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Jamie C. Yesnowitz
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In October 2017, Pennsylvania Governor Tom Wolf approved Act 43, the revenue-raising element of Pennsylvania’s fiscal year 2017-2018 budget, enacting several notable tax changes.1
The legislation addresses sales and use tax remote seller collection and reporting requirements, changes to the net loss carryover deduction limitation, additional non-resident withholding rules, and a reduced timeframe to file administrative appeals. On January 26, 2018, the Pennsylvania Department of Revenue issued guidance on the extensive new remote seller collection and reporting provisions.2 By March 1, 2018, certain remote sellers, marketplace facilitators or referrers that do not maintain a place of business in Pennsylvania are required to either file an election with the Department to prospectively collect and remit sales tax, or comply with new notice and reporting requirements.
Sales and Use Tax
The most significant tax reforms provided in the budget legislation involve several changes to the sales and use tax law.
Remote Seller Collection and Reporting Requirements
Act 43 requires remote sellers,3
with at least $10,000 in Pennsylvania sales during the immediately preceding 12 calendar-month period to file an election to either: (i) collect and remit sales tax to the state; or (ii) comply with new notice and reporting requirements.6
Under the first option, impacted businesses are required to register for a sales and use tax license and begin collecting and remitting tax on sales made to Pennsylvania customers.7
Otherwise, the sellers must comply with the detailed notice and reporting requirements.8
For marketplace facilitators
, the election requirement applies to sales at retail: (i) through the marketplace facilitator’s forum made by or on behalf of a marketplace seller9
not maintaining a place of business in Pennsylvania; and (ii) by a marketplace facilitator on its own behalf if the marketplace facilitator does not maintain a place of business in Pennsylvania.10
Marketplace facilitators and remote sellers
that do not elect to collect and remit sales tax must comply with the following notice and reporting requirements:
- Provide a notice to purchasers on the seller’s business forum stating that the purchaser may be subject to use tax if the product is delivered to Pennsylvania, and that the purchaser may be required to file a use tax report with the state.11
- Provide a notice at the point of sale that no sales tax is being collected on the sale and the purchaser may be required to remit use tax, and provide use tax remittance instructions to the purchaser. This information must also be placed on all receipts and invoices.12
- Provide a report by January 31 of each year to any purchaser having products delivered to a location within Pennsylvania.13
- Provide a report to the Department by January 31 of each year that includes, with respect to each purchaser, the purchaser’s name, billing address, Pennsylvania delivery address and aggregate sales made to the purchaser, and the name and address of the marketplace facilitator, marketplace seller or remote seller that made the sale to the purchaser.14 The report must include a statement that reasonable efforts were made to comply with the notice and reporting requirements.15
, the election requirement applies to retail sales directly resulting from the referral of a purchaser to: (i) a marketplace seller not maintaining a place of business in Pennsylvania; (ii) a remote seller; and (iii) a referrer’s own products if the referrer does not maintain a place of business in Pennsylvania.16
Different notice and reporting requirements apply to referrers, which must do the following:
- Post a notice on their platform, which displays certain information when the referrer transfers a purchaser to another person to complete a sale.17
- By January 31 of each year, provide a written notice to each remote seller to whom the referrer transferred a potential purchaser located in Pennsylvania during the prior year.18
- By January 31 of each year, submit a report to the Department that includes a list of persons who received a written notice. The report must include a statement that reasonable efforts were made to comply with the notice and reporting requirements.19
Remote sellers, marketplace facilitators, and referrers have until March 1, 2018
to make an election to either collect tax or comply with the notice and reporting requirements.20
If no election is made, the taxpayer is deemed to have elected to comply with the notice and reporting requirements.21
After the initial election is made, the taxpayer may change its election to collect sales and use tax instead of complying with the notice and reporting requirements at any time. Within 30 days of the new election, the taxpayer is required to begin filing sales and use tax reports.22
If the taxpayer fails to adhere to the notice and reporting requirements, a penalty that is the lesser of $20,000 or 20 percent of annual Pennsylvania sales will apply.23
The Department has issued guidance, Sales and Use Tax Bulletin 2018-01, to clarify the new marketplace sales requirements.24
Also, the Department has issued a form that must be used by marketplace facilitators, referrers and remote sellers to make the annual election.25
Support Services to Computer Software
Act 84 of 2016 expanded the scope of tangible personal property to include canned computer software and other digital products.26
The amended definition also included “maintenance, updates and support” related to such property, but these terms were not specifically defined.27
Act 43 clarifies that support services related to canned software only are subject to tax, adding that “separately invoiced help desk or call center support” is excluded from taxation.28
Support services related to other digital property are no longer subject to tax.
