Act 32 and Distressed Municipalities

State and Local Tax

By Cathleen Condrac

If the new withholding requirements were not challenging enough, employers may find fulfilling their responsibilities for distressed municipalities even more confusing. Generally, municipalities are not permitted to levy a nonresident tax that exceeds 1%. However, a municipality may exceed this 1% cap when it has been declared as “distressed” under the Municipalities Financial Recovery Act (Act 47 of 1987) or Act 205 of 1984 (amended by Act 44 in 2009).

So what is a “distressed” municipality? Act 47 defines two categories of distress: 1) Economic or structural distress, resulting from severe erosion of the tax base; and 2) Managerial distress, resulting from inadequate, poor or fraudulent practices. Act 205 was established to provide short-term fiscal relief to local governments operating financially distressed public pension plans.

As most of you already know, Act 32 of 2008 requires every employer having a place of business within a tax collection district to deduct from employee compensation the “greater” of the employee’s resident tax or the employee’s nonresident tax. The Policy and Procedure Manual for Act 32 under paragraph (3) of Section 512, expands on nonresident rates, particularly in municipalities that have been declared “distressed.”

The City of Aliquippa in Beaver County, for instance, has been declared a distressed municipality under Act 47 since December 1987. Under the Department of Community and Economic Development’s (DCED) official register, the nonresident rate for Aliquippa is 1.5%. Since the local earned income residential tax rate for nonresident employees working in Aliquippa is typically 1%, employers located within this distressed municipality will be required to collect 1.5% from the nonresident: 1% for the taxing jurisdiction where the employee is domiciled and 0.5% for Aliquippa.

Although the City of Beaver Falls has also been declared a distressed municipality under Act 205, there remains some confusion because the official register as published by the DCED does not reflect the earned income tax rate for nonresidents of 1.5%, which has been in effect since 1994 under Ordinance Nos. 1370 and 1812. Instead, the nonresident rate is currently published at 0.5%. Consequently, employers in the City of Beaver Falls might be wondering which of the nonresident rates they are required to use.

Section 511(6)(i) states that “[e]mployers shall not be required to deduct from compensation/…/any withholding tax that is not released on the official register/…/unless the political subdivision imposing the tax has provided written notice to the employer….” Paragraph (7) of Section 511 provides that employers may withhold at the most recently available rate on the tax register as long as the “political subdivision levying the tax notifies the employer in writing of the current tax rate. The most recently available tax rate, in this instance, may differ from the tax rate released on the official register.”

Based on the foregoing, any employer withholding the rate released by DCED on the official register would be considered as working within the confines of the law unless the political subdivision levying the tax has notified the employer in writing of the current tax rate. Employers will need to monitor the official register on June 15, which is when the register will next be updated.

Notice is taken that DCED earned income tax rates referenced in this article are from the official register and current as of January 24, 2012. If you have any questions regarding Act 32 or distressed municipalities, please do not hesitate to contact the state and local tax professionals at Schneider Downs.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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