Pennsylvania Enacts Corporate Tax Rate Reduction, Multiple Other Tax Changes
On July 8, 2022, Governor Wolf signed into law a significant tax bill (H.B. 1342) that makes several important changes to the Pennsylvania Corporate Net Income Tax, Personal Income Tax, and Sales and Use Taxes. The legislation also creates some new tax credits and incentives.
Corporate Net Income Tax (CNIT)
Changes to the CNIT in the legislation include a phased-in rate reduction, codification of economic nexus rules, and new sourcing requirements for certain types of intangibles.
Rate Reduction – Effective for tax years beginning after December 31, 2022, H.B. 1342 reduces the CNIT rate from 9.99% to 8.99% for tax year 2023, with a 0.5% reduction each subsequent year until the CNIT rate reaches 4.99% for tax years beginning on or after January 1, 2031. The rate reductions are not tied to state revenues and are scheduled to occur automatically.
Economic Nexus – For tax years beginning after December 31, 2022, H.B. 1342 codifies the rebuttable bright-line nexus $500,000 sales threshold for corporate income tax purposes. This threshold was originally promulgated by the Pennsylvania Department of Revenue (the Department) in Corporation Tax Bulletin 2019-04 (TB 2019-04).
In addition, the following business activities are now codified to establish substantial nexus with Pennsylvania:
- Leasing or licensing intangible property utilized in Pennsylvania.
- Regularly engaging in transactions with Pennsylvania customers involving intangible property, including lending to unaffiliated entities or individuals.
- Selling intangible property that was used by the corporation in Pennsylvania.
An exception is provided for certain affiliated entities domiciled in a foreign nation that have a comprehensive tax treaty with the United States.
The legislation did not address the application of economic nexus provisions to pass-through entities.
Apportionment Sourcing for Intangible Property Transactions – Prior to the enactment of H.B. 1342, Pennsylvania applied market-based sourcing for receipts from sales of services only. Receipts from sales of intangible property were still sourced using the costs of performance method. Effective for tax years beginning after December 31, 2022, H.B. 1342 requires market-based sourcing for the following types of gross receipts:
- The lease or license of intangible property.
- The sale of intangible property where the property sold is a contract right, government license or similar intangible property that authorizes the holder to conduct a business activity in a specific geographic area.
- The sale, redemption, maturity or exchange of securities that are held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business.
- Interest, fees and penalties from credit card receivables.
- Interest, fees and penalties imposed in connection with loans (the statute addresses both loans secured by property and unsecured loans and provides detailed sourcing rules).
The legislation also applies a throw-out provision that removes receipts from the numerator and denominator of the Pennsylvania sales factor with respect to sales of intangible property that are not directly addressed by H.B. 1342 (e.g., potentially, receipts from sales of goodwill).
Sales and Use Taxes (SUT)
Effective on January 1, 2023, H.B. 1342 requires peer-to-peer car-sharing marketplace facilitators to collect and remit sales and use taxes on shared vehicle rentals and clarifies that peer-to-peer car sharing is subject to up to $2.00 per day motor vehicle rental fee. Effective immediately, the legislation excludes peer-to-peer car sharing programs from the state’s Vehicle Rental Tax.
Personal Income Tax (PIT)
H.B. 1342 provides for PIT conformity to Internal Revenue Code (IRC) Section 179 by increasing the PIT expense deduction for eligible tangible personal property from $25,000 to $1,080,000. The legislation also conforms Pennsylvania with IRC Section 1031 by allowing taxpayers to defer gain on the sale of real property if the proceeds are reinvested in similar property (i.e., a like-kind exchange) for PIT purposes. These conformity changes will apply to property placed in service in tax years beginning after December 31, 2022.
The bill also codified the PIT exemption for Paycheck Protection Program (PPP) loans and other federal economic stimulus payments enacted by the federal government in response to the Covid-19 pandemic.
Tax Credits & Incentives
H.B. 1342 enacted two new tax credits and incentives.
Pennsylvania Child and Dependent Care Enhancement Program – Effective for tax years beginning after December 31, 2022, the law provides for a PIT credit modeled after the federal childcare credit. For eligible taxpayers, the tax credit can return up to 30% of eligible childcare expenses.
Pennsylvania Airport Land Development Zone (ALDZ) Program – Created to encourage and promote the creation of new jobs on land and buildings owned by airports within Pennsylvania, while accelerating economic activity around airports on undeveloped land or vacant buildings owned by airports that can provide new revenue sources for airports. The new law will provide tax credits to qualifying commercial or industrial employers who locate in an ALDZ and create new jobs.
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