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Taxes

Income Taxes

Personal Income Tax

The state personal income tax rate is 3.07%. The tax is applicable to the following categories of income: (1) salaries, wages, tips, gratuities, commissions, bonuses, incentive payments, vacation or holiday pay, termination or severance pay, certain sick pay, and reimbursements in excess of allowable business expenses, (2) interest income on taxable obligations, (3) dividend income, (4) net profits from business, farm, or profession, (5) net gains from sale, exchange, or disposition of property, (6) net rent, royalty, patent, or copyright income, (7) net gains and income derived through estates or trusts, and (8) gambling and lottery winnings, excluding the Pennsylvania state lottery.

The following are excluded from taxable income: social security benefits, public assistance, unemployment compensation, worker’s compensation, alimony, and pensions. No exclusion is provided for employee contributions to pension or 401(k) plans or for IRA contributions.

Generally, there are no personal exemptions or standard or itemized deductions. However, a deduction is allowed for unreimbursed allowable business expenses.

Local Wage and Net Profits Tax

By law, political subdivisions (except counties), may impose a tax up to a rate of 1% on individual earned income (salaries, wages, commissions, bonuses, incentive payments, fees, tips, and other compensation) and net profits (net income from the operation of a business, profession, or other activity, except a corporation). If overlapping jurisdictions (e.g. a township and a school district) concurrently impose a tax, the total rate is limited to 1%. The tax generally is imposed by the place of residence. Municipalities which have adopted a home rule charter and “distressed” school districts may invoke a tax rate above 1%. *Lehman & Porter Twps. are the only municipalities in Pike which charge the 1% local wage tax (in combination with East Stroudsburg School District).

Capital Stock/Franchise Tax

The capital stock/franchise tax is imposed on businesses’ capital stock value apportioned to Pennsylvania. The tax rate is 2.89 mills through 2011, drops to 1.89 in 2012, .89 mills in 2013 and is scheduled to be phased out entirely in 2014. The capital stock value is calculated using the following formula:

Capital Stock Value = {[.5 x (Average Net Income / .095)] + (.75 x Net Worth)} - $125,000

(Average net income is the five-year average of unconsolidated net income. Net worth is the sum of the issued and outstanding capital stock, surplus, and undivided profits as stated on the taxpayer’s federal income return – unless it is more than twice or less than half of the beginning balance.)

Corporations then multiply the capital stock value by a three-factor apportionment formula or a single “exempt assets” factor to determine the portion of the capital stock value apportioned to Pennsylvania.

The capital stock tax is imposed on domestic (Pennsylvania) corporations. This tax is deemed to be a property tax. The franchise tax is imposed on foreign corporations. The franchise tax is a tax on the privilege of doing business in Pennsylvania.

A statutory exemption is provided for assets, including intangibles, actually and exclusively employed within Pennsylvania in manufacturing, specified processing operations, or research and development activities. A statutory exemption is also provided for tangible assets used in Pennsylvania for water and air pollution control.

The three-factor formula comprised of property, payroll, and sales is the same formula used for the corporate net income tax; however, excluded from the numerators of the allocation fractions are tangible property, wages, and gross receipts which are directly connected with manufacturing, processing, or research and development in Pennsylvania.

The single “exempt assets” factor is calculated by dividing the book value of taxable assets (numerator) by the total book value of all assets (denominator). In addition to the statutory exemptions noted above, the following assets are excluded from the numerator: property where the corporate domicile is outside of Pennsylvania, obligations of the U.S. government and Pennsylvania and its political subdivisions, stock in other corporations if owning a majority share, and stock of domestic corporations subject to the capital stock tax.

The minimum capital stock/franchise tax is $200.

Corporate Net Income Tax

The corporate net income (CNI) tax is levied on domestic and foreign corporations doing business, carrying on activities, having capital or property employed or used in Pennsylvania, or owning property in Pennsylvania. The CNI tax rate is 9.99%.

Generally, Pennsylvania taxable income is determined by starting with the federal taxable income and adding back state and local income taxes and any federal net operating loss deduction. A deduction is permitted for interest income from U.S. securities which is included in federal taxable income. However, the deduction is reduced by any interest on indebtedness incurred to carry the securities, any expenses incurred in the production of such interest income, and any other expenses deducted on the federal income tax return that would not have been allowed under IRC Section 265 if the interest was exempt from federal income.

Deductions are also permitted for domestic and foreign corporation dividends received, although foreign dividends are not 100% deductible unless the foreign corporation meets the “80-percent voting and value test” of the Internal Revenue Service and would otherwise qualify as a 100% deduction if the foreign corporation were a domestic corporation.

Where a corporation is subject to income tax in more than one state, taxable business income is apportioned using the standard three-factor apportionment formula. The sales factor is weighted by 70%. Headquarters, manufacturing, and research facilities are typically beneficiaries of this factoring, also known as the double-weighted sales factor. Nonbusiness income (rents and royalties from real property, gains and losses from the disposition of property, interest, and patent and copyright royalties) is allocated -- as opposed to apportioned -- within or without Pennsylvania on the basis of the location on the asset or the commercial domicile of the company.

