Pennsylvania Tax Changes and Tax Amnesty Program

by Ballard Spahr LLP
Contact

Ballard Spahr LLP

As part of the budget package, the Pennsylvania General Assembly made many significant changes to various Pennsylvania tax laws and the unclaimed property law (including a tax amnesty program) that are estimated to generate $752 million of additional revenue for the Commonwealth.

Tax Amnesty Program

The new law requires the Department of Revenue to administer a 60-day tax amnesty program ending no later than June 30, 2017. Amnesty will be available only to taxpayers who did not participate in the Commonwealth's 2010 tax amnesty program and will not be available to taxpayers who are on notice that they are the subject of a criminal investigation or have been named a defendant in a criminal complaint alleging a violation of tax laws. The program will apply to all taxes administered by the Department—including sales tax collection and employment tax withholding obligations—for which a taxpayer was delinquent as of December 31, 2015.

Eligible taxpayers may participate in the program by filing a tax amnesty return, paying the tax and 50 percent of the interest, and filing completed new and/or amended returns for each year of delinquency. In exchange, the Department will waive 50 percent of the interest and all of the penalties that otherwise would be imposed on the delinquent taxes. Additionally, eligible taxpayers with "unknown" tax liabilities—i.e., liabilities for which the taxpayer has not been contacted by the Department regarding unfiled returns and which are not currently under audit—will not be liable for any delinquent taxes of the same type that were due before January 1, 2011. If a taxpayer seeks to participate in the program for a liability that is subject to a deferred payment plan, as a condition for amnesty, the taxpayer must agree to pay the full tax amount by the end of the amnesty period.

Participation in the amnesty program is contingent on continued compliance with Pennsylvania tax obligations. Specifically, if, within two years from the end date of the program, unless a valid appeal is pending, a taxpayer becomes delinquent for three consecutive periods for semi-monthly, monthly, quarterly, or other periodic tax liabilities, or becomes eight months or more delinquent for filing or paying any annual tax liabilities, the Department can collect all penalties and interest waived pursuant to the amnesty program. Following an unsuccessful appeal, a taxpayer must pay the liabilities within applicable time limits to avoid becoming delinquent and liable for the waived penalties and interest. As was true of the 2010 amnesty program, participation in the program will waive any right to participate in any future amnesty program.

The Department is tasked with promulgating guidelines detailing the program and procedures by September 11, 2016.

Sales and Use Tax Changes

The new law subjects digital delivery (including streaming) of games, music, movies, and apps, among other digital products, to sales and use tax effective August 1, 2016, giving vendors very little time to prepare. Specially, the new law provides that "tangible personal property" subject to tax includes "video; photographs; books; any otherwise taxable printed matter; applications, commonly known as apps; games; music; any other audio, including satellite radio service; canned software, notwithstanding the function performed; or any other tangible personal property electronically delivered, streamed, or accessed."

Notably, in addition to subjecting digital products to tax and expressly adding canned software to the list of taxable products (which software was subject to tax by virtue of a 2010 Pennsylvania Supreme Court decision, Dechert LLP v. Commonwealth), the new law provides that updates, maintenance and support of these digital products are subject to tax. Although it was not expressly part of the Dechert holding, the Court indicated that maintenance and support for canned software likely were exempt from tax.

Other sales and use tax changes include:

  • A reduction in the vendor discount for vendors who timely report and pay tax. Prior to the new law, all vendors who reported and paid timely were entitled to a 1 percent discount. Effective for sales tax returns due after August 1, 2016, the new law caps the discount at the lesser of 1 percent or $25 per return for monthly filers, $75 per return for quarterly filers, and $150 per return for semi-annual filers, all capped at $300 annually. It is possible that some vendors may argue that this severely reduced cap violates the Uniformity Clause of the Pennsylvania Constitution;
  • The addition of criminal penalties for vendors who use "zappers" or devices/software programs that suppress sales and use tax with the intent to evade tax; and
  • The addition of exclusions from sales and use tax for returnable corrugated boxes used to deliver snack foods, services related to the setup, teardown, or maintenance of certain tangible personal property at the Pennsylvania Convention Center in Philadelphia or at a convention center or public auditorium established under the Second Class County Code (i.e., the David L. Lawrence Convention Center in Pittsburgh), or the County Code (e.g., the Lancaster County Convention Center and the Bayfront Convention Center in Erie), and property and services used directly in timbering operations.

Corporate Net Income Tax Changes

Before the new law, Pennsylvania corporate net income tax (CNIT) law did not provide for amended returns. By regulation, taxpayers could file amended returns but there was no requirement that the Department process such returns. Additionally, confusion and missed deadlines arose when taxpayers filed amended returns claiming refunds rather than filing formal refund claims with the Board of Appeals. The new law attempts to address these issues by requiring the Department to act on amended returns; providing that if there is no action by the Department within one year from filing (a period that can be extended to two years with mutual consent), the return is deemed accepted; and allowing a taxpayer to appeal to the Board of Appeals if it disagrees with the Department's action on an amended return. However, it is important to note when considering whether to file an amended return that, when a taxpayer files an amended return, the statute of limitations for the Department to assess tax with respect to the entire return (not just the item or items causing the taxpayer to file an amended return) is extended to the later of one year from the date of the filing of the amended report, or three years from the filing of the original return. Thus, if an amended return is filed near the end of the limitations period for the Department to assess CNIT, an amended return could give the Department a substantial amount of additional time to review the entire tax year and assess additional CNIT. As under prior law, the taxpayer may consent to an additional extension of the statute.

