NOTICES

INDEPENDENT REGULATORY REVIEW COMMISSION

Actions Taken by the Commission

[27 Pa.B. 6385]

   The Independent Regulatory Review Commission met publicly at 11:30 a.m., Thursday, November 20, 1997, and took the following actions:

Regulations Approved:

   Department of Banking #3-33: Pawnbrokers License (amends provisions of 10 Pa. Code Part V)

   Department of Banking #3-31: Registration of Loan Brokers (amends provisions in 10 Pa. Code Chapter 42)

   Department of Agriculture #2-97: Agricultural Conservation Easement Purchase Program (amends 7 Pa. Code to add Chapter 138e)

   Unemployment Compensation Board of Review #12-43: General Requirements (amend provisions of 34 Pa. Code Chapter 101, Subchapter E)

   Department of Labor and Industry #12-50: General Provisions of Act 57 of 1996 (amends 34 Pa. Code Chapters 123, 127 and 131)

Regulations Disapproved:

   Department of Revenue #15-371: Tax Amnesty Program; Further Examination of Books and Records (amends 61 Pa. Code by deleting existing § 6.22 (Further examination of books and records) and adding § 8a.1 (Further examination of books and records), to Chapter 8a. (Enforcement).

Regulations Deemed Approved under section 5(g) of the Regulatory Review Act:

   Department of Banking #3-32: Repeal of Various Provisions (deletes 10 Pa. Code § 13.2(b) and (c), § 13.3(a)(3) and (b), Chapter 11, Chapter 17, Chapter 35 and § 41.3(i))

   Insurance Department #11-143: Deductible Program (amends 31 Pa. Code by deleting Chapter 131)

Commissioners present: John R. McGinley, Jr., Chairperson; Robert J. Harbison, III, Vice Chairperson; Alvin C. Bush; Arthur Coccodrilli; John F. Mizner

Public Meeting held
November 20, 1997

Department of Banking--Pawnbrokers License; Doc. No. 3-33

Order

   On April 1, 1997, the Independent Regulatory Review Commission (Commission) received this proposed regulation from the Department of Banking (Department). This rulemaking would amend provisions of 10 Pa. Code Part V, relating to pawnbrokers. The authority for this regulation is found in the Pawnbrokers License Act (act), as amended by Act 163 of 1994 (63 P. S. § 281-1 et seq.). The proposed regulation was published in the April 12, 1997 edition of the Pennsylvania Bulletin, with a 30-day public comment period. The final-form regulation was submitted to the Commission on October 30, 1997.

   The act was established in 1937 but not amended until the passage of Act 163 in 1994. The Act 163 statutory amendments prompted the need to update the pawnbroker regulations and the Department's pawnbroker forms. The proposed amendments impose minimum capitalization requirements of $10,000 in permanent capitalization for each pawnbroker office and up to a maximum minimum capitalization of $100,000 for all licensed offices. Pawnbrokers are required, inter alia, to publish certain public notice information in newspapers of general circulation in connection with initial license applications and license renewals. Other clarifying changes have also been made. There are an estimated five to ten initial license applicants per year and approximately 77 currently licensed pawnbrokers.

   We have reviewed this regulation and find it to be in the public interest. It incorporates changes which update the regulation consistent with the Act 163 amendments and also improve the overall clarity and consistency of its provisions.

Therefore, It Is Ordered That:

   1.  Regulation No. 3-33 from the Department of Banking, as submitted to the Commission on October 30, 1997, is approved; and

   2.  The Commission will transmit a copy of this Order to the Legislative Reference Bureau.

Commissioners present: John R. McGinley, Jr., Chairperson; Robert J. Harbison, III, Vice Chairperson; Alvin C. Bush; Arthur Coccodrilli; John F. Mizner

Public Meeting held
November 20, 1997

Department of Banking--Registration of Loan Brokers; Doc. No. 3-31

Order

   On January 31, 1997, the Independent Regulatory Review Commission (Commission) received this proposed regulation from the Department of Banking (Department). This rulemaking would amend provisions in 10 Pa. Code Chapter 42, relating to the registration of loan brokers. The authority for this regulation is found in section 8 of the Credit Services Act (act) (73 P. S. § 2188). The proposed regulation was published in the February 15, 1997 edition of the Pennsylvania Bulletin, with a 30-day public comment period. The final-form regulation was submitted to the Commission on October 30, 1997.