A net loss deduction carryover (subject to allocation and apportionment rules) is available up to a maximum of $3,000,000 or the greater of 12.5% of taxable income. Pennsylvania allows a 20-year net operating loss carry forward.

Pennsylvania is a separate-company reporting state. No unitary tax is imposed.

Building and loan associations, banks, savings & loan institutions, & trust companies and insurance and surety companies which are tax exempt under IRS Section 501 are not subject to the CNI but pay other taxes in its place. Closely held corporations that elect Subchapter S status (or Limited Liability Companies which quality as partnerships for federal tax purposes) tax their profits like partnerships (at the personal income tax rate).

Sales Taxes

Sales, Use, and Hotel Occupancy Tax

The state sales and use tax rate is 6%. The tax is imposed on retail sales and on the rental of tangible personal property and the purchase of certain services and room rental charges for periods of less than 30 days by the same person. Pike County charges at 3% hotel tax on all rentals of rooms with beds.

Broad industry and individual consumer exemptions apply, significantly reducing the effective tax rate. Industrial exemptions include machinery, equipment, raw materials, and component parts used or consumed directly in manufacturing, processing, the commercial horse racing industry, farming, mining, the rendition of public utility services pollution control equipment, customized computer software, or research and development. There is also an exemption for the remanufacture or retrofit of defense-related vehicles having a value of $50,000 or more.

Exemptions for consumer items include most food and beverages (except when purchased for immediate consumption), most wearing apparel including footwear, prescription and nonprescription drugs, medical supplies, textbooks, computer services, and magazine subscriptions. Fuel oil, gas, steam, and electricity purchased for residential use are also exempt from this tax.

Property Taxes

Real Property Taxes

There is no state real property tax. However, real property taxes are the “backbone” of the local government revenue structure. Three levels of local government are granted independent powers of real property taxation: county, municipal, and school district. Assessed percentages and tax rates vary by locale.

PIKE COUNTY 2011 MILLAGE RATES
For County & Township Calendar Year
For Fiscal School Year July 1, 2011 through June 30, 2012

MunicipalityCounty
Rate
Municipal
Rate
School Dist.
Rate
Total
Blooming Grove Twp.16.292.3WP63.477483.5674
Delaware Twp.16.2911.18DV100.87131.84
Dingman Twp.16.296DV100.87124.16
Greene Twp.16.295.5WP63.477485.7674
Lackawaxen Twp.16.297.75WP63.477491.5174
Lehman Twp.16.292ES128.88148.17
Matamoras Boro.16.2931DV100.87162.16
Milford Boro.16.2946.1DV100.87163.26
Milford Twp.16.298.00DV100.87125.16
Palmyra Twp.16.292.9WP63.477482.6674
Porter Twp.16.29.75ES128.88145.92
Shohola Twp.16.299.25DV100.87128.16
Westfall Twp.16.2916.7DV100.87148.36

*DV, Delaware Valley; WP, Wallenpaupack; ES, East Stroudsburg
Discount is 2% for all taxing bodies. Penalty is 10% for all taxing bodies except Green Township (5%)

Realty Transfer Tax

The state realty transfer tax is levied at the rate of 1% on the value of real property transferred be deed, instrument, or other writing. Additionally, local jurisdictions generally levy a realty transfer tax. The maximum local tax rate generally is 2% (including where overlapping jurisdictions concurrently levy the tax). Transfers between nonprofit industrial development agencies and industrial corporations purchasing from them are statutorily exempt from the realty transfer tax.

*Pike County’s Local Realty Transfer Tax is 2% divided evenly between the municipality and the school district.

Workers Compensation & Unemployment Insurance

Worker's Compensation

The Pennsylvania Worker's Compensation Act applies to all employers regardless of the number of employees. The law generally applies to all persons who perform services for wages or other items of value, unless the work is casual in nature and is not done in the course of the business of the employer. Excluded from coverage are the self-employed, domestic workers, and some agricultural workers; corporate officers who have an ownership interest in their company may elect to be exempted from coverage.

The Worker's Compensation Act is a “no-fault” law. Accordingly, the employee is paid compensation for his/her injuries/disease regardless of his/her negligence. In return, the employee forfeits by law any rights to recover from his/her employer in any legal action other than worker’s compensation.

Employers are required to insure payment of worker's compensation with the State Worker's Insurance Fund or with a private insurance carrier unless exempted by the Department of Labor and Industry by qualifying as a self-insurer. Insurance rates are based on the industry in which the employer operates the employer’s experience with occupational injuries and diseases, and the amount of the compensation provided by law.