Importantly, an amended return may not be filed:

  • in lieu of a timely appeal of an assessment "except if a taxpayer would be entitled to an adjustment of the taxpayer's tax liability as defined by the regulations of the department;"
  • if the issue giving rise to the amendment has been addressed on its merits by an administrative tribunal or court;
  • or if the amended return "takes a position that is contrary to law or published department policy."

The last exception is particularly troubling because it leaves open the possibility that the Department could argue that an amended return is contrary to its policy and therefore not subject to the requirement that the Department act within one year. Therefore, taxpayers still should consider filing refund petitions with the Board of Appeals rather than amended returns.

The new law also clarifies CNIT return filing dates by providing that all CNIT returns are due 30 days after the federal return is due (or would be due if the corporation is not required to file a federal return). Prior to this change, the statute provided that all returns were due on April 15 unless there was a valid federal extension. This change addresses a federal change effective for the 2016 tax year establishing April 15 (instead of March 15) as the due date for federal income tax returns filed by calendar year corporate taxpayers, and ensures consistent treatment for non-calendar year taxpayers that do not file a federal extension.

Changes to Unclaimed Property Law

Under the new law, subject to certain conditions, the Treasurer can require unredeemed and unclaimed U.S. Savings Bonds issued to Pennsylvania residents to be escheated to the Commonwealth if the bonds are more than three years beyond the date of final maturity and the owner has not indicated an interest in such bond.

Additionally, the new law provides new details regarding escheatment of property held by a fiduciary or agent-in-fact, including 401(k) accounts and individual retirement accounts (IRAs). Such property now is presumed abandoned and unclaimed three years after the holder has lost contact with the owner (as now defined in great detail in the unclaimed property law) unless the owner has, within that period increased or decreased the principal amount in the account, accepted a distribution or other payment of principal or income; or otherwise indicated an interest in the property or in other property of the owner in the custody of the holder.

Finally, the new law provides detailed instructions to holders for determining the specific date on which a holder has "lost contact" with a property owner for purposes of the unclaimed property law and establishes new, very detailed, notification requirements for the holder of the property to send to the owner prior to reporting the property to the Commonwealth as unclaimed.

Bank Shares Tax

  • The new law raises the bank shares tax rate to 0.95 percent from 0.89 percent effective January 1, 2017;
  • Effective for years beginning after December 31, 2016, the new law eliminates the $100,000 gross receipts threshold in the statutory definition of "doing business in this Commonwealth;"
  • The new law allows a phased-in exemption from the tax base for subsidiaries formed under the federal Edge Act to conduct international business;
  • The bank shares tax apportionment rules allow banks to apportion receipts from investments and trading using either Method 1 (the fraction of other receipts that are sourced to Pennsylvania) or Method 2 (the fraction of investment and trading assets that are in Pennsylvania). The new law reverses a published position of the Department and makes clear that all banks—even those with receipts from both investment and trading assets—may elect to use Method 1; and
  • The new law also changes the bank shares tax base by clarifying that the goodwill deduction applies to both the bank shares tax base and the deduction for U.S. obligations, and changing the definition of "total receipts" used in an institutions apportionment denominator to include all receipts reported on the bank's call sheet; previously, the factor was calculated on a separate company basis.

New Credit/Incentive Programs and Changes to Existing Programs

The new law creates several new tax credit programs (to be administered by the Department of Community and Economic Development) beginning July 1, 2017: Manufacturing Tax Credit; Computer Data Center Equipment Incentive Program, Rural Jobs and Investment Tax Credit; Concert and Rehearsal Tour Tax Credit; Video Game Production Tax Credit; Coal Refuse Energy and Reclamation Tax Credit; Waterfront Development Tax Credit; and Mixed Use Tax Credit.

In addition to the new credits, the new law:

  • retroactively extends the Research and Development Tax Credit, which had expired on December 31, 2015;
  • re-establishes the Brewer's Tax Credit effective June 30, 2017;
  • expands the Tax Credit for New Jobs to provide enhanced benefits when a taxpayer hires a veteran; and
  • increases the Film Tax Credit cap and provides that post-production expenses can qualify as qualifying expenditures for purposes of determining the credit amount.

The new law also makes changes to several of the special economic development zone programs. Of note, the new law authorizes the creation of 12 additional Keystone Opportunity Expansion Zones. It provides that tax benefits to parcels within certain existing Keystone Opportunity Zones, Keystone Opportunity Expansion Zones, or Keystone Opportunity Innovation Zones can be extended for an additional 10 years if (among other requirements) the extension application reflects a commitment to create at least 350 new jobs in Pennsylvania and to make a capital investment in Pennsylvania of at least $35 million within three years of receiving the extension.

Other Notable Changes

  • Effective 60 days after the Department issues notices clarifying the procedures for collection, the new law expands the tax on tobacco products by increasing the tax on cigarettes to $2.60 per pack (an increase of $1), imposing a 40 percent tax on the wholesale price of electronic cigarettes, and imposing a 55-cent tax on several other types of tobacco products.
  • Retroactive to January 1, 2016, the new law provides that Pennsylvania Lottery winnings are subject to personal income tax and personal income tax withholding at the time of payment.
  • Effective September 11, 2016, the new law creates new exclusions from realty transfer tax for:
    • Transfers of certain agricultural conservation easements;
    • Transfers under the "Conservation and Preservation Easements Act;"
    • Transfers of certain perpetual easements to federal, state, or local governments or to conservancies;
    • Transfers to veterans' organizations; and
    • Transfers to land banks.
  • Effective August 1, 2016, the Table Games Tax rate is increased from 12 percent to 14 percent.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ballard Spahr LLP | Attorney Advertising

Written by:

Ballard Spahr LLP
Contact
more
less

Ballard Spahr LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.