   The act was passed in 1992 partially in response to consumer complaints that unregulated loan brokers were collecting advance fees and then failing to deliver on their representations to arrange for loans, credit cards, and the like. Section 8 of the act and this regulation are designed to close a loophole of unregulated activity by loan brokers not licensed or otherwise subject to (or exempt from) other statutes. This regulation establishes procedures for loan brokers, as that term is defined in the act, to register with the Department initially and annually thereafter and provide the Department with the information specified in the regulation. In addition, the regulation provides that the Department will collect an annual registration fee of $300. The Department estimates that approximately 50 loan brokers will be affected by this regulation.

   We have reviewed this regulation and find it to be in the public interest. It will implement the loan broker registration requirements of section 8 of the act and enhance consumer protection by gathering relevant information on loan brokers subject to the act. Registration of loan brokers will also enhance the Attorney General's ability to facilitate discovery and investigation of, and enforcement action against, fraudulent loan broker activity under The Unfair Trade Practices and Consumer Protection Law (73 P. S. § 201-1 et seq.).

Therefore, It Is Ordered That:

   1.  Regulation No. 3-31 from the Department of Banking, as submitted to the Commission on October 30, 1997, is approved; and

   2.  The Commission will transmit a copy of this Order to the Legislative Reference Bureau.

Commissioners present:  John R. McGinley, Jr., Chairperson; Robert J. Harbison, III, Vice Chairperson; Alvin C. Bush; Arthur Coccodrilli; John F. Mizner

Public Meeting held
November 20, 1997

Department of Agriculture--Agricultural Conservation Easement Purchase Program; Doc. No. 2-97

Order

   On July 16, 1997, the Independent Regulatory Review Commission (Commission) received this proposed regulation from the Department of Agriculture (Department). This rulemaking amends 7 Pa. Code to add Chapter 138e relating to the Agricultural Conservation Easement Purchase Program. The authority for this regulation is section 15 of the Agricultural Area Security Law (Law) (3 P. S. § 915). The proposed regulation was published in the July 26, 1997 Pennsylvania Bulletin, with a 30-day public comment period. The final-form regulation was submitted to the Commission on October 24, 1997.

   The Department has administered this program using interim Guidelines since November 25, 1995. The Law allows the Department to use interim Guidelines with the caveat that the Guidelines expire no later than December 31, 1997, and must be replaced with a duly promulgated regulation. This final-form rulemaking establishes regulatory provisions that are identical to the current Guidelines in most instances.

   We have reviewed this regulation and find it to be in the public interest. This rulemaking will not adversely impact the private or the public sector because it is essentially a carryover of existing interim Guidelines, with only some minor refinements of certain provisions. Furthermore, it will satisfy the requirements of the Law which require the Department to adopt regulations to replace its Guidelines.

Therefore, It Is Ordered That:

   1.  Regulation No. 2-97 from the Department of Agriculture, as submitted to the Commission on October 24, 1997, is approved; and

   2.  he Commission will transmit a copy of this Order to the Legislative Reference Bureau.
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Commissioners present:  John R. McGinley, Jr., Chairperson; Robert J. Harbison, III, Vice Chairperson; Alvin C. Bush; Arthur Coccodrilli; John F. Mizner

Public Meeting held
November 20, 1997

Unemployment Compensation Board of Review--General Requirements; Doc. No. 12-43

Order

   On March 1, 1996, the Independent Regulatory Review Commission (Commission) received this proposed regulation from the Unemployment Compensation Board of Review (Board). This rulemaking would amend provisions of 34 Pa. Code Chapter 101, Subchapter E. The authority for this regulation is found in sections 203 and 505 of the Unemployment Compensation Law (43 P. S. §§ 763(d) and 825). The proposed regulation was published in the March 16, 1996 edition of the Pennsylvania Bulletin, with a 30-day public comment period. The final-form regulation was submitted to the Commission on October 29, 1997.

