This new law amends the Local Tax Enabling Act to require the county-wide consolidated collection of earned income tax (EIT) by 2012, excluding Philadelphia (which does not levy an EIT). Each political subdivision levying an EIT will be represented on a county-based committee that appoints a single tax collector to administer and collect local income taxes within the tax collection district.  (Allegheny County will have up to four sub-districts, each of which can have its own collector or merge with other sub-districts or counties.) Each tax collector will be a nonresident collector and collect employer withholding taxes owed to the employee’s place of residence, for redistribution to other counties within 30 days. Employers with multiple worksites across Pennsylvania would be permitted to remit local income taxes to just one collector.

Who is required to consolidate?
Act 32 of 2008 establishes a single county-wide tax collection district in each county for the purposes of collecting earned income taxes, except in counties of the first and second classes. In counties of the second class (i.e., Allegheny Co.) there will be four tax collection districts.  The law does not apply to counties of the first class (Philadelphia).  In other counties, the boundaries of a tax collection district generally are co-terminous with the county in which it is created, except when a school district or municipality straddles more than one county.  By January 28, 2009, DCED must establish a list of all tax collection districts and the political subdivisions in each tax collection district.  Tax collection districts are governed by a tax collection committee comprised of delegates from school districts and other municipalities authorized to levy earned income taxes.
        Commencing in 2012, neither school districts nor other political subdivisions will be able unilaterally to collect earned income taxes on their own.  Rather, taxing entities must work jointly with other municipalities and school districts within the county for the collection of earned income taxes. 

What does consolidation look like in Allegheny County?
DCED will define the boundaries of four tax collection districts in Allegheny County, the only county of the second class.  One district will be comprised of the City of Pittsburgh and any municipality and school district geographically located within the boundaries of Pittsburgh.  The remainder of the county will be divided into three tax collection districts of relatively equal population which contain co-terminous municipalities and school districts bounded by the county borders and the three major rivers.  The Department of Community and Economic Development (DCED) must establish a map and a list of the four collection districts in Allegheny County and make it available via its Internet website no later than January 28, 2009.

In what county does a multi-county school district participate?
For a school district whose boundaries are located in more than one county, it must be included in the tax collection district of the county containing the greatest share of the school district’s population as counted in the 2000 federal decennial census.  A municipality also is included in the tax collection district in which its school district is located.

What taxes may a tax collection district collect?
The tax officer appointed by a tax collection committee may collect other taxes levied pursuant to the Local Tax Enabling Act (e.g., earned income tax and the Local Services Tax), taxes levied under Act 1 (e.g. EIT or PIT under the Taxpayer Relief Act) or other statutory law, when designated to do so by the school district or municipality levying the tax.

How quickly will a school district receive its distributions of taxes collected?
Under the previous law, employers could be required to withhold wage taxes and remit them to a designated tax collection entity only on account of employees who resided in the same municipality where the employer was located.  Many employers voluntarily did so for other employees as well, remitting the withholdings directly to the tax collectors where the employees lived.

Under the new law, employers must remit wage tax withholdings on a quarterly basis to the tax officer for the tax collection district in which the employer is located (the “tax officer”), regardless of where an employee lives. There is an alternative for employers operating in multiple counties, who have the option of electronically remitting withholdings for all employees on a monthly basis to the tax officer in the district where the employer’s payroll office is located.

The tax office then must distribute withholdings for employees residing in other tax collection districts to the tax officers for the districts in which those employees reside (the “tax officer”), and those tax officers are responsible for further distributing the funds to the tax levying entity in which each employee resides.

The law phases in the time frames within which tax officers must distribute funds.  Unless otherwise decided by a tax collection committee, prior to April 1, 2013, tax officers must distribute funds received from employers to taxing entities within their collection district or to the tax officers of other collection districts within 60 days of either receipt from employers or the remittance deadline, whichever is later.  Withholdings received from employers operating in multiple tax collection districts under the single monthly remittance option must be distributed within 30 days of the last day of the month following receipt.  Funds received from other tax collection districts or directly from taxpayers also must be distributed within 60 days. From April 1, 2013 forward, those 60-day deadlines are reduced to 30 days for each stage.

All withholdings must be distributed based on the information submitted by the employer, taxpayer or other tax collection districts, and no longer may be distributed based on estimates or other methods.  Tax officers, political subdivision or tax collection districts may not be required to pay a fee or commission to another tax collection district on account of income taxes distributed.

Who governs the tax collection districts?
County-wide tax collection districts will be governed by a single tax collection committee.  The committee is composed of a voting delegate and one or more alternates representing and appointed by each tax-levying political subdivision.  Only those political subdivisions that imposed an income tax prior to July 1, 2009 are entitled to having voting delegates seated on a countywide tax collection committee.

