The Tax Bill signed by Governor Tom Wolf on October 30, 2017 made several significant changes to Pennsylvania tax laws that are estimated to generate additional revenue for the Commonwealth. Notable changes under the new law include the following:

Personal Income Tax – New Withholding Rules

Businesses with Pennsylvania employment tax obligations that are required to provide IRS Form 1099-MISC to vendors should immediately pay attention to new personal income tax (PIT) withholding rules. Effective December 29, 2017, a Pennsylvania business that makes trade or business payments totaling $5,000 or more during a calendar year to nonresident individuals or to disregarded entities owned by nonresident individuals is required to withhold PIT from such payments at a rate of 3.07%. Likewise, a Pennsylvania business that makes rent or royalty payments with regard to Pennsylvania property totaling $5,000 or more during a calendar year to nonresident individuals or to an agent, designee or other entity (including a disregarded entity owned by the nonresident individual) that collects rents on behalf of a nonresident individual is required to withhold PIT.

If the payor fails to withhold and remit the required PIT, the Department of Revenue (DOR) can collect the PIT from the payor. If the payee pays the tax, the DOR cannot collect the PIT from the payor, but it can collect interest and penalties attributable to any late payment of PIT by the payee from the payor.

A business that is subject to the new withholding rules must electronically file copies of its IRS Form 1099-MISC with the DOR and will be required to report (on a new form developed by the DOR) the tax withheld under the new provisions.

Marketplace Sales Provisions

Another significant change is the addition of "Marketplace Sales" provisions for sales and use tax (SUT) purposes designed to impose SUT collection or information reporting obligations on persons who sell or who facilitate sales through web platforms. The Marketplace Sales rules will apply beginning to all sales of products and services other than digital products and related services after March 31, 2018, and will apply to sales of digital products and related services after March 31, 2019.

"Marketplace facilitators," "remote sellers," and "referrers" (collectively referred to as Marketplace Sellers), defined below, will have new Pennsylvania SUT collection or reporting obligations:

• A "marketplace facilitator" is any person that facilitates a sale of tangible personal property by listing or advertising a sale and that collects the payment from the purchaser (i.e., a website platform).
• A "referrer" is any person (not including newspapers) that lists or advertises a sale at retail in a physical or electronic medium, and transfers a purchaser to a marketplace seller.
• A "remote seller" is any person that does not have a place of business in Pennsylvania but that sells tangible personal property (as defined in the SUT law) to customers in Pennsylvania.

Marketplace Sellers will be required to elect annually either to (i) collect sales tax, or (ii) comply with notification and reporting requirements designed to allow the DOR to collect use tax from purchasers.

Marketplace Sellers must make an initial election before March 1, 2018 and thereafter must make the election by June 1 of each calendar year effective for the next year. A Marketplace Seller that elects to comply with the notice requirements (as opposed to the collection requirements) may change its election at any time during the year and may begin collecting sales tax, but a Marketplace Seller who elects to collect tax is bound until the following June 1. If a Marketplace Seller fails to timely make an election, it is presumed to have elected to comply with the notice and reporting requirements.

Marketplace Sellers who elect to comply with the notice requirements must: post a conspicuous notice that informs purchasers that Pennsylvania SUT may be due; provide a written notice to each purchaser that includes a statement that sales tax is not being collected and that the purchaser may be required to remit use tax to the DOR; provide an annual notice to purchasers stating that sales tax was not collected, providing detail about the purchaser's purchases, and including instructions as to how use tax can be paid; and file an annual report with the DOR, including each purchaser's name, billing address, delivery address, and the aggregate amount of the purchases made.

The U.S. Court of Appeals for the 10^th Circuit recently upheld the constitutionality of a similar notice requirement in Colorado. We anticipate, however, that there may be a challenge to Pennsylvania's efforts to impose tax obligations on a group of taxpayers that arguably includes taxpayers that do not have nexus with Pennsylvania.

Other SUT Changes – Software Support Services

The new law clarifies that help center and call center services that are separately stated from charges for canned computer software are not subject to SUT. The General Assembly deemed this provision to be the clarification of the taxation of digital products effective August 1, 2016.

