Act 13 of 2019 (Act 13), signed by Governor Wolf on June 28, 2019, made several changes to Pennsylvania tax laws, including the following significant changes.
Personal Income Tax (PIT) Changes
Conformity with Federal Qualified Opportunity Zone (QOZ) Rules
Unlike in many states, Pennsylvania’s PIT base does not start with federal taxable income. Instead, PIT is imposed on seven categories of income, including the net gain from disposition of property and dividends, with certain PIT-specific adjustments. Consequently, absent a change to Pennsylvania law, PIT taxpayers would have been subject to PIT on their gains that are deferred and excluded for federal income tax purposes under the QOZ program. (For more discussion of the QOZ program, see the Ballard Spahr LLP QOZ Portal.)
Effective for tax years beginning after December 31, 2019, Act 13 gives taxpayers QOZ benefits for PIT purposes by clarifying that “net gains,” “net losses,” and “dividends” do not include any amounts of gain, loss, or income that are excluded from federal taxation under the QOZ rules. Income from QOZ investments will be included in PIT income only to the extent it is included in federal taxable income under the QOZ rules. Consequently, (i) Pennsylvania residents will receive all of the exclusions and deferrals offered for federal income tax purposes under the QOZ program, and (ii) non-residents of Pennsylvania who invest in QOZs in Pennsylvania will receive the exclusions and deferrals offered for federal income tax purposes with respect to such investments.
Other PIT Changes
Act 13 also changes the PIT rules to provide:
- Effective for tax years beginning after December 31, 2019, executors of estates that are subject to PIT will be able to make a PIT election to correspond with the election allowed under Section 645 of the Internal Revenue Code that, in certain circumstances, permits the executor of an estate and the trustee of a revocable trust to treat the income of the trust as the income of the estate and to therefore file a single return (for the estate) rather than separate returns for the trust and estate;
- Effective for tax years beginning after December 31, 2019, all PIT returns prepared by a paid tax preparer must be signed by, and include the preparer tax identification number of, the paid tax preparer;
- Effective immediately, Olympic medals and prize money are excluded from the PIT base; and
- For tax years beginning after December 31, 2019, the PIT return will provide a check-off box for voluntary contributions to the Veterans’ Trust Fund.
Sales and Use Tax (SUT) Changes
Wayfair Decision and Marketplace Sellers
Act 13 updates SUT collection rules in light of the United States Supreme Court’s decision in South Dakota v. Wayfair, Inc. As discussed here, in Wayfair, the Supreme Court held that physical presence in a state by a vendor is not required for the state to impose SUT collection requirements.
In 2017, before Wayfair expanded the rights of states to enforce collection by out-of-state vendors, Pennsylvania enacted a regime that imposed a variety of collection and information reporting obligations on persons who sell or who facilitate sales in Pennsylvania through the web (see our discussion of Pennsylvania’s 2017 changes here). After Wayfair was decided, the Pennsylvania Department of Revenue (DOR) announced its position in SUT Bulletin 2019-01 that any person with $100,000 or more of sales in Pennsylvania was immediately required to collect SUT following Wayfair.
Act 13 largely codifies the DOR’s announced position by providing that all direct vendors and “marketplace facilitators” - i.e., persons who facilitate sales on behalf of “marketplace sellers” - who had $100,000 or more of sales in Pennsylvania during 2018 are required to collect and remit SUT for the period from July 1, 2019 through March 31, 2020. All such persons who have $100,000 or more of sales in Pennsylvania during 2019 or any subsequent calendar year must collect and remit SUT beginning in the second quarter (April 1) of the following calendar year through the end of the first quarter (March 31) of the subsequent calendar year.
