Do you think that bigger selection of this tax would hurt the City in attracting more companies to locate in Philadelphia?
I would be interested to hear what the companies would say if they were aware of how we were currently taxing stock options. I think most of them are under the impression that we tax them the way the Internal Revenue Service taxes them. I would be curious to know whether -- if they knew that we will tax the stock at grant based on a low value, whether that would affect their decision. I think full taxation the way IRS taxes it probably does affect that decision. But I don't know if an individual would separate stock options from wage tax. Our wage tax is higher than anywhere else. If they're going to object to a tax on stock options, they're also going to object to the higher wage tax on all of 66 6/14/00 - WHOLE - BILLS 000336, 354, 451 their compensation.
Ms. Marx, for the record, are you for or opposed to any one of the three bills before us?
I haven't really said anything about the third bill, which I believe is the technology bill. I haven't specifically addressed that. We have greater problems with that. As far as the stock option bill...
It would be very nice for you to share it with us, since we're supposed to get it 48 hours in advance.
I'm sorry. I also have testimony on two other bills you're scheduled to hear today at the 2:00 o'clock meeting, if you want those distributed.
No. We're 67 6/14/00 - WHOLE - BILLS 000336, 354, 451 just considering three bills at the present time.
To answer your question, with the two changes that were proposed, we are not opposed to 000354 and 451. We're not opposed to those. Bill No. 336 would add a definition -- 336 amends the Business Privilege Tax by adding a definition of an information technology company and by excluding the receipts of such companies from tax. I'd like to begin by reiterating the administration's support for providing targeted incentives to encourage new businesses to locate in Philadelphia subject to the need for uniformity under the Pennsylvania Constitution and the limits of the First Class City Business Tax Reform Act, which authorizes the BPT. There are several things that make review and analysis of this bill difficult. Our understanding is that the bill was intended to aid new economy start-up firms. As drafted, however, there's nothing in the bill that would limit its application to new firms. Any company that classified itself 68 6/14/00 - WHOLE - BILLS 000336, 354, 451 as being in the designated codes would qualify for exemption. It's unclear whether the phrase "specific business conducted" is intended to limit the exclusion to the information technology activities of the business, or if all receipts of a business categorized as an information technology company would be excluded. It's also not clear what is added by inserting the phrase "the portion of receipts." There are also problems related to the use of the North American Industry Classification, NAIC, Codes that are used to identify the primary activity or nature of a business. The codes were established to measure broad economic trends, and they are not generally used to classify specific transactions such as the apportionment of tax receipts. Without penalties for mischaracterization, businesses would be in a position to simply declare themselves as information technology companies in order to avoid payment of the BPT. The bill also specifies that the tax exclusion will be effective for tax years 69 6/14/00 - WHOLE - BILLS 000336, 354, 451 2001 through and including 2006. If the intent is to provide tax relief for six years for start-up firms, this language will need to be changed. This approach would not provide a six-year exclusion for a firm that started to do business in Philadelphia in 2003. The bill as introduced will provide tax relief for only four years for such a firm. The obvious question for the Department of Revenue regarding this bill is how much current revenue would this City forego if this bill were enacted. Revenue currently uses standard industrial classification codes, SIC codes, to categorize businesses by sector for economical analysis. NAIC codes were established by the office of management and budget in 1997, but these codes are just now being phased in by users to replace the SIC codes. The bridge between the two classification systems is at the broad business sector level, and in many instances, especially with the newer technology-related categories, there is no bridge. 70 6/14/00 - WHOLE - BILLS 000336, 354, 451 Revenue will be initiating a project within the next year to add NAIC codes to our taxpayer identification files, but this will take many months of manual effort to complete. We would like to work with Council to come up with definitions and other aspects of the technology company that we could support. We were hoping to do this over the summer and have a bill out by the fall.
Thank you. Listening to this testimony I, too, would have some concern about the issues that have been raised by the representative of the revenue department. Unless the fact that the law department hadn't written the definition for technology company... Additionally, the opportunity to lie or to misrepresent your company now under the provisions of the Gross Receipts Tax exists. If you are a real estate sales company, you could claim that you're an information technology company. The way in which that's assured is the audit portion which would uncover that, and then 71 6/14/00 - WHOLE - BILLS 000336, 354, 451 that information would be adjusted and you would be taxed accordingly. You could claim you're a retailer, a wholesaler, or an information technology company. You could lie about it, but the audit function of the revenue department would uncover that information and you would be taxed accordingly. The information technology definition was written by the law department, and we reintroduced a bill on a later date in order to correct that problem. My information from the law department, my consultation and information the law department has given me is we are covered both definitionally and covered from an audit function. In fact, the problems you are raising exist today within any company that claims they're either a wholesaler or retailer and they may not be either. I don't understand what the delay for the summer would do to change that situation. I've got confidence in the instance the law department has written a definition of ITC, information technology 72 6/14/00 - WHOLE - BILLS 000336, 354, 451 company, in a correct way. Thank you.
