PA Tax Law Update
As you may know, Pennsylvania enacted a number of tax law changes with adoption of fiscal 2016-2017 state budget. Below is a brief summary of the changes. If you have any questions please contact your Maillie representative.
Corporate Income Tax Provisions:
Beginning January 1, 2016, corporate income tax returns are due on or before 30 days after the Federal return is due, or would be due if it was required of the corporation.
For reports filed after December 31, 2016, a corporate taxpayer may, within three years after the due date of the original report and extensions, file an amended report to notify the Department of Revenue of a correction to the original report. A taxpayer can file an amended report if a petition raising other issues is pending at the administrative or judicial level. However, a taxpayer is not allowed to file an amended report if, instead of a timely appeal of an assessment, except if a taxpayer would be entitled to an adjustment of the taxpayer’s tax liability; if an administrative appeal board or court has previously addressed an issue; or the taxpayer takes a position that is contrary to law or policy. The filing of an amended report will extend the department’s authority to adjust a taxpayer’s tax liability, including the assessment of additional tax, for the tax year to one year from the date of the filing of the amended report or three years from the filing of the original report, whichever is later.
Personal Income Tax Provisions:
For personal income tax purposes, effective September 12, 2016, the provisions of section 1033 of the Internal Revenue Code (IRC) regarding nonrecognition of gain from involuntary conversions is adopted. Further, applicable retroactive to January 1, 2014 the definition of intangible drilling and development costs is the same as in IRC §263(c).
Beginning in 2016, an account owner taxpayer will be able to make a contribution from their personal income tax refund to a beneficiary’s Tuition Account Guaranteed Savings Program or the Tuition Account Investment Program.
Every person required to deduct and withhold tax must file a withholding tax return at the same time that the person is required to file its annual return of withheld Federal income tax from nonpayroll payments.
The definition of lottery income is amended to explicitly exempt "noncash" prizes won from the Pennsylvania state lottery.
The Pennsylvania State Lottery or the person paying an annuity for a lottery prize annuity payment must deduct and withhold from the prize payment an amount equal to the amount of the prize payment subject to withholding multiplied by the tax rate in effect at the time the prize payment is made. The amount withheld must be reported on IRS form W-2G, or similar form used for federal reporting purposes.
Tax Credit Provisions:
Applicable retroactive to January 1, 2016, the December 31, 2015 expiration date for the research and development tax credit for Pennsylvania qualified research and development expenses is removed.
The credit for new jobs is amended to include a definition for veterans and to expand the credit for hiring veterans. Further, the department may now award the total amount of tax credits authorized for a multiple-year tax credit in the first year in which a new job is created and the tax credit earned.
The neighborhood assistance tax credit, available for contributions to a neighborhood organization, is expanded to include affordable housing, and domestic violence or veterans’ housing assistance. The veterans’ housing assistance credit is for up to 75% of the total amount contributed to the neighborhood organization.
The name of the Film Production Tax Credit is changed to the Entertainment Production Tax Credit. The term "qualified postproduction expenses" is added to the list production expenses eligible for the credit. A qualified postproduction expense qualifies for a 30% credit. Further, a "qualified postproduction facility" is a permanent facility located in Pennsylvania, approved by the department, employing at least ten full-time employees living in Pennsylvania and that has at least a $500,000 capital investment. Further, the department can now reissue a tax credit that was issued in a previous year beginning after June 30, 2017.
