Pennsylvania tax bill addresses NOL cap and remote seller provisions
TAX ALERT |
On Oct. 30, 2017, Pennsylvania Gov. Tom Wolf signed House Bill 542, providing for significant tax changes in an effort to close the state’s multi-billion dollar budget shortfall. A summary of the major state and local tax changes is provided below.
Corporate net income tax
Recently, the Pennsylvania Supreme Court ruled that the fixed-dollar amount cap on the use of the net loss carryforward deduction violated the Uniformity Clause of the Pennsylvania Constitution. House Bill 542 provides that for taxable years beginning after Dec. 31, 2017, the fixed-dollar cap is removed. The net loss carryforward deduction, which is currently limited to 30 percent of a taxpayer’s income for the 2017 tax year, is increased to 35 percent of a taxpayer’s taxable income for the 2018 tax year, and 40 percent of taxable income for the 2019 tax year and thereafter.
For more information on the recent decision addressing the net loss carryforward, please read our alert, Net loss carryforward cap violates Pennsylvania Constitution.
The decision of the Pennsylvania Supreme Court to invalidate the fixed dollar amount cap, and House Bill 542’s removal of the fixed cap for the 2018 tax year and forward will meaningfully raise the tax burden of many C corporation businesses. With 2018 being an election year in Pennsylvania, taxpayers should continue monitoring for additional adjustments to the net loss carryforward.
Manufacturing incentive for large new or refurbished facilities
The bill creates the Manufacturing Innovation and Reinvestment Deduction that provides qualifying businesses an annual deduction from taxable income equal to five percent of the private capital investment utilized to the build a new or refurbish an existing manufacturing facility. The private capital investment must be $100 million or more, and the qualified deduction is permitted for five years. The deduction is in addition to the depreciation and the Domestic Production Activities Deduction. The deduction is only permitted to offset corporate net income, and may not be transferred or carryforward.
New withholding tax rules
House Bill 542 requires entities making rent and royalty payments on Pennsylvania property to nonresidents in excess of $5,000 to withhold personal income tax on those payments.
Additionally, companies that use out-of-state vendors/contractors for work in Pennsylvania in excess of $5,000, and who are required to file form 1099, misc. with the Pennsylvania Department of Revenue, must withhold personal income tax from the compensation paid to the vendor/contractor.
Sales and use tax
House Bill 542 makes a number of changes to the sales and use tax, including provisions related to remote sellers and marketplace providers.
· Computer services
Following a provision enacted in 2016 imposing the sales and use tax on digital downloads, maintenance, updates and support, House Bill 542 clarifies that separately-invoiced help-desk or call-center support is excluded from the definition of taxable support. This provision addresses a number of concerns voiced by taxpayers related to the extent of taxable support. Notwithstanding, the department continues to tax services associated with software, information services, and digital products and services as evidenced by the recent Letter Ruling SUT-17-002.
· Marketplace Facilitators, Referrers and Remote sellers
House Bill 542 adopts various remote seller provisions including marketplace sales tax collection and reporting effective March 1, 2018. The provisions impose a sales tax collection responsibility or use tax reporting obligation on certain remote sellers, marketplace facilitators or referrers with aggregate sales of merely $10,000 or more in the previous calendar year.
o A “marketplace facilitator” is a person that facilitates a sales of tangible personal property by listing or advertising a sale at retail in any forum and collects the payment from the purchaser, such as Amazon.com.
o A “referrer” is a person that lists or advertises a sale at retail in a physical or electronic medium, and transfers by phone, link or other means a purchaser to a marketplace seller.
o A “remote seller” is one that does not have a place of business in the Commonwealth.
Marketplace facilitators, referrers, and remote sellers are required to make an annual election as to whether they will collect sales tax or comply with the use tax notification and reporting requirements.
The initial election must be made before March 1, 2018, remains in effect through the June 30, 2019 fiscal year. An election made to comply with the use tax notice and reporting requirements may be changed to an election to collect and remit sales and use tax at any time during the year. If no election is made, the seller will be presumed to have elected to comply with the notice and reporting requirements.
The use tax notice and reporting requirements require the remote seller or marketplace facilitator to:
1) post a conspicuous notice on its forum that informs purchasers intending to purchase tangible personal property for delivery into Pennsylvania that sales and use tax may be due in connection with the purchase, the Commonwealth requires the purchaser to file a return if use tax is due, and that notice is required by the law;
2) provide a written notice to each purchaser at that time of sale at retail that includes a statement that sales tax is not being collected, a statement that the purchaser may be required to remit use tax directly to the Pennsylvania Department of Revenue, and instructions for obtaining information on how to remit the use tax. Similar requirements are imposed for referrers complying with the notice and reporting requirements; and
3) provide an annual notice to purchasers and marketplace facilitators that includes:
a. Sales tax was not collected;
b. Details of the Pennsylvania purchases for the preceding calendar year;
c. Instructions on how to remit use tax; and
d. Notice that the remote seller or marketplace facilitator is required to report the names of purchasers and aggregate purchase amount to the Department of Revenue.
4) provide annual report to the Department of Revenue that includes:
a. Purchaser’s name;
b. Purchaser’s billing address;
c. Purchaser’s Pennsylvania delivery address; and
d. Aggregate amount of purchaser’s purchases.
Washington state recently enacted a similar remote sales tax collection and use tax reporting election, in addition to marketplace facilitator nexus provisions. The provisions in Washington are effective Jan. 1, 2018.
· Miscellaneous sales and use tax
Kegs used to contain malt or brewed beverages are now including as “wrapping supplies” for the purpose of the wrapping or packaging supply exemption. This exemption follows the re-enactment of an investment tax credit for brewers just two years ago, and demonstrates the importance of the brewing industry to Pennsylvania.
Procedural change to file Appeals
House Bill 542 reduces the period of time a taxpayer has to file a petition for reassessment, review, or adjustment with the Board of Appeals from 90 days to 60 days after the mailing date of the notice of assessment. The period to appeal a decision of the Board of Appeals is also reduced from 90 days to 60 days after the mailing date of the notice of the decision. These provisions are effective 60 days from the effective date of the bill.
The bill does not include provisions that would have required all evidence and arguments be limited to only that which is presented to the Board of Appeals, the first administrative appeal level.
Miscellaneous provisions to note
· Clarifies the realty transfer tax exemption for certain veterans’ service organizations by defining eligible organizations
· Provides certain tax credit eligibility changes allowing the department to make a finding that the taxpayer has filed all required reports and findings for all applicable taxable years and paid any balance of state tax due as determined by settlement or assessment before a tax credit is awarded
· Imposes a new tax on consumer fireworks at the rate of 12 percent, which is in addition to the sales and use tax
The additional revenue raised by the provisions of House Bill 542 amount to less than $200 million annually, and does very little to close the more than $2 billion budget deficit. The legislature is using an expansive increase in gaming and significant borrowing to balance the budget for the 2017-2018 fiscal year. There continues to be a recurring structural funding issue with the budget, which may result in another combative and political budget cycle for the next fiscal year. Taxpayers should remember that 2018 is an election year in Pennsylvania and should expect the continuing fiscal issues to remain a primary talking point through that election.