Corporate Net Income Tax – Net Operating Losses and Qualified Manufacturing Deduction

Following the Pennsylvania Supreme Court's decision in Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth striking down the dollar-based cap on net operating loss (NOL) carryforwards (which we discussed here), the new law caps NOL carryforwards based only on a percentage of a corporate taxpayer's corporate net income tax (CNIT) taxable income: 35% of a taxpayer’s CNIT taxable income for tax years beginning after December 31, 2017, and 40% of a taxpayer’s CNIT taxable income for all tax years beginning after December 31, 2018. Note that this provision only becomes effective following the publication in the Pennsylvania Bulletin of a "notice of decision" submitted by the DOR.

The law also adds a new CNIT deduction for "qualified manufacturing innovation and reinvestment" expenses equal to 5% of the amount invested in the creation or renovation of a Pennsylvania manufacturing facility for each tax year in a five-year period. Taxpayers seeking to take advantage of this new program must obtain pre-approval from the DOR and must agree to make at least $100 million of qualified investments within the initial three years (although the period in which a taxpayer makes qualifying investments may extend to five years).

Change to Tax Appeal Time Limitations

The new law shortened two important tax appeal time limitations—the time that a taxpayer has to appeal assessments to the Board of Appeals and the time that a taxpayer has to appeal an adverse Board of Appeals decision to the Board of Finance and Revenue—from 90 days to 60 days.

This change is effective December 29, 2017 (60 days after the bill was signed), but it is unclear how this effective date will be applied. We assume that assessments and/or Board of Appeals decisions mailed on or after that date are subject to the new time limitations. But, unless the DOR provides guidance to the contrary, taxpayers should treat the new 60-day deadline as effective for any assessments or Board of Appeals decisions it receives. For example, under the old law, a taxpayer would have 90 days to appeal an assessment mailed on November 15, 2017 (i.e., until February 13, 2018). However, if the provision is deemed to be effective for pending assessments, the DOR could argue that such an appeal must be filed by January 14, 2018 (i.e., 60 days after the mailing date of the assessment and after the effective date). To err on the side of caution, the taxpayer in this example should treat January 14, 2018 as the deadline unless the DOR provides other guidance.

Fireworks Tax

In connection with the legalization of consumer fireworks, effective December 29, 2017, the new law imposes a new tax at a rate of 12% on the sale of fireworks that are suitable for use by individual users; it is not applicable to display fireworks used by professionals. The new tax will be imposed in addition to SUT.

Carsharing Fee

Also effective December 29, 2017, the new law imposes a fee on "carsharing," defined as a membership program that (i) does not require a written agreement for each use, (ii) does not require an attendant to be present at vehicle sites, (iii) offers members the opportunity to use vehicles at any time, and (iv) allows a vehicle to be rented on per minute, per hour, per day or per trip rates, which rates typically include fuel, insurance, and maintenance. The fee is collected by the person who makes the vehicle available for use in addition to SUT at the following rates:

• $0.25 for uses of less than two hours;
• $0.50 for uses of two to three hours;
• $1.25 for uses of three to four hours; and
• $2 for uses of four hours or more.

Increased Benefits for ABLE Program

Effective October 30, 2017, taxpayers may deduct contributions to a Pennsylvania Achieving a Better Life Experience (ABLE) account for PIT purposes and distributions from an ABLE account are exempt from PIT.

Changes to Credit/Incentive Programs

• The new law provides that, to obtain approval for many Pennsylvania tax credits by the Department of Community and Economic Development (DCED), a taxpayer must have filed all required returns and paid all required taxes (unless a tax is under appeal).
• DCED is authorized to designate two "Film Production Tax Credit Districts" located on deteriorated property, each containing one qualified production facility and six soundstages. Specific credits for activities within the new districts will be authorized in the 2019-20 fiscal year and will be in addition to the currently-available Film Production Tax Credits.
• The new law extends the deadline by which applications by political subdivisions for designation of new Keystone Opportunity Zones (KOZs) must be made from October 31, 2016 to October 31, 2018, and extends the time for DCED to act on such applications from December 31, 2016 to December 31, 2018, thereby reopening the opportunity for municipalities to apply for KOZ designation.
• Effective October 30, 2018, Neighborhood Improvement Zones (NIZs) may be altered by transferring unused parcels out of the NIZ and replacing them with parcels of the same or lesser acreage.