Currently, you're correct. There is some tax advantage to calling yourself a wholesaler or retailer. That's generally a more obvious type of business. There is no benefit today to calling yourself a technology company or anything else, neither in the Internal Revenue Code or State or in the City. We do not allow people to use the benefits of being a wholesaler or retailer based on how they've classified their SIC code. They may or may not put down an SIC code when they apply for a Business Privilege Tax or Business Privilege License. We still grant them the license. We have done a very large project over the last year of going through and trying to identify SIC codes for all of our taxpayers so that we could use that in an economic analysis, much of which was requested by Council. 73 6/14/00 - WHOLE - BILLS 000336, 354, 451 There are broad methods the IRS gives for classifying yourself. The incentive to lie about being a wholesaler or retailer is much smaller than the incentive to claim -- I don't mean lie, but I just mean claim you're an information technology company even though it may be a very small part of your business. To be completely excluded from tax gives you much greater incentive to take some small portion of your business and claim you're a technology company than the different tax method that we allow the wholesalers and retailers, which is a very small difference in tax.
Thank you. I understand what you're saying. But if I look at the definition again provided to us by the law department and reintroduced as part of this new bill, it is very specific as to the functions that the definition concludes is an information technology company. It says, "A person whose business is categorized as electronic data processing services, computer system design and related 74 6/14/00 - WHOLE - BILLS 000336, 354, 451 services, custom computer programming services, computer facilities management services and online information services as set forth in North American Industry Classification System." If you have a deli guy who claims he's an information technology company in order to beat the tax, I'm sure you'll be able to determine that's the case. I don't imagine there's going to be literally thousands of companies applying for this exemption; should be enough, a manageable number of companies, to determine if, in fact, by determination of audit they are, in fact, an information technology helper. Madam President, I want to re-echo something you said. These bills have been in the administration's hands for quite some time. The first contact I received was a short, three-paragraph memo yesterday from Ms. Marx, really not telling me anything other than they wanted to hold the bill. I think that could have been done. We may have been able to work out some of the concerns the Administration allegedly now has if we had dealt with this three weeks 75 6/14/00 - WHOLE - BILLS 000336, 354, 451 ago. I think at this late date, with the calendar looming the way it is, I don't think it's appropriate that we start -- the law department has been clear. I think the people testifying from the business community are clear. This is a special circumstance we're trying to create for a special type of company that we're trying to attract to the City of Philadelphia, in its infant stages. If you guys didn't read the bill 13 or do any analysis in the last three weeks, what gives me any level of comfort you're going to do anything between now and September? I don't see the rationale, frankly.
I apologize for the communication problems that we've had. The law department that wrote this doesn't always know how our systems are set up. We don't have NAIC in our systems. We say any person whose business is categorized, but that's a self-categorization. To say ABC Grocery, yes, we would probably figure if they tried to categorize themselves as an electronic data processing 76 6/14/00 - WHOLE - BILLS 000336, 354, 451 service, we would know. But ABC Company or XYZ Company, we would have no way of knowing.
Wouldn't you still have the capability of auditing those businesses?
Wouldn't we be able to determine the potential fraud based on the audit? People misrepresent their federal taxes all the time. It's not until they get audited do they get caught and have to pay a fine and back taxes. I'm sure there's a lot of misrepresentation going on or interpretation by accountants and others that people would have objection to. If you're looking for an absolutely perfect system where no one is going to misrepresent their company or taxes or their receipts, I don't think you'll find that or we wouldn't have a need for IRS agents.
We do do audits, but obviously we don't audit everyone. When we select our audits, we use various methods of categorizing companies we should be auditing. 77 6/14/00 - WHOLE - BILLS 000336, 354, 451 This would have to be put into that. The concern is that a company that might be borderline, an accounting firm, for example, that does some consulting and, therefore, does some services could very well classify themselves in one of these codes and, therefore, would be exempt from taxes they're currently paying. This is meant to benefit new technology companies and to try to get new industry into the City. It's not necessarily going to do it by using these definitions, because there are a lot of -- we don't know how many, but there are a lot of existing companies that could qualify and could, therefore, claim even though they have been paying this tax in the past, they won't pay it in the future.