A Concert Rehearsal and Tour Tax Credit is created beginning in fiscal year 2017-2018. The credit may be claimed beginning July 1, 2017 by a concert tour promotion company, concert tour management company or other concert management company. The credit is available against the capital stock, personal and corporate income taxes. Beginning June 30, 2016, definitions are added for concert rehearsal and tour including venue types and sizes, rehearsal and tour requirements. During a tour, a taxpayer must purchase or rent concert tour equipment in an amount of at least $3 million from companies in Pennsylvania, rehearse at a qualified rehearsal facility for at least 10 days, perform at least one concert at a class 1 venue, and perform at one other venue in a different municipality. Qualified rehearsal and tour expenses include all Pennsylvania rehearsal and tour expenses if Pennsylvania rehearsal expenses comprise at least 60% of the total rehearsal expenses. The term does not include more than $2 million in aggregate of compensation paid to individuals for services provided in the tour. The aggregate amount of tax credit in any fiscal year cannot exceed $4 million and a taxpayer cannot be awarded more than $800,000 of tax credit for a tour. For a tour with concerts at two class 1 venues or a class 1 venue and a class 2 venue the credit cannot exceed 25% of the qualified rehearsal and tour expenses. For a taxpayer with concerts at a class 1 venue and a class 3 venue the credit cannot exceed 30% of the qualified rehearsal and tour expenses. For a taxpayer with concerts at a class 1 venue and a class 3 venue which does not serve alcohol the credit may not exceed 35% of the qualified rehearsal and tour expenses. Lastly, a taxpayer is eligible for a 5% credit of the qualified rehearsal and tour expenses if the taxpayer holds concerts at a total of 2 or more class 2 venues or class 3 venues.
A Video Game Production Tax Credit is created beginning in fiscal year 2017-2018 and can be claimed beginning July 1, 2017. The tax credit is available against the personal and corporate income, capital stock, bank and trust company shares, title insurance shares, insurance premiums, and mutual thrifts institutions taxes for qualified video game production expenses. Production expenses include all Pennsylvania expenses comprising at least 60% of the video game’s total production expenses, excluding $1 million in aggregate compensation paid to individuals. The credit can be carried forward for three tax years. The aggregate amount of credits awarded by the department to a taxpayer for a video game may not exceed 25% of the qualified video game production expenses incurred during each of the first four years that the expenses are incurred and 10% for each year thereafter.
A Coal Refuse Energy and Reclamation Tax Credit is created for a facility that combusts coal refuse or fuel composed of at least 75% qualified coal refuse, utilizes at a minimum circulating fluidized bed combustion unit equipped with a limestone injection system for control of acid gasses and a fabric filter particulate emission control system, and beneficially uses ash produced by the facility to reclaim mining-affected sites. The tax credit is available against the personal and corporate income, capital stock, bank and trust company shares, title insurance shares, insurance premiums, gross receipts and mutual thrifts institutions taxes. A qualified taxpayer can receive a tax credit equal to $4 multiplied by the tons of qualified coal refuse used to generate electricity at an eligible facility in Pennsylvania. The credit will expire December 31, 2026. The total amount of tax credits issued by the department may not exceed $7,500,000 in fiscal year 2016-2017 and $10,000,000 in each fiscal year thereafter. A single facility cannot receive more than 22.2% of the total tax credits.
A Waterfront Development Tax Credit is created to encourage private investment in waterfront property that creates public access to the water, increases property values, restores ecology and catalyzes further financial investment and job creation. The tax credit is available against the personal and corporate income, capital stock, bank and trust company shares, title insurance shares, insurance premiums, and mutual thrifts institutions taxes. To qualify for a tax credit, contributions made to a waterfront development organization must be used by the waterfront development organization for an approved waterfront development project. No tax credit may exceed 75% of the total contribution made by a business firm during a taxable year. The total amount of all tax credits will not exceed $1,500,000 in any one fiscal year.