Act 13 also eliminates the reporting-only option that was available to marketplace facilitators. Thus, when a marketplace facilitator facilitates sales in Pennsylvania on behalf of an out-of-state marketplace seller, the SUT collection responsibility falls on the marketplace facilitator, not the marketplace seller unless the marketplace seller fails to provide the marketplace facilitator with sufficient information to allow the marketplace facilitator to collect the tax (e.g., the marketplace facilitator cannot determine that a sale is to a customer in Pennsylvania or the sale of property that is subject to SUT). This is the case even if the marketplace seller makes sales of $100,000 or more in Pennsylvania through the marketplace facilitator. As long as a marketplace seller receives a statement from the marketplace facilitator indicating that the marketplace facilitator will collect and remit the SUT with respect to Pennsylvania sales made by the marketplace seller through the marketplace seller, the marketplace seller is relieved of SUT collection obligations (provided that the information the marketplace seller provides to the marketplace facilitator is sufficient to allow the marketplace facilitator to collect the SUT).
Vendor Absorption of Tax
Act 13 changes the long-standing prohibition against vendors advertising that the SUT imposed on certain sales will be absorbed in the vendor’s stated price. Effective immediately, vendors can advertise that the SUT will be absorbed by the vendor but must (i) state on any receipt provided to the customer that the vendor will pay the tax and not imply that the transaction is exempt from SUT, (ii) separately state the amount of the SUT on any receipt provided to the customer, and (iii) keep books and records documenting the purchase price and the SUT absorbed and remitted to the state.
Once the vendor satisfies the foregoing, the law provides that the vendor “shall be solely responsible and liable for any [SUT] . . . and shall not be entitled to a refund of such [SUT].” It is not clear to what extent the prohibition on refunds will apply (e.g., whether a vendor would be prohibited from claiming a refund if it just makes an erroneous overpayment during a tax period) or whether a blanket prohibition on refunds of overpaid tax would withstand constitutional scrutiny.
Malt Beverage Tax – Brew Pubs
The SUT treatment of malt beverages has traditionally differed from that of other tangible personal property in that the tax typically is collected from the retailer by the manufacturer or the distributor of the beverages and is not collected upon retail sales to consumers. Consequently, the SUT tax base typically is the lower amount paid by the retailer (i.e., the wholesale price of the beer) rather than the full retail price.
Following changes to the liquor laws that expanded the ability of brew pubs to sell directly to consumers for on or off-premises consumption, the DOR in SUT Bulletin 2018-02 announced that, effective July 1, 2019, brew pubs would be required to collect SUT on the retail price paid for its own products.
Act 13 supersedes SUT Bulletin 2018-02 and provides some relief to brew pubs by (i) delaying the implementation date to sales made after September 30, 2019, and (ii) providing that the deemed retail price of sales directly to the ultimate consumer for consumption on or off premises is 25% of the retail price of the product sold to the ultimate consumer for consumption on or off premises. Therefore, while brew pubs will soon have SUT collection obligations, the tax base should be closer to what would have been expected in the case of wholesale sales to retailers.
Act 13 also clarifies that Philadelphia County and Allegheny County may continue to impose their own local taxes on sales by manufacturers within those counties.
Other SUT Changes
Act 13 also provides for three new SUT exemptions, all of which are effective for sales occurring after December 31, 2019:
- The existing exemption for food and beverage sales by nonprofit organizations supporting youth sports is expanded to encompass nonprofit organizations supporting youth development programs;
- There is a new exemption for sales by volunteer fireman’s organizations that raise funds for use by such organizations; and
- There is a new exemption for the sale of building materials and supplies used for the construction or repair of an animal housing facility.
Corporate Net Income Tax (CNIT) – Change to Manufacturing Innovation and Reinvestment Deduction
Act 13 expands the existing CNIT deduction for “qualified manufacturing innovation and reinvestment" expenses by creating two tiers of investment and by increasing the allowable deduction. Under prior law, taxpayers who obtained pre-approval from the DOR and agreed to make at least $100 million of qualified investments within the initial three years could deduct 25% of the investment in each year.
Effective for tax years beginning after December 31, 2019, taxpayers can qualify for the deduction with a minimum investment of $60 million. Additionally, for the portion of investments in excess of $60 million and less than $100 million, the allowable deduction is increased 37.5% of the qualifying investment. The 25% cap on the deduction remains in place for any investment above $100 million.