My suggestion is we deal with that as it goes, do the audits, correct what needs to be corrected as we go along and let's get moving. Quite frankly, if the revenue department in the administration was that interested in solving the problem, they would have contacted myself or Council's staff a number 78 6/14/00 - WHOLE - BILLS 000336, 354, 451 of weeks ago as opposed to today. Thank you.
Ms. Marx, are you aware of any other city or county or municipality that has proposed or, in fact, done what we're proposing to do today through any of these bills?
I'm not aware of anyone who has tried to use either NAIC or SIC to classify taxable receipts.
I'm talking in the broader category of exempting stock options from a particular tax or trying to provide a rather narrow incentive to a particular industry or business sector to invite them to make a better business environment for certain types of industries to come to a particular city.
I'm not aware. Certainly none in the State of Pennsylvania have done it, merely because of uniformity concerns and other problems. I'm told there are some other states that have done -- have attempted to do 79 6/14/00 - WHOLE - BILLS 000336, 354, 451 this. One case I see here is New Mexico has enacted a technology jobs tax credit. So they've tried to do it through the credit method. Certainly, we could look and see if there are others who've done it in other ways. This is just one example of the way one state has tried to do it.
In all your experience, and I understand you're trying to do the best you can under apparently some rather difficult circumstances, this is not impossible?
Correct. We agree with the idea of trying to do something to try to encourage these businesses. We certainly are in favor of that. I'm not sure the NAIC method, without some kind of penalty -- the other thing would be to put in some kind of penalty that said if you misclassify, you'd be subject to a greater penalty. Otherwise, they can misclassify themselves and if we catch them, fine; if we don't, they've gotten away with it. There's better ways of doing it than this method. We do have problems in this State mainly because of the uniformity clause. 80 6/14/00 - WHOLE - BILLS 000336, 354, 451 But I think we could still get around that and do this. We would very much be in favor of doing it. We would like to have a little more time to consider it.
Any other questions or comments? (No questions.)
At this point, I would request that our technical staff Messrs. Auerbach and Ericson please approach the witness table. Ms. Marx, I suggest you stay at the witness table. (Mr. Owerback and Mr. Ericson come forward.)
I understand you have proposed amendments to Bill No. 354?
Please read them for the record. SPEAKER: Starting with the proposed amendment to Bill 451, Amendment No. 1 in Subsection 19-280211 (F) amended the last 81 6/14/00 - WHOLE - BILLS 000336, 354, 451 sentence so it reads as follows: "Any amount that would otherwise be considered as compensation arising from the exercise, exchange, sale or disposition of stock options, whether or not they had a readily ascertainable fair market value when granted, shall not be taxable under this chapter." Amendment No. 2, amend the second sentence of Section 2 of the bill so that it reads as follows: "The provisions of Subsection 19-280211 (F) of the Philadelphia Code as added by Section 1 of this ordinance exempting certain stock options from tax shall apply only to stock options that are granted after the date this ordinance takes effect and to stock options that are exercised, exchanged, sold or otherwise disposed of on or after the date this ordinance 19 takes effect." Those two amendments are responding to each of the two points that Ms. Marx raised in her testimony.
Any questions from Members of the Committee on the amendments? 82 6/14/00 - WHOLE - BILLS 000336, 354, 451 The Chair recognizes Councilman Cohen.
Could you state very simply what the result is of your two amendments? What did they do to the bill? SPEAKER: Sure. The first amendment, Ms. Marx expressed a concern with the use of the word "gain." If you look at the last section of Subsection F in the bill, she was concerned that by using the word "gain," it might not exclude compensation, stock options that would be deemed to be compensation. It's a technical concern that the use of the word "gain" might leave open certain stock option gains to tax. This makes it clear whenever a stock option is later exercised, the Revenue Department wouldn't say it might not be a gain, it's compensation and, therefore, we can tax it. That is to clarify, make it clear that stock options are excluded from tax even when later exercised. The second amendment, the effective date of the bill said that it would apply to stock options that were exercised after 83 6/14/00 - WHOLE - BILLS 000336, 354, 451 the bill become law. It omitted to say expressly that it also applied to stock options granted after the date the bill became law. The second amendment simply adds a phrase about stock options granted after the date the bill becomes law. Again, they're technical.