   The Board submitted a previous version of the final-form regulation in January 1997, but withdrew it prior to any formal action being taken on it. It was withdrawn for reconsideration after Representative Robert E. Belfanti, Jr., Minority Chairperson of the House Committee, and several other commentators submitted comment letters objecting to certain revised provisions.

   These amendments will replace the Board's former regulation on this subject which ''sunsetted'' on April 8, 1994, but which continued to be observed since that time by agreement of the parties. The changes are intended to correct minor problems of interpretation under the prior telephone hearings regulation.

   Telephone hearings comprise about 6% to 7% of all hearings conducted. There will be some savings in time and travel costs for those persons who participate in a hearing via telephone rather than appearing in person at a designated hearing location.

   We have reviewed this regulation and find it to be in the public interest. As further amended, it incorporates additional refinements which improve the clarity of the regulation and the fairness of the telephone hearings process.

Therefore, It Is Ordered That:

   1.  Regulation No. 12-43 from the Unemployment Compensation Board of Review, as submitted to the Commission on October 29, 1997, is approved; and

   2.  The Commission will transmit a copy of this Order to the Legislative Reference Bureau.

Commissioners present:  John R. McGinley, Jr., Chairperson; Robert J. Harbison, III, Vice Chairperson; Alvin C. Bush; Arthur Coccodrilli; John F. Mizner

Public Meeting held
November 20, 1997

Department of Labor and Industry--General Provisions of Act 57 of 1996; Doc. No. 12-50

Order

   On June 19, 1997, the Independent Regulatory Review Commission (Commission) received this proposed regulation from the Department of Labor and Industry (Department). This rulemaking amends 34 Pa. Code Chapters 123, 127 and 131. The authority for this regulation is contained in sections 401.1 and 435 of the Workmen's Compensation Act (77 P. S. §§ 710 and 991). The proposed regulation was published in the June 28, 1997 edition of the Pennsylvania Bulletin with a 30-day public comment period. The final-form regulation was submitted to the Commission on October 29, 1997.

   This final-form regulation addresses changes and additions to workers' compensation provisions resulting from Act 57 of 1996. The Department published a Statement of Policy (SOP) on April 5, 1997, to provide guidance. The final-form regulation replaces and elaborates on the provisions of the SOP. Pertinent provisions of the regulation concern the offset of benefits, impairment ratings, qualifications for vocational experts, earning power determinations and the process for special supersedeas.

   We have reviewed this regulation and find it to be in the public interest. The regulation is necessary to implement the new provisions to the Workers Compensation Act. The regulation should decrease costs associated with workers' compensation while continuing to assist injured employes.

Therefore, It Is Ordered That:

   1.  Regulation No. 12-50 from the Department of Labor and Industry, as submitted to the Commission on October 29, 1997, is approved; and

   2.  The Commission will transmit a copy of this Order to the Legislative Reference Bureau.

Commissioners present:  John R. McGinley, Jr., Chairperson; Robert J. Harbison, III, Vice Chairperson; Alvin C. Bush; Arthur Coccodrilli; John F. Mizner

Public Meeting held
November 20, 1997

Department of Revenue--Tax Amnesty Program; Further examination of books and records; Doc. No. 15-371

Order

   On September 13, 1995, the Independent Regulatory Review Commission (Commission) received this proposed regulation from the Department of Revenue (Department). This rulemaking amends 61 Pa. Code by deleting existing § 6.22 (Further examination of books and records) and adding § 8a.1 (Further examination of books and records), to Chapter 8a (Enforcement). This rulemaking also amends similar language in § 35.1 (Tax examinations and assessments) to avoid conflict or confusion with § 8a.1. The authority for this regulation is 72 P. S. § 9915-A. The proposed regulation was published in the September 23, 1995 Pennsylvania Bulletin with a 30-day public comment period. The final-form regulation was submitted to the Commission on October 22, 1997.