A Manufacturing and Investment Tax Credit is created for taxpayers able to increase taxable payroll in year one by at least $1 million, to maintain the increase for 5 years, and to maintain existing operation in Pennsylvania for 5 years. The tax credit is available against the personal and corporate income, capital stock, bank and trust company shares, title insurance shares, insurance premiums, gross receipts and mutual thrifts institutions taxes. The full-time job must have an average wage at least equal to the county average wage where the job is located and include employer-provided health benefits. The taxpayer must be engaged in the mechanical, physical or chemical transformation of materials, substances or components into new products that are creations of new items of tangible personal property for sale. The taxpayer can be awarded a tax credit of up to 5% of the taxpayer’s increase in annual taxable payroll, if the annual taxable payroll increases in year one by at least $1,000,000 above the base year amount. For each fiscal year beginning after June 30, 2017, $4,000,000 in manufacturing tax credits will be available. As part of the creation of the credit, the Promoting Employment Across Pennsylvania Act is repealed effective December 31, 2016.
A Rural Jobs and Investment Tax Credit is created for capital contributions made by a business firm to a rural growth fund used for investments in a rural business. The tax credit is available against the bank and trust company shares, title insurance shares, insurance premiums and mutual thrifts institutions taxes. No more than $100,000,000 in investment can be approved for credits. Beginning July 1, 2017, a business firm may claim a tax credit of up to 25% of the amount of tax credit certificates for each of the taxable years that includes the third through sixth anniversaries of the closing date of the growth fund.
The Keystone Special Development Zone tax credit is extended to June 30, 2035 (previously 2026). The Keystone Opportunity Zones, Keystone Opportunity Expansion Zones and Keystone Opportunity Improvement Zones provisions are added. The Department of Community and Economic Development may now designate up to 12 additional keystone opportunity zones that will create new jobs. Applicants must have a minimum of 2,500 employees, minimum capital investment of at least $300 million, conduct business operations from one or more facilities on the parcels. Applicants looking to expand a zone must create at least 350 new jobs or make a capital investment of at least $35,000.
Effective September 12, 2016, a Mixed-Use Development Tax Credit is created to increase affordable housing and commercial corridor development opportunities. The tax credit is available against the personal and corporate income, capital stock, bank and trust company shares, title insurance shares, insurance premiums, gross receipts and mutual thrifts institutions taxes. Amounts made available to qualified taxpayers to offset against qualified tax liability as authorized and allocated under this article, as evidenced by tax credit certificates and meeting all of the criteria set forth in this article. Up to $2,000,000 in each fiscal year will be available for mixed-use development tax credits. Beginning July 1, 2017, qualified taxpayers can receive a tax credit certificate upon receipt of payment of capital. If a qualified taxpayer cannot use the entire amount of the tax credit for the taxable year in which the tax credit is first approved, the excess credit may be carried over to subsequent taxable years and used as a credit against the qualified tax liability of the qualified taxpayer for those taxable years.
The existing Keystone Innovation Zone statute is repealed and replaced by the Keystone Innovation Zone (KIZ) Tax Credit that allows a company to claim a tax credit equal to 50% of the increase in the KIZ company's gross revenues in the immediately preceding taxable year. The increase must be attributable to activities in the KIZ over the KIZ company's gross revenues in the second preceding taxable year attributable to its activities in the KIZ. A tax credit for a KIZ company will not exceed $100,000 annually. The tax credit is available against the personal and corporate income, capital stock, bank and trust company shares, title insurance shares, insurance premiums, and mutual thrifts institutions taxes. The total amount of tax credits approved by the department will not exceed $15,000,000 for any one taxable year.
Cigarette & Tobacco Tax Provisions:
Effective August 1, 2016, the tax on each cigarette sold or possessed in the state will increase from $0.08 to $0.13. In addition, a floor tax of $0.05 per cigarette in the possession of a person must be paid by October 29, 2016. Further, a cigarette stamping agent’s commission is reduced from 0.87% to 0.586%.
An expiration date relating to municipal cigarette taxes is repealed.
Generally effective October 1, 2016, the state will impose a tax on tobacco products other than cigarettes. The definition of "tobacco products" includes electronic cigarettes. The term tobacco products does not include either cigars or any item taxed pursuant to the cigarette tax law. The tax is imposed on the dealer or manufacturer at the time the tobacco product is first sold to a retailer in the state. The general rate of tax is $0.55 per ounce for the purchase of any tobacco product other than electronic cigarettes. The tax must be collected from the retailer by whomever sells the tobacco product to the retailer and remitted to the department.