Does Ms. Marx agree it deals with the questions she raised?
I want to go back to an issue that Ms. Marx raised about potential companies who may be a real estate firm claiming they're an information technology company. Wouldn't it be true even if they did that, even if a certain portion of their business was dedicated to something that could be arguably called information technology, they wouldn't exempt all of their gross receipts for 84 6/14/00 - WHOLE - BILLS 000336, 354, 451 all of the other functions of the business they performed, sale of property, any of the other things they do that earns them dollars? The argument point would simply be focused on the portion of their business that they claim is, in fact, information technology as put forth in the definition of this legislation.
That is one of the other aspects that was not clear to us. Section 11 says that with the tax years 2000 through and including 2006, any receipts or portion of receipts from the specific business conducted by an information technology company is exempt. It wasn't clear to us whether that meant all of the business of any company that was otherwise an information technology company, or only the receipts that were information technology receipts, even though the company is otherwise classified as an information technology company. That was just another area we weren't clear on.
I think in fairness it's clear that it's the specific business conducted by the information technology company. 85 6/14/00 - WHOLE - BILLS 000336, 354, 451 So if you had ABC Real Estate Company claiming they were an ITC, the arguing point would only be the portion of the business that's covered in the definition, not the other services that particular company conducts in order to turn income.
I understand what was intended. In reading it, it wasn't clear that's the way that someone could aggressively interpret it. It says the specific business conducted by a technology company. Once I'm a technology company, all of my business is my specific business. It doesn't say the technology business. I understand it can be interpreted that way. For an aggressive company, it might also be interpreted the other way?
Can I ask who in the law department you've consulted with in preparing your analysis on the legal problems associated with this bill?
On our concern about some of the language, it was revenue department's concern.
None of the 86 6/14/00 - WHOLE - BILLS 000336, 354, 451 lawyers in the law department had any input?
We discussed it with -- there are so many bills. I think this one we discussed with Frank Piva, maybe, and Richy Fader (ph).
I haven't talked to Mr. Piva directly, but I believe he has no 9 knowledge or recollection talking to anyone in the revenue department about 336.
One of the problems that we have is that the law department frequently feels that they can't discuss these with us because they're dealing as your counsel. As your counsel, they have confidentiality problems with discussing these things with the revenue department. We get into that kind of -- we have said and asked the law department to ask the council people with whom they're working if they would mind if they got the revenue department involved in drafting some of this legislation. They feel frequently the council people don't want to get us involved in advance, and so they're walking the tightrope of their ethical concerns. 87 6/14/00 - WHOLE - BILLS 000336, 354, 451
Coming back to the point Councilman Kenney raised, I'd like to address to our technical staff, do you think -- there seems to be full agreement between Councilman Kenney and Ms. Marx as to what's intended to be covered. Do you think there's any need for any kind of clarifying amendment that we could produce at this time and get that issue clear? Since there seems to be total agreement, there's no disagreement as to the intent.
There's no disagreement on the intent. We still have concerns about classifying businesses, and I guess in effect benefitting businesses that we didn't think it was your intention to benefit. That's our main concern. If the intention is to benefit new companies coming into the City...
That's a separate question. Let's deal with each question, if we can. Is it the opinion of Mr. Auerbach that the concerns Ms. Marx has are legitimate 88 6/14/00 - WHOLE - BILLS 000336, 354, 451 concerns, and if so, how do we resolve it to carry out the intent of Councilman Kenney?
I'm Thomas Ericson, Council's technical staff. I haven't really looked into this bill. I know we have shared it with people in the technology industry, and they have expressed some concern about whether or not the bill targets their businesses. I mean, we've gone over the particular code application list with a couple of companies, and they didn't feel comfortable with it. I think it can be corrected eventually. I don't think that we have sufficient knowledge to do it right now. I would question whether or not some of the problems that were discussed here today about to only tax that part of the receipts that deals with those particular businesses might be able to be resolved by regulations of the revenue department. That could be a possibility to clarify that problem as to is all the receipts of a particular company exempt, or is only that portion of the receipts derived from their information technology portion of their 89 6/14/00 - WHOLE - BILLS 000336, 354, 451 businesses to be exempt.
Wouldn't it be possible if the bill were enacted in its present form that if there were questions, we would expect the City to refer that back to us with maybe some amendatory language at a later time?
Seems perfectly appropriate to me. It might have to sit over for the summer if you tried a second reading, final passage.
I think Councilman Kenney makes a good point in expressing the urgency of the situation. There's been no dispute as to the urgency of the situation.