   This regulation provides for examination of all books, papers and records of a taxpayer to verify the accuracy and completeness of any tax return filed by the taxpayer or to assess any tax owed to the Commonwealth if no tax return has been filed by the taxpayer. Included in the provisions of this regulation is the use of ''statistical sampling'' and ''block sampling'' in ''test audits'' under certain circumstances to establish the liability of a taxpayer.

   The Department has already adopted regulations which are the subject matter of this proposed rulemaking. Section 22 of Act 21 of June 30, 1995 (Act 21) (P. L. 139, No. 21) contains the Tax Amnesty Program for which the Legislature allowed the Department to adopt regulations without going through the regulatory review process. In conjunction with implementation of the Tax Amnesty Program, and working within the time constraints of Act 21, the Department added § 6.22 (Further examination of books and records). The proposed regulation, upon which the Commission expressed strong concerns, was identical to the tax amnesty program regulation at § 6.22. The Department intends to delete § 6.22 of its regulations when the final-form version of § 8a.1 is approved.

   We have reviewed this regulation and find it not to be in the public interest. The final-form regulation is an improvement over the proposed rulemaking in several areas. The Department added language to recognize the statutory provisions for the taxpayer to challenge the accuracy of a statistical sample or test audit. The Department also added definitions of the terms used in the regulation and clarified the scope of the regulation. However, the final-form regulation violates our criteria in three areas.

   The first area of concern is the reasonableness and clarity of the procedures used for statistical sampling and test audits. Act 21 established 72 P. S. § 9915-A (Further Examination of Books and Records). Subsection (b) provides the following authority in part:

   The department may determine the liability based upon a reasonable statistical sample or test audit performed in accordance with the regulations of the department when the individual being audited does not have complete records of transactions or when the review of each transaction or invoice would place an undue burden on the department to conduct an audit in a timely and efficient manner.

   The proposed regulation did not provide guidance on the statistical certainty a statistical sampling or test audit must meet. Kirkpatrick and Lockhart commented that the proposed regulation contained little if any guidance regarding statistical sampling or test audit procedures. Kirkpatrick and Lockhart recommended reducing the statistical probability of an over-assessment to at least 5%. Keefer, Wood, Allen, and Rahal expressed similar concerns and recommended that any statistical sampling should be performed so as to produce a ''95% one-sided confidence interval.'' The House Finance Committee commented that ''As currently drafted, the regulations do not provide adequate guidelines to ensure the Department arrives at an accurate assessment.'' The House Finance Committee suggested that a 5% risk of over-assessment would be acceptable. We recommended the following in our Comments on the proposed rulemaking:

   We strongly recommend that the Department incorporate into the final-form regulation either existing recognized standards, as mentioned by the commentators, or some reasonable standards a statistical sampling and test audit must meet. We strongly recommend including guidance on the specific degree of statistical certainty required of an audit in the final-form regulation.

   In their ''Comment and Response Summary'' accompanying the final-form regulation, the Department stated that there was a consensus among the comments received that the regulation should be amended to provide a statistical method that would reduce the chance of over-assessment. In response, the Department added a provision to eliminate an ''outlier'' from the sample. However, the Department did not discuss or add any provisions which would establish the specific degree of statistical certainty required of an audit.

   The final-form regulation has provisions related to the certainty of the audits. Subsection (f) of the final-form regulation requires a sample to ''reasonably represent the population from which the samples were selected.'' Subsection (g) (Statistical estimation and software) provides ''A standard error of the estimate shall be computed to indicate the reliability of the estimated average, total, or ratio.'' There is no mention of how the standard error would be used. However, neither of these provisions imposes a reasonable standard which an audit is required to meet.

   The Majority and Democratic Chairpersons of the House Finance Committee submitted a joint letter to the Commission on November 18, 1997. The Chairpersons determined the final-form regulation does not sufficiently address the risk of over-assessment as mentioned in the Committee's comments on the proposed rulemaking. Therefore, their concern with the risk of over-assessment remains. They are concerned that this whole area could be an invitation to litigation on the quality of the statistical samples the Department uses. The Chairpersons continue to believe that the regulation should ensure that assessments relying upon a statistical sample are developed in a manner which substantially reduces the risk of over-assessment consistent with the practices of the Internal Revenue Service and the state of New York.