An "electronic cigarette" is an electronic oral device that provides a vapor of nicotine or any other substance and the use of inhalation that simulates smoking whether the device is sold as an e-cigarette, e-cigar, e-pipe, or any other product, name or description. The definition also includes a liquid or substance placed in or sold for use in an electronic cigarette. The rate of tax on electronic cigarettes is 40% of the purchase price charged to the retailer. The tax must be collected from the retailer by whomever sells the electronic cigarette to the retailer and remitted to the department.
A floor tax is due on tobacco products in the possession of a retailer on the effective date of the tax.
Some of the terms of the new tax relating to roll-your-own tobacco requires (1) amendments that affect the Master Settlement Agreement and (2) the consent of participating manufacturers. Those provisions will take effect 60 days after the Office of Attorney General publishes the notice of the consents.
Tax Amnesty Program:
For fiscal year 2016-2017, Pennsylvania will conduct a tax amnesty program. The amnesty will be conducted over a period of 60 consecutive days ending no later than June 30, 2017. The amnesty will apply to any tax administered by the Department of Revenue (DOR) (eligible taxes) as of December 31, 2015. An "eligible tax" also will include any interest, penalty, or fee on an eligible tax. For purposes of the International Fuel Tax Agreement (IFTA), the program will apply only to taxes, interest, and penalties owed to the Commonwealth.
Generally, the program will apply to a taxpayer who is delinquent on payment of a liability for an eligible tax as of December 31, 2015. The delinquency can include, among other things, liabilities not reported, underreported, or not established. A taxpayer who participates in the program will not be eligible to participate in a future tax amnesty program. Taxpayers participating in deferred payment plan agreements with the DOR are eligible for the program.
During the amnesty period, participants will be required to:
• file a tax amnesty return;
• pay all taxes and half of the interest due to the state (no payment of penalties would be required); and
• file complete tax returns or, for previous underreporting, amended tax returns for all required years for which the taxpayer previously has not filed.
Generally, the DOR may not collect any penalties or interest waived during the program period unless the taxpayer who is granted amnesty, within two years after the end of the program:
• becomes delinquent in payments for three consecutive periods without contesting the assessments; or
• becomes delinquent in payments and is eight or more months late in payment of taxes due.
Bank and Trust Company Act:
Beginning January 1, 2017, the bank and trust company tax rate will be increased to 0.95% of each dollar of taxable amount. Currently, the rate is 0.89%. In addition, terms are added concerning ascertainment of taxable amounts and where institutions filing reports of condition on a consolidated basis with certain subsidiaries for calendar years 2018-2022.
Retroactive to January 1, 2014, in computing the deduction for certain U.S. obligations, a taxpayer must subtract goodwill recorded as a result of the use of purchase accounting for specific acquisitions or combinations. Formerly, the taxpayer had the option of making the deduction. Also there are amendments to the apportionment of an institution’s taxable amount of shares.
Applicable to tax years beginning after December 31, 2016, the definition of "doing business in this Commonwealth" has been amended by removing a requirement that an institution must generate gross receipts apportioned to the Commonwealth in excess of $100,000. In addition, the definition of "receipts" has been replaced with the following:
The total of all items of income reported on the income statement of the institution's Reports of Condition at the end of the preceding calendar year. If the institution does not file quarterly Reports of Condition, the term shall include all items of income included on an income statement determined in accordance with generally accepted accounting principles for the preceding calendar year.
Table Game Tax:
In addition to other table game taxes, a new table game tax is imposed on certificate holders, each of whom must pay an additional 2% of its daily gross revenue. This tax will expire June 30, 2019.
