Pennsylvania Tax Update
While debate over tax reform continues in our nation’s capital, several tax changes affecting both businesses and individuals have recently taken place in Pennsylvania. On October 30, 2017, Governor Tom Wolf signed House Bill 542 (HB 542) into law in an effort to generate revenue for PA’s 2017/2018 budget. The following is an overview of some of the noteworthy changes.
Sales Tax Collection on Platforms
Pennsylvania becomes the fourth state to impose tax collection or reporting obligations on platforms like Amazon.com and ebay.com. Beginning on March 1, 2018, remote sellers with over $10,000 in sales in the preceding 12 calendar months will need to either collect or remit sales tax or comply with additional reporting requirements.
Minnesota, Rhode Island and Washington have similar platform legislation, but critics of Pennsylvania’s legislation claim that the wording is ambiguous and could lead to disputes over compliance. Remote marketplace sellers and facilitators should determine now how this law applies to their business and how they should prepare to comply.
Wrapping Supply Exemption Includes Kegs
HB 542 expands the sales and use tax exemption for wrapping supplies and packaging. Kegs that contain malt or brewed beverages are now part of the exemption - marking the second expansion of the wrapping exemption in the last few years. The last expansion resulted from a Pennsylvania Supreme Court decision holding that returnable shipping pallets are nontaxable wrapping supplies.
Computer Support Services
In a controversial move in August 2016, Pennsylvania expanded the definition of tangible personal property for sales tax purposes to include digital goods and canned software. That meant that software delivered as part of a maintenance, update or support contract for taxable software was subject to tax. In addition, standalone charges for helpdesk services were also subject to tax.
HB 542 attempts to reverse this situation by expanding the definition of tangible personal property to specifically include support for canned software, but excluding helpdesk support if these services are invoiced separately.
Entities making rent and royalty payments on PA property to nonresidents in excess of $5,000 will now be required to withhold personal income tax on the payments. This requirement extends to companies that bring out-of-state independent contractors into PA for work in excess of $5,000. Personal income tax must be withheld from the compensation and filed on Form 1099-MISC electronically. This new rule takes effect 60 days from the enactment of the law. Therefore, this withholding will be required beginning in January 2018.
Shortened Period for Tax Appeal
The period for appealing a Notice of Assessment to either the Board of Appeals or the Board of Finance and Revenue has been reduced from 90 days to 60 days. It is worth noting that this amendment is listed under Revenue Maximization, since it may likely result in more taxpayers missing their appeal opportunities and paying more tax
Qualified Manufacturing Deduction
Manufacturers can take advantage of a new corporate net income tax deduction provided they’ve invested in “qualified manufacturing innovation and reinvestment”. The deduction amounts to 5 percent of the “private capital investment utilized” in the creation or renovation of a manufacturing facility per tax year for five years. To qualify, manufacturers must get preapproval and agree to invest at least $100 million during the first three years.
On top of existing sales and use taxes, PA consumers will now be hit with an additional 12 percent tax on the sale price of consumer fireworks (professional pyro technicians are exempt). Thankfully, 2 percent of the taxes collected – not to exceed $2 million annually – will be transferred to PA’s General Fund with 75 percent going to support the Emergency Medical Services Grant program and 25 percent going to a special account for volunteer firefighter training.
License fees are also outlined in HB 542. The fee for permanent structures will be either $7,500, $10,000 or $20,000 – depending on square footage – while facilities and temporary structures will be assessed $2,500 and $1,000, respectively.
Nextel Case – Treatment of Net Operating Loss (NOL)
HB 542 amends Pennsylvania’s limitation on the use of NOLs by corporations and is in response to a PA Supreme Court ruling involving Nextel Communications. Since 2014, the PA NOL cap has been the greater of either $5 million or 30 percent of taxable income.
In 2007 Nextel was operating with more than $150 million of NOLs and $45 million of taxable income – yet their NOL deduction was limited to $5.6 million under the PA NOL cap in effect for that year. Nextel challenged the NOL limit in court and the Commonwealth Court ruled in favor of the taxpayer and eliminated both caps. The PA Department of Revenue appealed to the PA Supreme Court On October 18, 2017, the Court found the cap unconstitutional and struck down the dollar limitation. However, the Court, and HB 542, maintain the limitation based on a percentage of the taxpayer’s taxable income. In 2018, the percentage is 35 percent followed by 40 percent in 2019 and subsequent years.
For many small businesses in PA this court decision may result in higher PA corporate net income tax. Before this ruling, entities with less than $3 million of PA taxable income have been able to use NOLs to reduce their taxable income to zero. It remains unclear at this time what will happen to returns that have been filed based on the NOL dollar limit. There are concerns that the PA Department of Revenue will revisit those returns and begin to access tax for open years using the percentage of income limitation.
With the above changes designed to add close to $600 million to Pennsylvania’s budget, a broad range of PA taxpayers will be affected. To determine what steps you should take moving forward, contact a member of the Herbein tax team.