Realty Transfer Tax Changes
- Act 13 adds, with an immediate effective date, a new realty transfer exemption for a transfer of property that is subject to an agricultural conservation easement to a “qualified beginning farmer,” defined as a person who:
- Demonstrates experience in the agriculture industry or related field or has transferable skills as determined by the Department of Agriculture;
- Has not received federal gross income from agricultural production for more than the 10 most recent taxable years;
- Intends to engage in agricultural production in Pennsylvania and to provide the majority of the labor and management involved in that agricultural production; and
- Obtains written certification from the Department of Agriculture confirming qualified beginner farmer status.
Changes to Economic Development Programs
- Act 13 allows the Department of Community and Economic Development (DCED) to designate additional Keystone Opportunity Zones in Cambria County, Clearfield County and Lancaster County. The counties must submit an application to DCED by October 1, 2021, and DCED is required to act on any applications by December 31, 2021.
- Act 13 made clarifying changes to the City Revitalization and Improvement Zone (CRIZ) law by (i) allowing the use of funds to finance revolving loans, and (ii) amending the definition of "infrastructure" to make clear that facilities that are ancillary to the primary facilities in the CRIZ qualify.
- Act 13 also made clear that the SUT exemption applicable in certain strategic development areas (SDAs) applies to the use of computers, laptops, software, and cell phones by employees assigned to a facility located within a SDA when such items are used by those employees at a location outside the SDA.
Extensions and Expansions of Existing Credit Programs
Act 13 made the following changes, all effective as of July 1, 2019, to various tax credit programs in the Commonwealth:
- Film Production Credit. Act 13:
- Defines "postproduction expenses" to include the purchase of music rights if (i) (a) the purchase is from a resident of the Commonwealth, (b) the purchase is from an entity subject to taxation in the Commonwealth, and (ii) the transaction is subject to PIT or CNIT;
- Extends the period for investing at least $400 million within a tax credit investment district from four years to eight years and the number of required soundstages located in the district is reduced from six to two;
- Permits the sale or assignment of tax credits to an entity filing on the same federal consolidated return as the seller or assignor without any reduction of the credit amount; and
- Increases the annual cap on total credits from $65 million to $70 million.
- Concert and Rehearsal Tax Credit. Act 13:
- Allows for the use, sale, or assignment of unused tax credits generated from rehearsals held after January 1, 2017 and before October 1, 2018.
- Increases the annual cap from $4 million to $8 million and updates the individual limitations per tour as follows:
- (1) purchases between $3 million and $4 million - $800,000 per tour;
- (2) purchases between $4 million and $8 million - $1.25 million per tour; and
- (3) purchases of at least $8 million - $2 million per tour.
- Resource Enhancement and Protection Tax Credit. Act 13:
- Raises the existing cap per eligible applicant from $150,000 to $250,000; and
- Increases the annual cap from $10 million to $13 million.
- Historic Preservation Incentive Tax Credit. Act 13:
- Extends the sunset date from 2020 to 2031;
- Allows non-commercial buildings to qualify for the program;
- Establishes an application fee of $2,000; and
- Increases the annual cap from $3 million to $5 million.
- Coal Refuse Energy and Reclamation Tax Credit. Act 13:
- Extends the sunset date of from 2026 to 2036;
- Provides for netting of federal tax credits; and
- Increases the annual cap from $10 million to $20 million.
- Rural Jobs and Investment Tax Credit. Act 13:
- Allows businesses with fewer than 150 employees to apply (decreased from fewer than 250 employees); and
- Increases the annual cap from $1 million to $6 million and increases the total amount that may be awarded over the life of the program from $6 million to $30 million;
- Neighborhood Assistance Tax Credit. Act 13:
- Adds investments in Youth and Adolescent Development Services as allowable policy goals of the program but provides that no more than $2 million shall be used for such purposes.
Other Miscellaneous Tax Changes
Finally, Act 13 made other changes to Commonwealth taxes:
- The transfer of property to a child aged 21 or younger from a natural parent, adoptive parent or stepparent will be exempt from Inheritance Tax effective for dates of death on or after January 1, 2020.
- The 2% Table Games Tax is extended through December 31, 2021.