Corporate Net Income Tax
Net Loss Carryover Deduction
Pennsylvania limits the amount of net loss carryovers that corporate taxpayers may deduct from taxable income in any given tax year. Prior to the enactment of Act 43, taxpayers were allowed the greater of either a fixed dollar amount or a percentage of taxable income.29
However, Act 43 eliminates the fixed dollar limitation for future tax years in light of Nextel Communications v. Commonwealth
, in which the Pennsylvania Supreme Court declared the net loss carryover deduction unconstitutional in violation of the Uniformity Clause of the Pennsylvania Constitution.30
, the Court severed the fixed dollar limitation from the statute while retaining the percentage limitation.31
Following the Court’s lead, Act 43 provides that the net loss carryover limitation for corporate net income tax will be a set percentage of taxable income effective for tax years beginning after December 31, 2017.32
The limitation is 35 percent of taxable income for the 2018 tax year, and the limitation will increase to 40 percent for the 2019 tax year and after. On January 27, 2018, these changes became effective when the Department published a notice of the Nextel
In Corporation Tax Bulletin 2017-01, the Department gave the removal of the fixed dollar limitation prospective effect, advising taxpayers that the limitation is not available for tax years beginning in 2017 and thereafter.34
Manufacturing Innovation and Reinvestment Deduction
Act 43 introduces a capital investment deduction for manufacturers. The deduction is available to taxpayers investing more than $100 million in a capital project “for the creation of new or refurbished manufacturing capacity within three years.”35
The project must be completed within five years of the start date to be eligible for the deduction.36
Upon completion of the project, the taxpayer may begin taking the deduction, pending Department approval of all eligibility requirements. The deduction is equal to five percent of the capital investment and may be utilized for five years after the project is completed.37
Personal Income Tax
The most significant change to the Personal Income Tax under Act 43 concerns withholding rules for Pennsylvania non-residents. Act 43 expands the withholding requirement on non-resident vendors and contractors, providing that any person that “makes payments of income … to either a non-resident individual or an entity that is disregarded … that has a non-resident member” is required to withhold personal income tax on any payments over $5,000.38
In other words, companies bringing out-of-state independent contractors into Pennsylvania for more than $5,000 in payments are required to withhold personal income tax from their payments. Additionally, any entity that remits a lease payment to a non-resident lessor on Pennsylvania property is required to withhold tax if the payments are more than $5,000 annually.39
Lease payments include any “rents, royalties, bonus payments, damage payments, delay rents and other payments made pursuant to a lease.”40
Businesses are required to electronically file Form 1099-MISC for all employees and all classes of Pennsylvania source income.
In December 2017, the Department released an informational notice providing further guidance to both payors of Pennsylvania source income and lessees of Pennsylvania real estate making lease payments to non-resident lessors on their filing, withholding and remittance obligations.41
The notice provides detailed withholding and filing instructions for payors of non-employee compensation to non-residents. The notice provides the same for lessors of real estate who make lease payments in the course of their trade or business to a non-resident lessor.
Although Act 43 specifies that the new withholding provisions become effective 60 days after enactment of the law, or December 29, 2017,42
the Departmental guidance states that the new requirements are effective January 1, 2018.43
Administrative Appeals Deadlines
Act 43 reduces the period of time the taxpayer has to file a petition for reassessment or petition for review of tax adjustment with the Pennsylvania Board of Appeals (BOA) from 90 days to 60 days of the notice mailing date.44
Similarly, the period to appeal a decision from the BOA to the Pennsylvania Board of Finance and Revenue (BF&R) is reduced from 90 days to 60 days after the mailing date of the BOA’s decision and order.45
Both provisions became effective on December 29, 2017.
