July 17th – Tax Alert – Pennsylvania Enacts Significant Tax Law Changes

Signed into law by Governor Corbett on July 9, 2013, Pennsylvania House Bill 465 brings substantial tax law changes to the Tax Reform Code of 1971. The legislation, estimated to generate a net increase of up to $60 million in revenue during fiscal year 2013-14, modifies the Pennsylvania tax code with respect to personal income tax, corporate income tax, sales and use tax, inheritance tax, and a number of other sections, in addition to restructuring the administrative appeals process at the Board of Finance and Revenue. The following is a brief summary of the most significant new provisions:

Personal Income Tax

  • The Department of Revenue is authorized to undertake the following actions to improve compliance of pass-through entities: (1) Assess tax at the entity level; (2) Require partnerships to maintain lists of partners and addresses; (3) require estates and trusts to withhold on nonresident PA-source income; (4) require non-resident estates and trusts to file PA returns in the event they have PA beneficiaries or PA-source income.
  • The resident credit for taxes paid to a foreign country is eliminated beginning in 2014.
  • The Federal rule allowing start-ups to deduct $5,000 in the first year of operation is adopted beginning in 2014.
  • Intangible drilling costs can be immediately expensed as ordinary and necessary business expenses. Alternatively, an election is available to amortize over 60 months or 10 years.
  • Effective in 2014, the Department can impose fines for failing to pay or file employer withholding returns.

Corporate Net Income Tax

  • The “Delaware Loophole” will be closed, effective January 1, 2015, by requiring companies to add-back intangible expenses and costs. This does not apply to arms-length transactions that did not have tax avoidance as a primary purpose.
  • For purposes of the Corporate Net Income Tax, market-based sourcing will apply to the sale of services for the sales apportionment factor, for tax years starting after December 31, 2013. The service will be sourced to where the customer receives the benefit.
  • A new apportionment formula applies to providers of satellite television services based upon the value of equipment used.
  • The net operating loss deduction cap is increased to the greater of $4 million or 25% of income in 2014, and $5 million or 30% of income starting in 2015.
  • A non-filing penalty of $500 plus 1% of every dollar in excess of $25,000 is instituted for C-corporations that fail to file a return, effective in 2014.

Sales and Use Tax

  • The call center tax credit is repealed.
  • Aircraft parts and services to aircraft and aircraft components are excluded from sales tax.
  • The appeal period for businesses operating without a sales tax license is reduced from 90 to 30 days.
  • Philadelphia is authorized to extend the 1% sales and use tax which was scheduled to expire on June 30, 2014.

Miscellaneous Provisions:

  • Capital Stock and Franchise Tax: Phase-out of the Capital Stock and Franchise Tax, which will be completely eliminated by 2016, is modified to be .89 mills in 2013, .67 mills in 2014, and .45 mills in 2015.
  • Bank Shares Tax: The bank shares tax is reformed to: (1) Replace the six-year moving average calculation with a one-year variation formula; (2) Adjust the rate and base of taxation from 1.25% to .89% of total bank equity capital; (3) Apportion the taxable value of shares by a receipts factor rather than payroll and deposit factors; (4) Include out-of-state banks doing business in PA in the tax base for the “doing business in the Commonwealth,” “receipt factors,” and “institution” definitions; (5) Include the Bank Shares tax in the newly formed appeals process.
  • Realty Transfer Tax: The 89/11 realty transfer tax loophole that allowed the purchase of 89% of a company with an option to purchase the remaining 11% 3 years later to avoid transfer tax is eliminated.
  • Film Tax Credit: The following technical changes were instituted: (1) Production companies must withhold personal income tax on payments to pass-through entities representing individual talent; (2) Tax credits purchased or assigned in 2013 may be carried forward to 2014, and credits from 2014 may be carried forward to 2015.
  • Innovate in PA Tax Credit: A new tax credit program is established to provide a new source of funding for early-stage venture capital investment. A total of $100 million in credits may be available to qualified taxpayers for use starting in 2016.
  • Inheritance Tax: Transfer of business assets between members of a family is excluded from inheritance tax, provided that the business interest continues to be owned by a qualified transferee for a minimum of 7 years after the decedent’s death.
  • Tax Appeals Administrative Process Reform: The Board of Finance and Revenue is reorganized to include three full-time members consisting of two members appointed by the Governor, and the State Treasurer or a designee. Oral and documentary evidence will be presented to the Board for tax appeals, and the Board may order a compromise settlement with mutual agreement of both parties.