   The purpose of a statistical sample and test audit is to determine the liability of a taxpayer. Methods are available to evaluate the precision of statistical calculations. The statute requires the liability to be ''. . . based upon a reasonable statistical sample or test audit performed in accordance with the regulations of the department. . . .'' The final-form regulation does not provide assurance that the liability determined by the Department using statistical sampling or test audit will be accurate within any degree of precision. This violates the Regulatory Review Act criteria of reasonableness and clarity.

   The second area of concern is the clarity and reasonableness of the determination of whether to employ statistical sampling and test audits. The Department has the authority to use statistical sampling or test audits when complete records are not available or when the review of each transaction would place an undue burden on the Department to conduct the audit in a timely and efficient manner. The Commission recommended that the Department establish a definition of or expand upon the phrase ''undue burden on the Department to conduct an audit in a timely and efficient manner.''

   In the ''Comment and Response Summary'' accompanying the final-form regulation the Department stated that it is their position that the term ''undue burden'' cannot be defined because each case is different. Instead, the Department stated that it modified subsection (e) to provide a list of factors the Department will consider in making a determination whether to employ a test audit. However, subsection (e) of the final-form regulation states ''the department may consider'' the following factors. There is a discrepancy between the ''Comment and Response Summary'' which requires the factors to be considered and the wording of the final-form regulation which makes consideration of the factors optional. The list of factors includes important considerations such as whether the taxpayer's business is cyclical, whether significant changes in the business occurred during the audit period, and ''other relevant factors.''

   Subsections (f)(3) and (f)(4) provide similar provisions for specific taxes. In the proposed rulemaking these subsections provided ''the Department will consider the following factors:'' . . . . However, subsections (f)(3) and (f)(4) were modified in the final-form regulation to provide ''the Department may consider the following factors:'' . . . . The ''Comment and Response Summary'' has no explanation of why subsections (f)(3) and (f)(4) of the final-form regulation were modified to make consideration of factors optional.

   These changes are significant. The Department should be required to consider factors such as whether the taxpayer's business is cyclical, whether significant changes in the business occurred during the audit period, and ''other relevant factors.'' These factors are directly related to the appropriateness of the audit. If these factors are not considered, the sample used to infer a liability for the entire population could be flawed. Therefore, the final-form regulation is ambiguous concerning factors the Department will consider for test audits.

   The third and final area of concern is the clarity of the provisions regarding concurrence of the taxpayer. Subsection (f) was modified by the Department to provide the following, in part:

   When a test audit method is chosen to reduce burden, or because certain records are unavailable, or for any other reason, the concurrence of the taxpayer in the test audit plan will be sought. In the absence of concurrence of the block sampling method, the Department will select blocks. . . . (Emphasis added.) We have two clarity concerns with this provision. First, we have a concern with the clarity of stating ''When a test audit is chosen to reduce burden...or for any other reason. . . .'' It is not clear what other reasons the Department is contemplating. The statute only provides authority for test audits to reduce undue burden or when a taxpayer does not have complete records. The phrase ''or for any other reason'' lacks clarity and does not track the statute. Therefore, it should be removed from the final-form regulation.

   Second, the phrase ''In the absence of concurrence of the block sampling method'' is confusing. It is not clear why a block sampling method would not be in concurrence or what comparison would be used to determine concurrence. It would appear the intent of this phrase is actually directed at the absence of concurrence of a taxpayer on the block sampling method. However, regardless of the intent, the wording of the final-form regulation lacks clarity.