Initially, there was confusion as to how the new 60-day deadline would apply to notices or decisions issued prior to the December 29, 2017 effective date. However, the Pennsylvania State Treasurer has clarified that the 60-day appeal deadline applies to any appeals due on or after December 29, 2017. The 60-day deadline applies regardless of whether a notice would have originally qualified under the 90-day appeal deadline, or whether the notice states that the taxpayer has 90 days to file an appeal.
Other Notable Provisions
Other notable provisions contained in Act 43 include the following:
- The Keystone Opportunity Zones (KOZ) application deadline for additional zones was extended from October 2016 to October 2018. Additionally, the Department’s deadline for a decision on KOZ applications was extended from December 2016 to December 2018.46
- A fireworks tax is now imposed in addition to sales and use tax already imposed on the sale of such items. The tax will be imposed at a rate of 12 percent of the sale price on consumer fireworks that are suitable for use by the public.47 Additionally, all fireworks sellers will be required to apply for a license, which is $2,500 per location and $1,000 for a temporary structure.48 Additionally, an annual license fee applies, ranging from $3,000 to $20,000 depending on the location size.49
- The creation of a carsharing fee on a per hour basis ranging from $0.25 to $2.00.50 Carsharing is defined as “a membership based service that provides an alternative to personal car ownership.”51 This service is differentiated from a car rental service by not requiring a specific contract for each trip, and providing customers a self-service “network of shared vehicles” at all times.52
The enactment of Act 43 resulted from several months of contentious budget negotiations between Republicans and Democrats in both the Pennsylvania House and Senate, following the enactment of a spending bill on July 11, 2017.53
The fact that the budget was not enacted until late October technically violated the requirement in the Pennsylvania Constitution that the budget be completed by June 30.54
Following the lead of states such as Rhode Island55
, Pennsylvania has required that remote sellers or facilitators either register to collect and remit Pennsylvania sales and use tax or otherwise comply with burdensome notice and reporting requirements. The complex requirements provide an incentive for remote sellers or facilitators to collect and remit Pennsylvania sales and use tax, rather than undertaking compliance with the intentionally burdensome requirements.
The lasting effect of Pennsylvania’s sales and use tax notice and reporting requirements may be limited given the U.S. Supreme Court’s pending consideration of South Dakota v. Wayfair.57
At issue in this case is the constitutionality of South Dakota’s economic nexus law imposing a “bright-line” presence standard in order to trigger a sales and use tax collection obligation.58
South Dakota’s law directly contravenes the long-standing physical presence standard for sales and use tax nexus pronounced in Quill Corp. v. North Dakota.59
Should the Court uphold the constitutionality of South Dakota’s economic nexus law, state notice and reporting laws may become moot, as states would then be permitted to require remote sellers to collect and remit sales and use tax without having in-state physical presence.
Consistent with the Nextel
decision, Act 43 officially removes the flat dollar limitation portion of Pennsylvania’s net loss carryover provision for tax years beginning after December 31, 2017, by increasing the percentage limitation to 35 percent of taxable income for the 2018 tax year, and 40 percent of taxable income for the 2019 tax year and after. The Pennsylvania Supreme Court’s denial of Nextel Communication’s application for reargument of the decision60
confirms this treatment. Unless Nextel decides to appeal the decision to the U.S. Supreme Court and the Court agrees to hear the case, the litigation would be completed, and the flat dollar limitation permanently stricken from the statute.
Pennsylvania is somewhat unique in enacting stricter withholding rules for businesses making payments to out-of-state vendors, independent contractors or property owners in excess of $5,000 annually. The new rules are likely to increase the compliance burden on small businesses and practitioners. As discussed above, guidance released by the Department in December provides clarity on how and when to file the required withholding payments, in addition to instructions on filing electronically.
On February 6, 2018, Pennsylvania Governor Tom Wolf delivered his fiscal year 2018-2019 budget address. Governor Wolf is proposing the enactment of a severance tax as well as combined reporting with an offsetting corporate net income tax rate reduction. It will be interesting to see whether these proposals are successful and whether a budget agreement will occur by the June 30 deadline this year.
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