Realty Transfer Tax:
Applicable to real estate transfers on or after September 11, 2016, definitions relating to the realty transfer tax have been added for "conservancy" and "veterans’ organization." Veterans’ organizations have been added as exempt parties in a section previously relating only to governmental bodies. Terms for conservancy exemptions were amended to conform to the new definition and new provisions for transactions involving conservancies and certain other parties were added. Finally, an exemption was added for transfers to or by a land bank.
Real estate taxes may not be assessed on any property in a neighborhood improvement zone owned by a contracting authority. Further, for purposes of determining the assessed value of property located in a neighborhood improvement zone, the actual fair market value of the property must be established without utilizing or considering the cost approach to valuation, and any funds received by the contracting authority and utilized directly or indirectly in connection with the property shall not be considered real property or income attributable to the property.
Sales and Use Tax Provisions:
Tax on Downloads:
Effective August 1, 2016, sales and use tax is imposed on downloaded videos; photographs; books; any otherwise taxable printed matter; applications (commonly known as apps); games; music; any other audio, including satellite radio service; canned software; and any other otherwise taxable tangible personal property electronically or digitally delivered, streamed, or accessed. These items are taxable as tangible personal property and are considered tangible personal property whether they are electronically or digitally delivered, streamed, or accessed and whether they are purchased singly, by subscription, or in any other manner, including maintenance, updates, and support.
Refund for Data Centers:
Beginning July 1, 2017, an owner, operator, or qualified tenant of a certified computer data center may apply to the Department of Revenue for a refund of sales or use tax paid on certain equipment that is used to outfit, operate, or benefit a computer data center and component parts, installations, refreshments, replacements, and upgrades to the equipment. The initial application must be filed by July 30, 2017, and subsequent applications must be filed by July 30 of the following years. The department will notify applicants of the amount of their tax refund by September 30, 2017, and by September 30 of the following years. Types of equipment for which taxes can be refunded include:
• equipment necessary for the transformation, generation, distribution, or management of electricity that is required to operate computer servers or similar data storage equipment;
• equipment necessary to cool and maintain a controlled environment for the operation of the computer servers or data storage systems and other components of the computer data center; • water conservation systems;
• software, including enabling software and licensing agreements, computer servers or similar data storage equipment, chassis, networking equipment, switches, racks, cabling, trays and conduit;
• monitoring equipment and security systems;
• modular data centers and preassembled components of any item of computer data center equipment, including components used in the manufacturing of modular data centers; and
• other tangible personal property that is essential to the operations of a computer data center.
The refund is not available for equipment used by a data center to generate electricity for resale to a power utility, with certain exceptions, or to generate, provide, or sell more than 5% of its electricity outside the data center.
To qualify for the refund, a data center owner or operator must apply to the Department of Revenue for certification. The application must include the name, address, and telephone number of the owner or operator; the address of the computer data center site; and anticipated investment or employee compensation information. The department may not certify any computer data center for the refund after December 31, 2029.
For an owner or operator, the qualification period begins on the date of certification of the computer data center and expires at the end of the 15th full calendar year following the calendar year in which the owner or operator filed an application for certification. For a qualified tenant, the qualification period begins on the date that the tenant enters into an agreement concerning the use or occupancy of the computer data center and expires on the earlier of the expiration of the term of the agreement or the end of the 10th full calendar year following the calendar year in which the qualified tenant enters into the agreement. A qualified tenant is an entity that contracts with the owner or operator of a certified computer data center to use or occupy part of the computer data center for at least 100 kilowatts per month for two or more years.
A computer data center must meet the requirements in either (1) or (2) below, after taking into account the combined investments made and annual compensation paid by the owner or operator of the computer data center or the qualified tenant:
(1) On or before the fourth anniversary of certification, the computer data center must create a minimum investment of (a) at least $25 million of new investment if the computer data center is located in a county with a population of 250,000 or fewer individuals or (b) at least $50 million of new investment if the computer data center is located in a county with a population of more than 250,000 individuals. "New investment" means the construction, expansion, or build out of data center space at either a new or an existing computer data center on or after January 1, 2014, and the purchase and installation of computer data center equipment, except software and related items.
