Pennsylvania enacts tax changes
Provides for sales tax on digital goods and tax amnesty program
TAX ALERT |
On July 13, 2016, Pennsylvania Gov. Wolf signed House Bill 1198, enacting the Commonwealth’s annual tax funding bill to balance the budget for the 2016-17 fiscal year. The funding bill was enacted nearly nine months earlier than last year’s bill, but still almost two weeks after the constitutionally imposed deadline of June 30. House Bill 1198 includes numerous changes to the Pennsylvania tax code, a few of which may meaningfully impact the broad-based business community.
The most significant changes enacted by House Bill 1198 that Pennsylvania taxpayers should be aware of include:
- Digital and electronic products and services are now subject to the sales and use tax
- A new tax amnesty program will be held before June 30, 2017
- Amended corporate tax reports are now required to be reviewed and acted upon by the Pennsylvania Department of Revenue (department)
These changes, amongst others, are discussed in detail below.
Digital downloads are taxable as of Aug. 1, 2016: The statutory definition of ‘tangible personal property’ per section 7201(m) was expanded to include the following whether electronically or digitally delivered, streamed or accessed and whether purchased singly or by subscription, including maintenance, updates and support:
- Any other taxable printed material
- Applications / apps
- Any other audio, including satellite radio service
- Canned software
- Any other taxable tangible personal property electronically or digitally delivered, streamed or accessed
It is important that vendors making sales of digital products over the internet review the taxability of their products carefully. For instance, the new language does not specifically include newspaper or periodicals, but it does include ‘other taxable printed material.’ Newspapers and periodicals in tangible printed form are exempt, therefore, remain exempt in electronic or digitalized form. Vendors should review the sale of any product that falls into one of the categories listed above, as well as whether the nondigital version of the product is subject to tax.
Vendor discount for timely reporting and remitting sales tax: Currently, vendors receive a 1 percent discount for timely reporting and remitting sales and use tax. For returns due on or after Aug. 1, 2016, the vendor discount will be limited to the lower of 1 percent of the tax collected and remitted, or, as follows-$25 per return for a monthly filer, $75 per return for a quarterly filer, or $150 per return for a semi-annual filer.
Civil and criminal penalties for zappers (sales suppression devices): Users or providers of sales suppression devices, such as zappers, (e.g., software program that falsifies the electronic records of a point of sale system for tax evasion purposes) are subject to new civil and criminal penalties that include monetary fines and/or imprisonment.
Tax amnesty program
The governor is required to establish rules and conduct a 60-day tax amnesty program ending on or before June 30, 2017. Some of the parameters include:
- ‘Any tax administered by the department’ is eligible
- Known and unknown liabilities are eligible
- Returns, amnesty forms, outstanding tax and 50 percent of interest must be filed and paid prior to the end of the amnesty period
- Penalties will be abated
- For those reporting unknown liabilities, all unknown liabilities for years prior to 2011 will be relieved
- Taxpayers surrender their right to any refunds
- Potential for claw backs if there are issues of noncompliance within the subsequent two years
Although only 50 percent of interest is required to be paid before the close of the amnesty period, it is unclear if the remaining 50 percent of interest will be abated or is still required to be paid during or after the amnesty period. The guidelines to the 2010 tax amnesty program, the latest amnesty program in the Commonwealth, provided an abatement of 50 percent of the interest, and it is expected the same abatement will occur under this program.
Per the 2010 guidelines, taxpayers that participated in the 2010 tax amnesty program, are barred from participating in future amnesty programs; the 2016 program includes a similar provision. However, 2010 amnesty filers should review the department’s upcoming 2016 guidelines and instructions carefully to see whether the department will permit 2010 participants into the 2016 program.
Corporate tax return due date: Generally, corporate tax reports are due on or before the fifteenth day of the fourth month following the close of the tax year. House Bill 1198 amends that provision, changing the due date to 30 days after the federal tax return is due. The federal due date was recently changed to April 15, thus, the new Pennsylvania corporate report due date is May 15. The new provision does not specifically address whether the federal due date includes the extended due date.
Amended corporate tax report: Section 7406.1 was added to address the issue of amended Pennsylvania corporate tax reports. Under the new law, taxpayers may file an amended corporate tax report within three years of the original due date of the report, including extensions. If timely filed, the department has one year to review and respond to the taxpayer in writing whether the amended return has been approved, modified or rejected. If the department does not respond within one year, the amended report is deemed to be approved as filed. If the amended report is rejected, the taxpayer has 90 days to appeal to the Board of Appeals.
Filing an amended return may extend the statute of limitation for the department to review the return, which is the later of the original statute of limitations of three years from the due date of the report including extensions, or one year from the date that the amended report was filed.