Those school districts or municipalities that do not currently impose an income tax may appoint a nonvoting delegate and one or more nonvoting alternates.  Nonvoting delegates may become voting delegates if a political subdivision imposes an income tax for the first time after July 1, 2009.  The law requires that political subdivisions take action to appoint their initial delegates and alternates no later than September 15, 2009. 

Unless as a tax collection committee adopts a different method, actions of a tax collection committee are determined by a majority vote of the delegates present and voting, although the voting power of all delegates is not necessarily equal.  The voting power of each delegate is weighted based on a combination of the amount of revenue the represented taxing entity collects and that taxing entity’s population, in proportion to the revenues collected and populations of all represented entities. This statutory default may be changed if the tax collection committee adopts a different method of weighting votes.  The law describes the default weighting formula as follows: 

50% shall be allocated according to the proportional population of each political subdivision in proportion to the population of each tax collection district as determined by the most recent federal decennial census data and 50% shall be weighted in direct proportion to income tax revenues collected in each political subdivision, based on each political subdivision’s most recent annual financial report submitted to [PDE or DCED].

There is an exception to this process for counties (Lancaster is actually the only one that satisfies the criteria) in which all municipalities and school districts already participate in a county-wide consolidated collection entity established and governed jointly by school districts.  If by July 1, 2009, a majority of the municipalities and school districts in the county adopt resolutions choosing to continue to operate under that existing structure and governing board, the existing entity will serve as the tax collection committee for that county’s tax collection district.

How are the operating costs of a tax collection district allocated?
The costs for the tax collection committee are not allocated by the same formula as the voting power.  Unfortunately, the new law requires operating costs always to be allocated proportionally to the revenue collected on behalf of each taxing entity, based on the most recent audit report, and worse, it DENIES TAX COLLECTION COMMITTEES ANY LOCAL OPTION TO ADOPT A DIFFERENT COST ALLOCATION.  Because the workload involved is driven more by the number of taxpayers, transactions and returns than it is by dollar volume, the result is that entities collecting greater revenues due to higher rates, such as school districts, will be forced to absorb a disproportionate share of actual collection costs.

What is the role of a tax collection district?
The law sets forth a tax collection committee’s multiple duties and powers and includes the following:

• Appointing and overseeing a tax officer for the tax collection district.
• Setting the compensation of a tax officer.
• Requiring, holding, setting and reviewing a tax officer’s bond.
• Establishing the manner and extent of financing of a tax collection committee.
• Adopting, amending and repealing bylaws and keeping records of votes and actions.
• Hiring staff as necessary and fixing their compensation.
• Retaining legal counsel and other consultants to render professional services.
• Acquiring, leasing or renting of real or personal property.
• Forming agreements with other tax collection committees to form a joint tax collection committee.
• Sue and be sued.
• To borrow money, accept grants and incur indebtedness.

When does consolidation occur?
These are the key deadlines stated in the law for transition to the new system:

• January 28, 2009         DCED posts on the Internet its maps and lists of tax collection districts.
• July 1, 2009                 Taxing entities in Lancaster County adopt resolutions choosing whether to continue to operate under the existing consolidated tax collection bureau.
• September 1, 2009      DCED calculates the weighted vote for each political subdivision within each tax collection district.
• September 15, 2009    Taxing entities appoint their voting delegates and alternates to the tax collection committee.
• September 15, 2009    Chairperson of the board of county commissioners notifies taxing entities of the date of the first meeting of the tax collection committee.
• October 26, 2009        Chairperson of the board of county commissioners provides public notice of the initial meeting of the tax collection committee.
• November 15, 2009    First meeting of the tax collection committee occurs. 
• December 31, 2009     DCED provides a report of existing effective practices, methods, procedures and risk management strategies to tax collection committees.
• April 15, 2010             Tax collection committee adopts its bylaws.
• June 1, 2010                Tax collection committee establishes an appeals board.
• July 1, 2010                 DCED annually recalculates the weighted vote unless a tax collection committee’s bylaws provide for a more frequent recalculation.
• September 15, 2010    Tax collection committees appoint a tax officer.
• September 25, 2010    Tax collection committee notifies DCED of tax officer’s appointment and contact information.
• November 1, 2010      Taxing entity determines whether its current tax officer or the newly appointed tax officer shall collect 2011 income taxes.
• December 1, 2010       Taxing entity notifies DCED of its selection of tax officer for 2011 income taxes. 
• July 1, 2011                 Tax collection committee devises a transition plan for transferring responsibilities to the new tax officer.
• January 1, 2012           Consolidated collection under tax collection committees begins.
• June 30, 2012              Article XIII tax officers (appointed under the previous law) turn over tax records to the new tax officer.  Delinquent income taxes from 2011 or prior years become responsibility of the new tax officer, except to the extent a taxing entity has made other provisions for the collection of delinquent taxes and has so notified the tax officer.
• December 31, 2012     Annual selection of auditor for tax officer’s records audit.
• September 1, 2013      Auditor’s report for the preceding calendar year filed annually with political subdivisions and DCED.
• December 31, 2016     Legislative Budget and Finance Committee conducts an audit and evaluation of the impact of the consolidated collection of local income taxes.

