Pennsylvania Cuts Corporate Income Tax Rates, Makes Other Important Tax Changes | Ballard Spahr LLP
Pennsylvania’s budget season just ended and Act 53 of 2022 (Act 53)made many significant changes to Commonwealth business and personal taxes.
Corporate Net Income Tax Changes
Gradual reduction of the CNIT rate
Law 53 provides for a gradual reduction in the rate of net corporate income tax (CNIT) from the current rate of 9.99% to 4.99% in accordance with the following schedule:
Adoption of market-based sourcing for sales of intangibles
Effective January 1, 2023, Bill 53 eliminates sourcing using the performance cost method for sourcing revenue from the sale of intangibles and instead adopts market-based sourcing for all sales.
Pennsylvania uses a single sales factor to allocate CNIT revenue. Since 2014, revenues from the sale of services by CNIT taxpayers (such as sales of tangible personal property) are distributed according to market supply. That is, revenue from the sale of services may be included in the numerator of a CNIT taxpayer’s sales factor if the profit from the services originates in Pennsylvania. However, sales of non-service intangibles were sourced from Pennsylvania on a “cost of performance” basis –that’s to say, revenue from sales of intangible assets may be included in the numerator of the sales factor if a greater proportion of the revenue-generating activity related to the intangible asset is performed in Pennsylvania than in any other state. Consequently, items such as patent receipts, royalties, franchise agreements, sale or exchange of securities and interest were obtained using a different methodology than sales of services and sales of tangible goods. .
Bill 53 adopts a uniform procurement rule for all gross receipts by implementing market-based procurement for receipts from intangibles effective for tax years beginning on or after January 1, 2023 .
Economic link coding
As of January 1, 2023, Law 53 also formally adopts the economic link for the purposes of the CNIT. Although there is no statutory provision imposing the CNIT on taxpayers without a physical presence in the Commonwealth, in 2019 the Department of Revenue (the Department) announced that, with effect from tax years commencing on or after January 1, 2020, a corporate taxpayer with $500,000 or more in gross receipts from certain Pennsylvania sources is nexus for CNIT purposes, even without a physical presence in Pennsylvania.
Law 53 makes economic nexus the law in Pennsylvania by including a rebuttable presumption that a company with sales of $500,000 or more originating in Pennsylvania has a real nexus and is subject to the CNIT in the Commonwealth regardless of physical presence in the state.
The determination of whether a taxpayer has $500,000 in sales from Pennsylvania is made using the Market Supply Rules as amended by Law 53. Accordingly, all gross receipts from (i) sales of goods tangible assets, (ii) services, and (iii) intangible assets count toward the $500,000 if destined for a customer in Pennsylvania.
Among other consequences, this means that a lender without a physical presence in Pennsylvania will have a CNIT bond if it earns $500,000 or more in interest, fees, or penalties from borrowers in Pennsylvania. Note, however, that Law 53 excludes interest on loans made to affiliated entities from Pennsylvania-source income. Interest paid by a CNIT taxpayer to an affiliated entity may be disallowed under rules in effect since 2014 which restrict the deductibility of certain expenses and intangible costs paid to an affiliated entity. But such interest goes not ensure that the lender affiliate has a connection to Pennsylvania.
Personal Income Tax (PIT) Changes
For tax years beginning January 1, 2023, good news for personal income tax (PIT) taxpayers: For about five years (despite issuing a notice to the contrary), the Department of Revenue took the position that for IRP purposes, a taxpayer cannot defer the gain by effecting a like-kind exchange under Section 1031 of the Internal Revenue Code (IRC). In Pearlstein v. Commonwealtha Commonwealth Court panel agreed with the Department and that decision is being appealed.
For tax years beginning in 2023, Bill 53 resolves this issue by providing that the gain deferred in a like-kind exchange under IRC 1031 will also be deferred for PIT purposes. Similarly, pursuant to Law 53, exchanges of insurance policies that are not subject to tax under IRC Section 1035 will not be subject to IRP during the years of taxation commencing on or after January 1, 2023.
Sales and Use Tax Changes
Law 53 adopts sales and use tax rules for peer-to-peer car-sharing facilitators (essentially, websites/apps that act like Airbnb, but for vehicles) to ensure that the Sales and use tax is charged on shared vehicle rentals. Bill 53 treats peer-to-peer car-sharing facilitators (such as Turo and Getaround) as market facilitators like Amazon and eBay and makes those facilitators responsible for collecting sales and use tax on behalf of participants in its platform when the facilitator facilitates a vehicle rental transaction in Pennsylvania.
Changes to credit and incentive programs
Law 53 also made changes to many existing credit and incentive programs and added additional incentives, including the following:
- Airport Development Zones: Bill 53 allows airports to submit plans for an “airport development zone” of up to 2,000 acres to expedite development activities on land and in vacant buildings owned by airports. airports. Upon approval by the Department of Community and Economic Development (DCED), employers in an airport development zone can obtain a tax credit of up to $2,100 for each full-time employee in the zone. The credit can be used against the CNIT, the PIT, the tax on shares of banks and trust companies, the tax on shares of title insurance companies and the tax on mutual savings institutions.
- Keystone Opportunity Zones: Bill 53 extends certain Keystone Opportunity Zone (KOZ) benefits to affiliates of entities certified as DCED Qualified Businesses. Specifically, the KOZ Act allows companies that meet certain job creation and/or capital enhancement measures to apply to the DCED for a 10-year extension of the KOZ tenure. Under Law 53, if a qualified company in a KOZ receives such a 10-year extension for job creation in a KOZ, affiliated companies located in the KOZ also receive the extended benefits and the extension will remain in effect. force for such an affiliate even if the original applicant leaves the KOZ.
- Movie tax credit: Bill 53 adds new provisions to the movie tax credit rules for a “Pennsylvania movie producer” – a Pennsylvania-domiciled movie company. The movie tax credit cap is increased (effective in fiscal year 2022-23) to $100 million (from $70 million), including $5 million reserved for Pennsylvania movie companies.
- Other tax credit cap increases: Law 53 increased the tax credit caps for the following programs, starting in fiscal year 2022-23:
- Research and Development Tax Credit: $55 to $60 million.
- Entertainment Enhancement Program Tax Credit: $8 million to $24 million.
- Shoreline development tax credit: $3.5 to $5 million.