Therefore, It Is Ordered That:

   1.  Regulation No. 15-371 from the Department of Revenue, as submitted to the Commission on October 22, 1997, is disapproved;

   2.  The Department of Revenue shall, within 7 days of receipt of this Order, notify the Governor, the designated Standing Committees of the House of Representatives and the Senate, and the Commission of its intention to either proceed with the promulgation of the regulation without revisions, to revise the regulation or to withdraw the regulation. Failure to submit notification within the 7-day period shall constitute withdrawal of the regulation;

   3.  The Commission will transmit a copy of this Order to the Legislative Reference Bureau; and

   4.  This Order constitutes a bar to final publication of Regulation No. 15-371 under section 6(b) of the Regulatory Review Act.

Commissioners present:  John R. McGinley, Jr., Chairperson; Robert J. Harbison, III, Vice Chairperson; Alvin C. Bush; Arthur Coccodrilli; John F. Mizner

Public Meeting held
November 20, 1997

Department of Banking--Repeal of Various Provisions; Doc. No. 3-32

Order

   On April 1, 1997, the Independent Regulatory Review Commission (Commission) received this proposed regulation from the Department of Banking (Department). This rulemaking deletes 10 Pa. Code § 13.2(b) and (c), § 13.3(a)(3) and (b), Chapter 11, Chapter 17, Chapter 35 and § 41.3(i). The authority for this regulation is contained in section 103 of the Banking Code (7 P. S. § 103). The proposed regulation was published in the April 12, 1997 edition of the Pennsylvania Bulletin with a 30-day public comment period. The final-form regulation was submitted to the Commission on October 30, 1997.

   The regulation repeals various sections of the Department's regulation determined to be unnecessary or no longer consistent with the Banking Code. The revisions are being made as part of its implementation of Governor Ridge's Executive Order No.1 requiring agencies to delete obsolete or unnecessary regulations.

   The final-form regulation contains no changes from the proposed regulation. We did not file any comments on the proposed regulation. Furthermore, we did not receive any negative recommendations on the final-form regulation from the Senate Banking and Insurance Committee or the House Commerce and Economic Development Committee.

Therefore:

   The Commission will notify the Legislative Reference Bureau that Regulation No. 3-32 from the Department of Banking, as submitted to the Commission on October 30, 1997, was deemed approved under section 5(g) of the Regulatory Review Act on November 20, 1997.

Commissioners present:  John R. McGinley, Jr., Chairperson; Robert J. Harbison, III, Vice Chairperson; Alvin C. Bush; Arthur Coccodrilli; John F. Mizner

Public Meeting held
November 20, 1997

Insurance Department--Deductible Program; Doc. No. 11-143

Order

   On March 31, 1997, the Independent Regulatory Review Commission (Commission) received this proposed regulation from the Insurance Department (Department). This rulemaking amends 31 Pa. Code by deleting Chapter 131. The authority for this regulation is found in sections 206, 506, 1501 and 1502 of The Administrative Code of 1929 (71 P. S. §§ 66, 186, 411 and 412); the Casualty and Surety Rate Regulatory Act (40 P. S. §§ 1181--1199); and the Fire, Marine and Inland Marine Rate Regulatory Act (40 P. S. §§ 1121--1264). The proposed regulation was published in the April 19, 1997 Pennsylvania Bulletin with a 30-day public comment period. The final-form regulation was submitted to the Commission on October 20, 1997.

   The Department is proposing to delete 31 Pa. Code Chapter 131 relating to the deductible program because the substance of Chapter 131 is sufficiently addressed in the insurance law, and because the regulations in no manner enhance the authorizing statutes.

   The final-form regulation contains no changes from the proposed regulation. We did not file any comments on the proposed regulation. Furthermore, we did not receive any negative recommendations on the final-form regulation from the House Insurance Committee or the Senate Banking and Insurance Committee.

Therefore:

   The Commission will notify the Legislative Reference Bureau that Regulation No. 11-143 from the Insurance Department, as submitted to the Commission on October 20, 1997, was deemed approved under section 5(g) of the Regulatory Review Act on November 10, 1997.

JOHN R. MCGINLEY, Jr.,   
Chairperson

[Pa.B. Doc. No. 97-1964. Filed for public inspection December 5, 1997, 9:00 a.m.]

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