Tax alert

Pennsylvania budget includes significant state tax changes

Jul 12, 2022
State tax nexus Income & franchise tax State & local tax

On July 8, 2022, Pennsylvania Gov. Tom Wolf signed the fiscal year 2022-2023 budget and supporting legislation, adopting a number of corporate and personal income tax changes including a scheduled corporate rate reduction, codification of the $500,000 receipts nexus threshold previously issued through Pennsylvania Department of Revenue guidance, changes to intangible sourcing and federal conformity to sections 179 and 1031. A summary of the more impactful tax changes follows below.

Corporate income tax rate reductions

Pennsylvania has long-imposed one of the highest corporate net income tax rates in the country at 9.99%. House Bill 1342 provides a schedule of rate reductions beginning Jan. 1, 2023. The first reduction is a full percentage point in 2023, followed by half-percentage point reductions each year after until the rate reaches 4.99% beginning Jan. 1, 2031. A reduction of the corporate net income tax rate has been debated for years considering the commonwealth’s neighbor, New Jersey, has the only higher rate at 11.5% at its maximum. While the scheduled rate reduction is welcome news, Pennsylvania taxpayers should also recall the phase-out of the capital stock/foreign franchise tax that was extended multiple times, sunsetting over five years from the original scheduled phase-out.

The corporate net income tax rate schedule is reproduced below for reference.

Calendar year

Corporate income tax rate





















Corporate nexus economic nexus presumption codified

Issued about a year following the 2018 South Dakota v. Wayfair decision, Corporate Tax Bulletin 2019-04 explained that the department deemed there to be a rebuttable presumption that corporations without physical presence, but having more than $500,000 of receipts sourced to the commonwealth, will have established nexus for corporate income tax purposes. House Bill 1342 codifies that presumption into statute effective for tax years beginning after Dec. 31, 2022, although the original guidance is still in effect. 

Sourcing of intangible sales

Amending the sourcing for intangible sales, House Bill 1342 replaces the cost-of-performance rule for a market-based scheme that provides specific rules for sourcing revenues associated with various categories of intangible property. Examples of intangible property include patents, royalties, franchise agreements and sales or exchanges of securities. The sourcing for sales of services was previously amended to market-based sourcing in 2014. The sourcing change for intangible property aligns the sourcing rules with those applicable for both tangible personal property and services. The revised sourcing provisions are effective tax years beginning after Dec. 31, 2022.

Miscellaneous tax changes

Among others, the following tax related changes were enacted through House Bill 1342:

  • Conforms the commonwealth’s section 179 deduction allowable for the personal income tax to federal law, i.e., eliminates the $25,000 limit and conforms to the federal limit of $1.08 million and allows an election to deduct certain qualifying property in the year the property is placed into service instead of over the depreciable life of the property. This provision is effective for property placed in service in tax years beginning after Dec. 31, 2022
  • Conforms the commonwealth to federal section 1031, thus allowing gain resulting from a like-kind exchange to be tax-deferred for personal income tax, effective for transactions occurring in tax years beginning after Dec. 31, 2022.
  • Adds relevant definitions for peer-to-peer car sharing; clarifies that peer-to-peer sharing networks are treated like marketplace facilitators for purposes of the sales tax and excludes vehicles rented through a peer-to-peer car sharing program from the 2% vehicle rental tax. The definitional amendments and additions are effective Jan. 1, 2023, and the exclusion from the vehicle rental tax is effective immediately. 
  • Increases the cap on total research and development credits approved by the department to $60 million, from $55 million, applicable to fiscal years beginning after June 30, 2022.
  • Modifies the film tax credit annual cap by allowing for approval of an additional $30 million in credits per fiscal year, for a total of $100 million; updates and adds new definitions to the credit, applicable to fiscal years beginning after June 30, 2022.


Taxpayers with significant Pennsylvania activity should consider closely analyzing the changes and modeling the impacts of the legislation. Significant corporate tax rate reductions may impact structuring decisions; as noted previously, the phased cut of the commonwealth’s prohibitively high corporate tax rate may open new opportunities for tax-efficient business operations. Additionally, the market-based sourcing of intangibles, including the many nuances involved in determining such sourcing, may significantly impact taxpayers that have traditionally sourced such sales to (or outside) the commonwealth under the cost-of-performance rules.

The fiscal year 2023 budget was one of the last to be adopted in the nation, and it is also the last budget of democrat Gov. Wolf’s eight year tenure as governor of Pennsylvania. The legislation was overwhelmingly approved in both chambers of the Republican-controlled General Assembly. Taxpayers have advocated for a reduction of one of the highest corporate net income tax rates for years as well as for allowing for greater conformity to the federal code in key areas, such as like-kind-exchanges. The legislation is largely taxpayer favorable, but many new provisions, especially changes to intangible sourcing, still involve complexities that should be carefully considered. Please speak to your Pennsylvania state tax advisers for questions about the latest tax changes and their potential impacts.

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