On October 30, 2017, Governor Tom Wolf signed additional legislation (House Bill 542) to address the state’s $2.3 billion budget deficit. Estimated revenue derived from this bill is approximated at $1.6 billion, with $1.5 billion generated by borrowing against future revenues due to Pennsylvania from the 1998 national tobacco settlement. Some significant changes to Pennsylvania’s tax code as adopted in this legislation are discussed herein.
Sales and Use Tax
Online Marketplaces – Remote Sellers: Effective March 1, 2018
Remote sellers, marketplace facilitators, and referrers with sales of tangible personal property of at least $10,000 in the previous calendar year are required to elect either to (1) begin to collect and remit sales and use tax by April 1 or (2) comply with new notice and reporting requirements in Pennsylvania. This $10,000 sales threshold is based on the “worth” of the tangible personal property sold, rather than on the sale price itself. Reporting requirements include sending use tax notices with each sale, indicating that sales tax is not being collected, and filing an annual summary of purchases with the Department, including information such as purchaser’s name, mailing address, delivery address of product, total dollar amount of purchase, and the name and address of the remote seller or marketplace facilitator/seller.
For those opting to collect sales tax, the new provisions require collection to begin by April 1, 2018, for tangible personal property. The effective date is delayed until April 1, 2019, for digital goods such as electronic copies of books, canned software, music, and similar items.
Canned Software: Effective October 30, 2017
Help desk and call center support for canned software that is separately invoiced is removed from the definition of tangible personal property and, as such, is exempted from sales and use tax. The use of canned software will continue to be taxed.
Wrapping and Packaging Supplies: Effective October 30, 2017
The sales tax exemption for wrapping and packaging supplies has been expanded to include beer kegs, which are used to contain malt or brewed beverages.
Corporate Net Income Tax
Net Operating Loss: Pending
If any part of the net operating loss (NOL) deduction is deemed unconstitutional by the Pennsylvania Supreme Court, a provision that will remove the $5 million cap on NOL deductions and increase the current 30-percent cap of taxable income to 35 percent for tax year 2018 and 40 percent for tax year 2019 and thereafter will take effect.
Manufacturing Innovation and Reinvestment Deduction: Effective December 29, 2017
The Manufacturing Innovation and Reinvestment Deduction has been modified to include a new deduction for qualified businesses of five percent of their “private capital investment” from their corporate net income tax liability. To be eligible, manufacturers must invest at least $100 million in the creation of new or refurbished manufacturing capacity within three years of the start date. The deduction cannot exceed 50 percent of the corporation’s tax liability and will be available to each qualifying business for five years. Taxpayers must contact the Department of Community and Economic Development to determine eligibility.
Keystone Opportunity Zones: Extended
The Keystone Opportunity Zone (KOZ) Program has extended the application date for additional KOZs from October 2016 to October 2018.
Personal Income Tax
Nonresident Withholding: Effective January 1, 2018
Entities paying nonresidents over $5,000 in rent and/or royalties on Pennsylvania property will now be subject to personal income tax withholding on those payments. In addition, nonemployee compensation and business income over $5,000 paid to Pennsylvania nonresidents will be subject to personal income tax withholding. This applies to companies that hire out-of-state independent contractors to work in Pennsylvania.
ABLE Savings Accounts: Effective October 30, 2017
Individuals will be allowed to deduct contributions to an Achieving a Better Life Experience (ABLE) account. A contributor to an ABLE account is limited to a deduction of $14,000 per year from Pennsylvania personal taxable income. Undistributed earnings and distributions from an ABLE account are exempt from personal income tax.
Significant expansion of Pennsylvania’s gaming laws includes authorization for gambling on the Internet, video gaming terminals at truck stops, gambling machines at airports, casino simulcasting, and regulations regarding fantasy sports contests. A five-year license for fantasy sports contests would cost $50,000, and renewals would cost $10,000. A monthly tax equivalent to 15% of fantasy contest’s adjusted revenue would be assessed on licensees.
A one-time, nonrefundable fee of $10,000,000, if paid within 90 days, would allow slot machine licensees to conduct interactive gaming. After that, a $4,000,000 fee per category of gain would apply. Interactive gaming would be allowed at airports, with fees of $2,500,000 in Philadelphia, $1,250,000 in Pittsburgh, and $500,000 for all other international airports in the Commonwealth.
Fireworks: Effective October 30, 2017
Consumer fireworks have been legalized for purchase in Pennsylvania. An additional tax of 12 percent is imposed on the purchase price of suitable consumer fireworks, on top of the state sales tax and any local sales tax.
The period of time for a taxpayer to file a petition for reassessment, review, or adjustment with the Board of Appeals is reduced from 90 days to 60 days from the mailing date of the assessment notice. In addition, the period of time for a taxpayer to appeal a Board of Appeals decision to the Board of Finance and Revenue is likewise reduced from 90 days to 60 days from the mailing date of the Board of Appeals decision. These changes take effect for petitions filed on or after December 29, 2017.
If you have any questions, or for additional guidance, please contact Laura Karpo or your Wipfli relationship executive.