Who is authorized to collect earned income taxes?
The tax officer is designated by vote of the tax collection committee.  A tax officer can be a political subdivision, public employee, tax bureau, county (except a county of the first class), or other public or private agency appointed to collect earned income taxes. Importantly, PSBA’s efforts were successful in ensuring the new law gave tax collection committees a wider range of feasible options for how to carry out their functions than was provided in earlier versions of the legislation.  Thus, the new law does not leave outsourcing to third party service providers as the only practical option.  Instead, it provides the authority and flexibility for the tax collection districts to take a number of different approaches, including operating their own tax bureaus and employing staff, appointing other public agencies as tax officers, or selecting an existing tax bureau as the tax collection officer. 

Regardless of what approach a tax collection committee chooses, the tax officer may not have been convicted of a felony involving fraud, extortion or dishonesty in any jurisdiction; nor have engaged in conduct which significantly adversely reflects on the applicant’s credibility, honesty or integrity.

Does this mean that counties are taking over local earned income tax collection?
No. Some individuals mistakenly believed that the law established the county as the sole entity that would be authorized to collect an earned income tax.  This is not the case.  The new law prescribes only a limited role for the county in the startup of tax collection districts, assigning the following tasks to the chairman of the board of county commissioners:

• Schedule the first meeting of the tax collection committee no later than November 15, 2009;
• Notify participating political subdivisions about the date for the inaugural meeting by September 15, 2009;
• Provide public notice of the inaugural meeting at least 21 days before it occurs; and
• Conduct (chair) the first meeting of the tax collection committee up to the point where the committee elects a chairperson, vice chairperson and secretary.

However, a county or county-operated entity is not precluded from serving as a tax collection officer if designated as such by the tax collection committee.

What if there is a dispute among taxing entities or with the tax officer?
The law creates an internal appeals board to be formed for the resolution of issues relating to the assessment, collection, refund, withholding, remittance or distribution of income taxes.  It also allow for mediation – both voluntary and mandatory.  Mandatory mediation is imposed if the dispute involves a ten percent or greater deviation from taxes received in the previous tax year.  All other submissions of disputes to the appeals board are voluntary. 

May a school district or municipality withdraw from a tax collection committee?
After January 1, 2014, a school district or other taxing entity pursuing judicial enforcement proceedings to compel a tax officer or tax collection committee to turn over funds or perform other duties may request in addition to other remedies that the court permit the entity to withdraw from the tax collection district.  The court must be satisfied that the following criteria are met:

•  The political subdivision has suffered loss in income tax revenues that is directly and primarily attributable to the willful and continued failure of the tax officer or committee to comply with the act;
• The tax collection committee has failed to take reasonable measures to correct the deficiencies in the performance of the tax officer;
• The political subdivision and the tax collection committee have engaged in good faith mediation before a special master appointed by the court, but have failed to reach agreement about alternative corrective measures in lieu of withdrawal;
• Other relief available to the court would not adequately provide a reasonable prospect of compliance by the tax officer and that withdrawal by the political subdivision is in the best interests of the political subdivision, taxpayers and employers.   

If the withdrawal is granted, the political subdivision may adopt a resolution for withdrawal and appoint its own tax officer to collect its income taxes effective for the next calendar year beginning at least six months after the adoption of the withdrawal resolution.

What startup assistance will be provided to tax collection committees?
DCED has agreed to prioritize its existing shared service grant monies for the start-up costs associated with tax collection committees.  DCED did not request new monies for this line item.  To offset any potential shortage of financial assistance, DCED is charged under the law to conduct a department study of existing local earned income tax collection methods and practices with particular attention to the existing consolidations and to identify practices, methods, structures, procedures, regulations, software and risk management strategies that appear to promote effectiveness, cost efficiency, loss prevention and willing intergovernmental cooperation.  It also must include with the report sample bylaws, procedures, regulations, forms, agreements, and sample requests for proposals for the selection of tax officers or procurement of software systems.  The report must be distributed to tax collection committees by December 31, 2009.  DCED also must evaluate the feasibility of statewide contracts for recommended software systems, and is authorized to adopt temporary, interim and permanent regulations to carry out the act.