Press Room: Tax Release

January 18, 2016

The End of an Archaic Tax: Pennsylvania Capital Stock and Foreign Franchise Tax Phased-Out

On January 4, 2016, Pennsylvania Governor Tom Wolf announced the elimination of Pennsylvania’s Capital Stock and Foreign Franchise (CSFF) tax, effective January 1, 2016. This completes a gradual phase-out which began in 2002. Originally set to culminate after 2010, the phase-out had been delayed on multiple occasions. Gov. Wolf had stipulated in his original budget proposals for fiscal year 2015-16 that he would not further delay complete phase-out of the CSFF tax.

Pennsylvania’s CSFF tax is an entity-level charge imposed on corporations, joint-stock associations, limited liability companies, business trusts and other domestic and foreign companies conducting business within Pennsylvania. The tax is based on a company’s apportioned capital stock value, generally computed as net worth plus average book income for as many as five prior years. The tax is filed using Form RCT-101, PA Corporate Tax Report.

Phase-out of the CSFF tax, which was first implemented in 1844, has been a recurring point of discussion among Pennsylvania tax proposals for almost two decades. Phase-out of the tax was first initiated in 2001 under then-Governor Tom Ridge, but complete elimination was delayed on several subsequent occasions. The tax was most recently scheduled to expire on December 31, 2013. In June 2013, the phase-out was extended to December 31, 2015 under then-Governor Tom Corbett. In the ensuing years, the rate for the CSFF tax decreased from 0.89 mills in 2013, to 0.67 mills in 2014 and 0.45 mills in 2015.

Opponents of the CSFF tax have argued that the tax harms the Commonwealth’s business climate and forces unprofitable businesses to pay tax on the value of their assets. According to the Department of Revenue, the tax generated revenue of $242 million in its last full year, but had produced many times that figure in previous years.

Takeaway for Entities Filing PA Corporate Tax Reports

For entities which file the PA Corporate Tax Report strictly for purposes of the CSFF tax, such as S corporations, LLCs taxed as partnerships or single member LLCs, and business trusts, the 2015 return will be the final filing for the CSFF tax. Accordingly, these returns should be marked as final on the Form RCT 101.