(2) One or more taxpayers operating or occupying a computer data center, in the aggregate, must pay annual compensation of at least $1 million to employees at the certified computer data center site for each year of the certification after the fourth anniversary of certification.
Computer data center owners, operators, and qualified tenants must keep records of all investment created by the data center and all tax refunds they receive. Owners and operators must notify the department regarding their satisfaction of the investment or employee compensation requirements on or before the fourth anniversary of certification. A computer data center’s certification can be revoked and refunded taxes can be recaptured if the requirements are not satisfied.
The total amount of tax refunds cannot exceed $5 million in any fiscal year and if the approved refunds exceed that amount the refunds will be allocated among all applicants.
Sales & Use Tax Exemptions:
Timbering machinery and equipment: Effective July 1, 2017, machinery and equipment used in timbering and parts and supplies for such machinery and equipment are exempt from sales and use tax.
• the business of producing or harvesting trees from forests, wood lots, or tree farms for the purpose of the commercial production of wood, paper, or energy products derived from wood by a company primarily engaged in the business of harvesting trees; and
• all operations taking place prior to the transport of the harvested product that are necessary for the removal of timber or forest products from the site, in-field processing of trees into logs or chips, complying with applicable environmental protection and safety requirements, loading of forest products onto highway vehicles for transport to storage or processing facilities, and post-harvest site reclamation, including activities necessary to improve timber growth or ensure natural or direct reforestation of the site.
Timbering does not include harvesting trees for clearing land for access roads.
Returnable or reusable cartons: The exemption for cartons used for deliveries of tangible personal property applies to corrugated boxes used by manufacturers of snack food products to deliver the manufactured product, regardless of whether the boxes are returnable for potential reuse.
Services to property rented to certain exhibitors: After June 30, 2016, services related to the set up, tear down, or maintenance of tangible personal property rented by a Pennsylvania Convention Center Authority to exhibitors at a convention center or a public auditorium are exempt.
For sales and use tax returns due on or after August 1, 2016, the collection discount allowed to licensees as compensation for collecting and remitting the tax is changed from 1% of the amount of tax collected to the lesser of: (1) 1% of the amount of tax collected or (2) $25 per return for a monthly filer, $75 per return for a quarterly filer, or $150 per return for a semiannual filer.
Automated Sales Suppression Devices:
Any person who purchases, installs, or uses an automated sales suppression device, zapper, or phantomware in Pennsylvania with the intent to defeat or evade a Pennsylvania tax or other amount due commits a misdemeanor. Furthermore, any person who, for commercial gain, sells, purchases, installs, transfers, or possesses an automated sales suppression device, zapper, or phantomware with the knowledge that the sole purpose of the device is to defeat or evade the determination of a Pennsylvania tax or other amount due commits an offense punishable by a fine of not more than $5,000 or by imprisonment for not more than one year, or both. A person who uses an automated sales suppression device, zapper, or phantomware is liable for all taxes, interest, and penalties due as a result of the use of that device.
If a person is guilty of an offense related to an automated sales suppression device, zapper, or phantomware and the person sold, installed, transferred, or possessed not more than three of such devices, zappers, or phantomware, the person commits an offense punishable by a fine of not more than $5,000. If a person commits an offense related to an automated sales suppression device, zapper, or phantomware and the person sold, installed, transferred, or possessed more than three of such devices, zappers, or phantomware, the person commits an offense punishable by a fine of not more than $10,000.
These provisions do not apply to a corporation that possesses an automated sales suppression device, zapper, or phantomware for the sole purpose of developing hardware or software to combat the evasion of taxes by use of automated sales suppression devices, zappers, or phantomware.