I'm not prepared to answer for the revenue department problems they see in the administration of it.
Ms. Marx, the suggestion I made that passage of the bill in its present language, couldn't that be changed later? If you found there was a problem, you would refer, as suggested, ordinance to us to amend that section that created the problem?
The bill has merit. 90 6/14/00 - WHOLE - BILLS 000336, 354, 451 Most of us feel we ought to move ahead with it.
The bill has an effective date of July 1, 2000. That in itself presents problems because the tax is a calendar year tax. So if we were to put off doing something in the fall, we could still have an effective date of January 1, 2001, and be effective for the tax year 2001. There's no need to necessarily have it passed before the summer recess.
If the bill were passed now, since the tax returns aren't due until next April or the amendments that the Administration wanted to propose over the summer months, they could be dealt with in the fall and that would be done in sufficient time to allow this to be used in the next calendar year's taxes.
We'll have problems there. We'll have problems in getting all the rates written and the returns prepared. We would rather have it all done at once so we know what the returns are supposed to look like. It's difficult to tell people how to file their taxes when we don't know what the law is going to look like at the time it's being 91 6/14/00 - WHOLE - BILLS 000336, 354, 451 filed.
The thing we're worried about is the time you would take might be a year or two years from now.
There's no reason that should be. We would be very happy to sit down tomorrow or next week to try and come up with language.
If you do that, why couldn't you use the amendment process?
Are there any other questions or comments for members of the committee? SPEAKER: We had read the proposed amendments to 451 into the read. Would you like the amendments to 354 to be read into the record?
We do have copies. We'll give it to the stenographer. Do all council members have copies of the proposed amendments? Ms. Marx, I ask again, you have reviewed them and you do concur with the proposed 92 6/14/00 - WHOLE - BILLS 000336, 354, 451 amendments?
This will conclude the Committee of the Whole. We will now go into our public meeting. The chair recognizes Councilman Kenney regarding Bill No. 336.
Thank you. I move that Bill No. 336 be reported out of this Committee with a favorable recommendation and a request made for a rule of suspension so as allow first reading at our next Council session.
It's been seconded. I move that Bill No. 336 be reported out of Committee with a favorable recommendation, also a recommendation for the rules of Council be suspended so as to permit first reading at our next session of Council. All in favor will signify by saying aye; those opposed say nay. The ayes have it. The chair recognizes Councilman Nutter regarding Bill No. 354. 93 6/14/00 - WHOLE - BILLS 000336, 354, 451
I move the adoption of the amendment as read into the record on Bill 354.
It has been moved and seconded that the amendment to No. 354 be adopted. All in favor, let it be known by saying aye; those opposed say nay. The ayes have it. The motion is carried. The Chair recognizes Councilman Nutter.
I move that Bill 15 No. 354, as amended, be reported out of this Committee with a favorable recommendation, also a recommendation for the rules of Council be suspended so as to permit first reading at our next session.
It has been moved and seconded. All in favor, let it be known by saying aye; those opposed, say nay. The ayes have it. The Chair recognizes Councilman Nutter regarding Bill No. 451.
I move the 94 6/14/00 - WHOLE - BILLS 000336, 354, 451 adoption of the amendment to Bill No. 451 as read into the record.
It's been moved and seconded that the amendment be adopted to Bill No. 451. All in favor, let it be known by saying aye; those opposed, say nay. The ayes have it. The Chair recognizes Councilman Nutter.
I move that the amended Bill No. 451 be reported out of this Committee with a favorable recommendation, also a recommendation for the rules of Council be suspended so as to permit first reading at our next session.
It has been moved and seconded that Bill No. 451 as amended will be reported out of Committee with a favorable recommendation, also a recommendation rules of Council be suspended so as to permit first reading at our next session of Council. All in favor by saying aye; those opposed, say nay. The ayes have it. This concludes the Committee of 95 6/14/00 - WHOLE - BILLS 000336, 354, 451 the Whole. Our next hearing will be the Finance Committee. I do apologize for everyone that's been waiting. I'm sorry. (Hearing adjourned at 2:50 p.m.) 96 C E R T I F I C A T E I HEREBY CERTIFY that the foregoing proceedings of the Council of the City of Philadelphia of June 14, 2000, were reported and accurately by me, and that this is a correct transcript of same. ______________________________ MAUREEN E. BRODERICK, RPR and Notary Public __________________________________, JOSEPHINE CARDILLO, Registered Professional Reporter