
1 shown on the report by ten per cent or more, interest resulting 2 from the utilization of the total tax in the application of the 3 provisions of this subsection shall not be imposed if, within 4 forty-five days of the mailing date of a notice from the 5 department increasing the total tax, payments are made such that 6 the total amount of all payments of estimated tax equals or 7 exceeds the amount which would have been required to be paid on 8 or before such date if the estimated tax were an amount equal to 9 the total tax. 10 (4) In any case in which the taxable year for which an 11 underpayment of estimated tax may exist is a short taxable year, 12 in determining the tax shown on the report or the total tax for 13 the safe harbor base year, the tax shall be reduced by 14 multiplying it by the ratio of the number of installment 15 payments made in the short taxable year to the number of 16 installment payments required to be made for the full taxable 17 year. 18 (d.2) (1) If there is a substantial underpayment, as 19 defined in subsection (a), of any installment of estimated 20 corporate net income tax or estimated capital stock/franchise 21 tax for any taxable year beginning in 2009 or 2010, there shall 22 be imposed additional interest in an amount determined at one 23 hundred twenty per cent of the annual rate as provided by law 24 upon the entire underpayment for the period of the substantial 25 underpayment. 26 (2) The additional interest imposed by this subsection is in 27 addition to any other interest imposed on underpayments by this 28 section. 29 Section 5. The amendment or addition of the following 30 provisions shall apply to taxable years beginning after December 20070H1378B1725 - 26 -
1 31, 2008: 2 (1) Section 401(3)1(a) and (b), 2(a) and (e) and 4(c) 3 and (5), (8), (9), (10), (11), (12) and (13) of the act. 4 (2) Section 403(a.1), (a.2), (a.3), (a.4) and (a.5) of 5 the act. 6 (3) Section 404 of the act. 7 (4) Section 3003.3(d), (d.1) and (d.2) of the act. 8 Section 6. This act shall take effect July 1, 2007, or 9 immediately, whichever is later. D10L72MSP/20070H1378B1725 - 27 -