Section 7406.1 applies to amended reports filed after Dec. 31, 2016.
This is a long awaited and much requested change. Numerous times over the years, various committees, panels and interested groups of tax practitioners and taxpayers have advocated for this type of adoption and formalization of a standard treatment for amended returns.
Bank shares tax
Tax rate: The Bank Shares Tax Rate will be increased from 0.79 percent to 0.95 percent for tax years starting on or after Jan. 1, 2017.
Tax base: The inclusion of the value of subsidiary capital in the tax base will be incrementally phased out. In the 2018 tax year there will be permitted a 20 percent exclusion. An additional 20 percent exclusion will be permitted in the four successive years until the exclusion reaches 100 percent for the 2022 tax year and thereafter.
Additionally, taxpayers will be granted a deduction for the value of net worth attributable to goodwill resulting from purchase accounting for acquisitions made after June 30, 2001.
Credits and incentives
Research and Development Tax Credit, section 8707-B: Amended to eliminate the termination date of Dec. 31, 2015, and thus, retroactively reinstated the credit for tax years starting on or after Jan. 1, 2016, and all qualified expenses incurred on or after Jan. 1, 2016.
The Computer Data Equipment Incentive Program: Enacted. It provides a sales tax refund on machinery and equipment to the owners, operators and tenants of a qualified data center. This program is applicable to purchases made on or after July 1, 2017.
Film Production Tax Credit: Renamed the Entertainment Production Tax Credit. Accordingly, the definition of qualified production activities was expanded to include more than film production. Furthermore, the maximum amount of available credit was increased from $60 million to $65 million for tax years starting on or after Jan. 1, 2018.
The Job Creation Tax Credit Program: Amended to provide an additional benefit for hiring veterans. The per job tax credit for new jobs for veterans is $2,500 in comparison to $1,000 for general new job creation.
A manufacturing and investment tax credit: Enacted (along with the Rural Jobs and Investment Tax Credit) to replace the Promoting Employment Across Pennsylvania Act, which was repealed. A 5 percent tax credit for additional payroll will be granted if the taxpayer increases qualified payroll by $1 million or more of the baseline in one year. The annual maximum available credit is $4 million. The potential credit is a far less meaningful incentive than the Promoting Employment Across Pennsylvania Act, which provided for a rebate of 95 percent of the withholding tax on qualified payroll for a 10-year period.
Quick summary of other tax changes
Tobacco products: Additional tax levied on the sale of certain tobacco products, including smokeless tobacco and electronic cigarettes.
- The term ‘sale at retail’ amended to exclude ‘timbering.’ Therefore, machinery equipment and supplies purchased for the purpose of timbering is not subject to sales and use tax.
- Corrugated boxes used by a manufacturer to ship snack food products are exempt from sales and use tax.
- Services related to the setup, maintenance and tear down of tangible personal property rented by exhibitors at qualified convention centers are exempt from sales and use tax.
Personal income tax:
- Pennsylvania cash lottery winnings are now subject to Pennsylvania personal income tax.
- The rules of section 1033 concerning involuntary conversions have been adopted.
Realty transfer tax (RTT):
- Qualified Veterans Organizations per section 503(c)(19) are exempt taxpayers. Thus, if the other party to the transaction is a taxable entity it will be responsible for the full state and local RTT.
- Transfers of conservation easements are exempt from RTT.
Concert rehearsal and tour tax credit: Enacted to support Pennsylvania as a location for the pre tour rehearsal location of large scale music and entertainment tours. The annual maximum available tax credits total $4 million.
Video game production tax credit: Enacted to incentivize the video game development industry by providing a tax credit. The annual maximum available tax credits total $1 million.
Coal refuse energy and reclamation tax credit: Enacted to provide $4 per ton of reclaimed coal. The annual maximum available tax credits is $7.5 million for the 2017 tax year and $10 million 2018 and forward.
City Revitalization and Improvement Zone: The definition of ‘eligible taxes’ was expanded to include personal income tax paid by shareholders, members or partners and the hotel occupancy tax.
Brewery tax credit: Given ‘life’ since it sunsetted after the 2008 tax year. All brewers, regardless of size, are eligible for up to a $200,000 tax credit for capital investments made in equipment and machinery made after July 1, 2017. The annual maximum available tax credit is $5 million.
Table gaming tax: An additional tax of 2 percent of gross table gaming daily revenues enacted.
The more substantial proposed changes that were debated, but did not become part of this year’s budget bill, included combined filing for corporate income tax, increased personal income tax, increased rate and expanded base for sales and use tax, and an extraction tax on natural gas. Pennsylvania taxpayers should carefully review whether and how the provisions of the 2017 fiscal year budget bill affect their Pennsylvania tax profiles and discuss with their tax advisors how to proceed.