Non-Resident Philadelphia Workers are Eligible for “Super Credits”

Individuals who work in Philadelphia, but reside outside the city, are now unquestionably eligible to take a full credit for taxes on compensation paid to Philadelphia, known as a “super credit”, against the earned income tax (EIT) owed to the political subdivisions where they reside.  The Supreme Court has affirmed the decision of the Commonwealth Court to that effect.   See Berks Cnty. Tax Collection Comm. (Berks County TCC) v. Pennsylvania Dep’t of Cmty. & Econ. Dev., 60 A.3d 589 (Pa.Cmwlth. 2013) aff’d, 5 MAP 2013, 2013 WL 6133858 (Pa. Nov. 21, 2013).  If eligible, taxpayers who did not claim the “super credit” on final EIT returns in the past three years can file refund requests.

The Sterling Act, a state law, requires non-residents of Philadelphia who work in Philadelphia to pay a tax on compensation to the city at a much higher rate than that which the EIT is imposed pursuant to another state law, the Local Tax Enabling Act (LTEA).  Those non-residents are also required to pay EIT on their Philadelphia compensation to the political subdivisions where they reside.  Because those non-residents are subject to multiple taxes on the same compensation, the LTEA authorizes the non-residents to claim a credit on their local EIT return for taxes paid to Philadelphia.

Prior to the Commonwealth Court’s decision in the Berks County TCC case, there was a question of whether the LTEA credit was limited to the EIT to be paid on compensation earned in Philadelphia, or whether the taxpayer was eligible to receive a “super credit” against their EIT for the larger compensation taxes paid to Philadelphia.  Many tax collectors disallowed a “super credit” and routinely allowed only an “apportioned credit”.  Under this interpretation, the taxpayer would only receive a credit for EIT owned compensation from employment in Philadelphia.

In 2012, the tax collection committees for a number of suburban Philadelphia counties filed an action in the original jurisdiction of the Commonwealth Court, asking the Court to declare the “super credit” unlawful and to approve the “apportioned credit.”  They argued the “super credit” violated the provision of the Pennsylvania Constitution that requires all taxes to be uniform because, with the “super credit”, taxpayers who work outside of Philadelphia have a higher EIT liability than taxpayers who work in the city.

The Commonwealth Court followed its 1981 decision in Dunmire v. Applied Business Controls, Inc., 63 Pa. Cmwlth. 479, 482, 440 A.2d 638, 640 (1981), which held corporate taxpayers could deduct the LTEA credit directly from their tax liability, rather than from their tax base.  The Commonwealth Court disagreed that taxpayers who work outside of Philadelphia bear a disproportionate local tax burden, since taxpayers who work in Philadelphia pay a tax on compensation at a significantly higher rate.  The Supreme Court affirmed the Commonwealth Court’s opinion without further opinion.  Justice Saylor wrote the lone dissent in support of the “apportioned credit.”

For EIT taxpayers who work in Philadelphia, the decision means not only future tax savings but also the opportunity to ask for a refund.  The LTEA requires local governments to adopt ordinances allowing taxpayers to file a refund for overpayment of EIT.  A request for a refund must be filed within three years of the due date for the filing of the final EIT return, as extended, or one year after actual payment of the eligible tax, whichever is later.