OIL COMPANY GROSS PROFIT TAX

Proposal: Funding for mass transit at the level recommended by the Transportation Funding and Reform Commission is proposed to be provided by a new Oil Company Gross Profits Tax (OCGPT). The OCGPT is to be a new tax on the gross profits of oil companies, on a combined reporting basis. Gross profits would be defined as the total sales of the oil company minus the costs of goods sold. Oil companies subject to the OCGPT would be exempt from the corporate net income tax (CNIT). The tax rate is proposed to be 6.17%.

Discussion: The OCGPT is proposed to provide funding for the mass transit systems of the Commonwealth. At the rate of 6.17%, the tax is expected to generate $722 million in FY 07-08, and $830 million in a full year. Of that amount, $70 million will be transferred to the General Fund to make up for the loss of oil company CNIT payments, leaving a net $760 million annually for transit.

The gross profits tax would be imposed on oil companies – defined as entities that perform exploration, drilling, importation, refining or wholesale distribution of petroleum products. Petroleum products are any products that contain or are made from petroleum or a petroleum derivative.

The gross profits tax base would be calculated for the entire corporate group, and apportioned to Pennsylvania based on the total sales of the group. This is a requirement to avoid a successful constitutional challenge.

The OCGPT would require oil companies to combine the gross profits of all related companies on one tax return. This makes it more difficult for them to shift profits to related companies such as a Delaware holding company.

Any tax imposed on a combined reporting basis raises questions about how to define the taxable group of companies. The proposal includes a definition of the members of the corporate group that must be included in the combined report. The definition would be consistent with the US Supreme Court decisions upholding combined reporting taxes in other states.

This tax base differs from the corporate net income tax in that the CNIT base is federally defined net income, taking into account all sources of income less all expenses, on a separate company basis. Under the proposed gross profits tax, many types of expenses would not be deductible. The gross profits base is therefore much broader, allowing for greater revenue at a lower rate.

The OCGPT and the exemption from the CNIT would be effective in 2008. Payments would be required in March of each year for the upcoming year. The legislation is to include a fund transfer of $70 million per year to the General Fund to make up for the loss of oil company CNIT payments. However in FY 07-08 the fund transfer would be $17 million, representing the partial year effect. The estimated revenue from the proposed tax is based on national data from IRS Statistics of Income for companies in the petroleum business. The taxable portion of total gross profits is derived from the sales of petroleum products in Pennsylvania as a share of the national total, which is 3.8%. In the initial fiscal year of 07-08, only the estimated payments for 2008 would be due, but in subsequent fiscal years a full year of revenue is expected.

Oil Company Gross Profit Tax press release: PDF | Word

rabbittransit, York County’s public transportation system, provides a variety of transportation services to the residents of York County. Nearly 6,000 people depend on rabbittransit each day to get to work, medical facilities, school and other life-sustaining activities. rabbittransit is dedicated to helping all York Countians get to where they want to go.