Mar 16, 2015
From KPMG TaxWatch
Recently, legislation was introduced that would enact the tax provisions necessary to implement Governor Wolf’s proposed FY 2015-16 Executive Budget. Although we have reported on the general proposals in previous TWISTs, the newly-released legislation provides additional details—notably on the proposed sales and use tax changes. On the corporate net income tax side, the budget legislation would reduce the tax rate from 9.99 percent to 5.99 percent for tax years beginning on or after January 1, 2016. The rate would be further reduced to 5.49 percent for tax years beginning on or after January 1, 2017, and then again to 4.99 percent beginning in 2018. Another change would be to adopt market sourcing rules for receipts from licensing intangible property. Specifically, such receipts would be attributable to Pennsylvania to the extent the licensee uses the intangible property in the state. One of the more significant changes is that for tax years beginning after December 31, 2015, the budget legislation would implement water’s edge mandatory combined reporting. The water’s-edge unitary group would include certain foreign entities, including companies that are doing business in certain countries identified as ‘tax havens.’ Currently, for taxable years beginning after December 31, 2014, NOLs are capped at the greater of 30 percent of taxable income or $5 million. Under the budget legislation, net operating losses for each combined group member would be capped at the greater of $3 million per year or 12.5 percent of taxable income. Losses must be used by the entity generating the loss and cannot be shared among entities in the group. Interestingly, the legislation provides that the Secretary of Revenue must generally follow the rules, regulations and procedures under IRC section 482, but that no inference will be drawn from the fact that the IRS has not conducted a 482 audit of a taxpayer’s international transactions. Another provision affecting corporations is that the capital franchise/stock tax would be allowed to sunset, as scheduled, for tax years beginning on or after January 1, 2016. Although banks subject to the bank shares tax would not be subject to the new combined reporting requirements, the legislation would repeal a rate reduction slated to go into effect January 1, 2014. Under the proposal, the bank shares tax rate would not decrease to 0.89 percent, but would remain at the 2013 rate of 1.25 percent, effective retroactively to January 1, 2014. In addition, the legislation would repeal a provision that exempted out-of-state taxpayers with $100,000 or less receipts apportioned to Pennsylvania. As a result, out-of-state institutions generally will be “doing business” and subject to the bank shares tax if they have any income sourced to Pennsylvania under the State’s customer-based sourcing rules. The proposal also would make certain other bank shares tax changes to clarify provisions enacted in 2013.
The budget proposal also includes certain personal income tax changes, most notably an increase in the flat rate from 3.07 percent to 3.70 percent effective July 1, 2015.
On the sales and use tax side, effective January 1, 2016, the sales and use tax rate would be increased from 6.0 percent to 6.6 percent. The tax base would be broadened by taxing digital equivalents and a plethora of services. Specifically, the definition of tangible personal property would be revised to include a host of items delivered or accessed electronically or digitally, including, but not limited to, videos, books, newspapers, magazines, apps, games, and software. These items would be considered tangible personal property whether purchased singly or by subscription. Furthermore, the definition of “sale at retail” and “use” would be revised to include all services enumerated in new subsection “dd” rendered for consideration or obtained by the purchaser, unless specifically exempted. New subsection “dd,” which is entitled “miscellaneous services,” extends for 30-plus pages and lists almost every imaginable service—from legal and accounting to singing telegram, cremation, and baby shoe bronzing services. Several new exemptions are proposed to reflect the shift to taxing almost all services, including an exemption for professional, technical, and business services rendered to another business as well as incorporating the concept of services into the ‘sale for resale’ exemption. One notable change to the sales and use tax administration provisions is that the budget legislation adopts a 10-year statute of limitations for the Department to enforce the sales tax law against a person who has collected tax from a purchaser, but not remitted the same to the Department. Also, currently, Pennsylvania allows a one percent vendor discount for timely remitting sales and use tax. Under the legislation, the vendor discount would be capped at $25 per month for monthly filers ($75 for quarterly filers and $150 for semi-annual filers).
The funds raised from the new and increased taxes would provide property tax relief, increased funding for education, and new incentives for companies that create jobs, notably manufacturing companies. Please stay tuned to TWIST for future updates on the budget legislation.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.