In early July, Pennsylvania Gov. Tom Wolf signed House Bill 1342 into law. The law applies market-based sourcing rules to receipts from sales of intangibles, codifies the Department of Revenue’s economic nexus standard for corporate income taxes, conforms to certain Internal Revenue Code (IRC) provisions, imposes sales and use tax on peer-to-peer car sharing, and makes edits to various tax credit and economic development zone provisions.
The law states that beginning in 2023, the current 9.99% corporate tax rate will decrease to 4.99% over the subsequent nine years.
|Tax years beginning on or after:||Rate|
|January 1, 2023||8.99%|
|January 1, 2024||8.49%|
|January 1, 2025||7.99%|
|January 1, 2026||7.49%|
|January 1, 2027||6.99%|
|January 1, 2028||6.49%|
|January 1, 2029||5.99%|
|January 1, 2030||5.49%|
|January 1, 2031||4.99%|
Before this law, Pennsylvania sourced receipts from sales of intangibles based on a cost-of-performance method. Effective for tax years after December 31, 2022, the receipts from sales of intangibles will be sourced using the market-based sourcing method. These gross receipts will be in the sales factor numerator. Intangible property not otherwise described below is excluded from the sales factor numerator and denominator. The law also states that goodwill arising from the business and gross proceeds/gains from hedging transactions will be excluded from the sales factor numerator and denominator. The bill, however, does not specifically address goodwill receipts that also could be subject to these throwout rules.
Pennsylvania will source the following intangible gross receipts to Pennsylvania:
- Lease or license of intangible property
- Sale of intangible property that is a contract right, government license, or similar property authorizing the holder to conduct business activity in a specific geographic area
- Sale, redemption, maturity, or exchange of securities held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business in the commonwealth
- Interest, fees, and penalties imposed on loans secured by real property received by a corporation that regularly lends funds to unaffiliated entities or individuals
- Interest, fees, and penalties from loans for the sales of tangible personal property if the property is delivered or shipped to a purchaser in the commonwealth
- Interest, fees, and penalties from loans for sales not previously described if the borrower is in the commonwealth
- Interest, fees, and penalties from credit card receivables and credit card fees charged to cardholders if the cardholder's billing address is in the commonwealth
- Interest not otherwise described if the lender's commercial domicile is in the commonwealth
The sourcing described above should not be confused with sourcing of services. Pennsylvania has sourced revenues from services as market-based since 2014.
The law also codifies Pennsylvania’s stance on corporate income tax nexus. There is now a rebuttable presumption of a filing requirement for corporations without physical presence in Pennsylvania if they have $500,000 or more of Pennsylvania-sourced gross receipts (economic/substantial nexus). This type of economic nexus has been published informally before in Corporation Tax Bulletin 2019-04, but this bill puts the threshold into statute. The bill does not mention a retroactive date, so it is uncertain if 2023 is the first year the economic or substantial nexus standard applies. Business activities that would give rise to nexus include leasing or licensing intangible property that is used in the commonwealth, regularly engaging in transactions with in-state customers involving intangible property, or selling intangible property that was used by a corporation in the commonwealth.
Other Personal Income Tax IRC Conformity Updates
Conformity to IRC Section 179 Expense Deduction
For property placed in service in tax years beginning after December 31, 2022, §179 property may be deducted consistent with the federal limitations in effect at the time the property is placed in service. Prior to the bill, property was limited to the IRC of 1986, which limited the expense to $25,000.
Conformity to IRC §1031 Like-Kind Exchanges
For transactions occurring in tax years beginning after December 31, 2022, Pennsylvania conforms to IRC §1031.
If you have any questions about these law changes in Pennsylvania, be sure to reach out to a professional at FORVIS or submit the Contact Us form below.