Compensation covers medical expenses, replacement of employee’s wage loss, specific loss payments, and death benefits. Medical expenses include all services, medicines, and supplies necessary for medical, surgical, and hospital care. There are no restrictions on the length of coverage. Payable medical expenses are limited to 113% of comparable Medicare charges. Prescription drug benefits are limited to 110% of average wholesale costs.

Rules for replacement of lost wages vary depending on whether the disability is total or partial. In total disability cases, the injured employee receives compensation based on his/her average weekly wage up to the maximum, $845 for those with average weekly incomes of $1267.51 or more for 2010. For employees with average weekly wages of $469.43 or lower, benefits will be 90% of their weekly wage; those within the range of $469.44 to $633.75 receive $422.50 per week while those within the range of $633.76 to $1267.50 receive 66.6666% of weekly wages. Payments are based on the benefit schedule for the year of injury. Payments for total disability continue for the duration of the disability, even for life. In partial disability cases (where the employee is able to work, but at a lower wage than before the injury/disease), the injured employee receives 66-2/3% of the difference between his/her average wage prior to the injury and his/her current wage. Payments for partial disability are for a maximum of 500 weeks. No compensation is paid for the first seven days of disability unless the period of disability continues for 14 days or more.

Specific losses (such as loss of vision, hearing, limbs or body functions) are compensated based on 66-2/3% of the employee’s average weekly wages (up to the statewide maximum) for a fixed, distinct number of weeks assigned to the specific loss. Additionally, a “healing period” is set by law for a specific loss. This healing period ends when the employee returns to work without a wage loss, or at the end of the healing period, whichever occurs first.

If a work-related injury or occupational disease causes, contributes to, or accelerates the death of an employee, the surviving dependents may be eligible for death benefits.

Employers who establish and maintain certified safety committees are eligible to receive a 5% premium credit for up to 5 years.

Workers Compensation Reform was a priority of the administration of Governor Tom Ridge and the Northeast Pennsylvania Business Journal reported that “a 1997 survey by the PA Compensation Ratings Bureau concluded that the state’s rates had dropped from 2nd highest to 2nd lowest in the region.” The administration of Governor Ed Rendell has also prioritized workers compensation reform. On Feb. 12, 2008 the administration announced a 10.22% overall decrease in workers compensation costs. *The percentage is an average reduction. This is the 4th reduction in workers compensation costs during the Rendell Administration.

Unemployment Compensation Tax

Pennsylvania's unemployment compensation tax is generally imposed on an employer who employs at least one individual. The tax is paid on the first $8,000 of wages for each employee. The contribution (tax) rates for experience-rated employers range from 1.5000% to 10.3836%.

The minimum and maximum experienced contribution rates for 2010 are determined as follows:

MinimumMaximum
Benefit Ratio Factor0.0000 %5.0000 %
Reserve Ratio Factor0.0000 %2.7000 %
State Adjustment Factor0.0000 %1.5000 %
Basic Rate1.5000 %9.2000 %
Surcharge Adjustment
(5.8% x Basic Rate)
0.0000 %0.0580 %
Additional Contributions Factor0.0000 %0.0025 %
Interest Factor0.0000 %0.0000 %
Total Contribution Rate1.5000 %9.2025 %

The factors comprising the contribution rates are defined as follows:

Benefit Ratio Factor – The benefit ratio factor is the relationship between the employer’s average annual taxable payroll and the average annual benefits charged. The factor ranges from 0% to 5%.

Reserve Ratio Factor – The reserve ratio factor represents the relationship between the balance in the employer’s reserve account and the average annual taxable payroll. The factor ranges from 0% to 2.7%.

State Adjustment Factor – The state adjustment factor is levied at a uniform rate on all employers and deal with those benefits which were not assigned to a specific employer’s reserve account. The factor ranges from 0% to 1.5%. The 2010 factor is 1.5%.

Surcharge Adjustment – The surcharge adjustment automatically adjusts tax levels to ensure that a sufficient fund balance is available to meet normal benefit obligations. The surcharge adjustment for 2010 is 5.8%.

Additional Contributions Factor – The additional contributions factor is designed to keep the unemployment compensation trust fund solvent. The factor ranges from 0% to 0.75%. The 2010 factor is 0.65%.

Interest Factor – All employers (except newly-liable employers) are assessed an additional contribution for interest due on federal advances. The interest factor is a variable rate not exceeding 1%. Since there currently are no interest-bearing advances, the factor is 0.00%.

Pennsylvania has no debt with the Federal Unemployment Compensation Trust Fund.

Accordingly, Pennsylvania employers pay the net basic federal tax rate for federal unemployment tax.

In addition to the unemployment compensation tax on employers, Pennsylvania also has an employee tax that ranges from 0% to 0.2% of gross wages. The 2010 tax rate is 0.08%.

The maximum weekly unemployment compensation benefit for 2010 is $564.

Source: Met-Ed, PA Dept. of Revenue & PA Dept. of Labor & Industry

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