Pennsylvania Enacts Sweeping Tax Changes
(July 17, 2013)
On July 9, 2013, Pennsylvania Gov. Tom Corbett signed House Bill (HB) 465, which makes significant changes to various Pennsylvania tax provisions. The legislation extends the franchise tax for two more years, imposes a corporate income tax add-back requirement for amounts paid to related entities, adopts market-based sourcing for sales factor apportionment purposes, and makes extensive changes to the tax appeals process and the bank shares tax.
Corporate Net Income Tax
Intangible Expense Add-Back Provision
For taxable years beginning after Dec. 31, 2014, taxpayers will not be able to deduct intangible expenses, such as royalties, (or interest expenses related to such intangibles) paid to related parties. Various exceptions to the add-back requirement are provided, including an exception for arm's-length transactions that "do not have avoidance of tax as the principal purpose."
Market-Based Sourcing of Service Revenue Adopted for Apportionment Purposes
Effective for taxable years beginning after Dec. 31, 2013, market-based sourcing must be used to compute the sales factor for service receipts. Under market-based sourcing, a receipt is attributed to the state where the benefit of the service is received by the customer. If the benefit of a service is received both inside and outside of Pennsylvania, the Pennsylvania sales factor will reflect the percentage of total value of the service received at the Pennsylvania location. The existing cost-of-performance standard will continue to apply only in certain cases, such as receipts from the sale of intangible property.
Net Operating Losses
Pennsylvania currently limits the use of net operating loss carryforwards to the greater of $3 million or 20 percent of taxable income. The limits are increased to the greater of $4 million or 25 percent of taxable income for taxable years beginning after Dec. 31, 2013, and to the greater of $5 million or 30 percent of taxable income for taxable years beginning after Dec. 31, 2014.
Capital Stock/Franchise Tax
The capital stock/franchise tax, which was scheduled to expire at the end of 2013, is extended for two years. For taxable years beginning in 2014, the rate of tax will be 0.067 percent. For taxable years beginning in 2015, the rate of tax will be 0.045 percent. The capital stock/franchise tax will expire for taxable years beginning on or after Dec. 31, 2015.
Bank Shares Tax
Various changes to the bank shares tax will take effect for the calendar year beginning Jan. 1, 2014:
- The tax is imposed at a rate of 0.89 percent of bank equity capital. Previously, the tax was imposed a rate of 1.25 percent of total equity capital.
- The apportionment factor will be based only on receipts. The payroll and deposit factors have been eliminated.
- Bank equity capital will be based on a one-year valuation formula instead of a six-year moving average.
- Nexus rules are expanded to subject more out-of-state banks to the tax.
- Appeals now will be handled using the same administrative appeals process as other taxes. The provision that requires a special appeals process for the bank shares tax has been repealed.
Philadelphia Sales and Use Tax
Philadelphia is authorized to continue charging a 1 percent sales and use tax, which was originally due to expire in 2014. This local sales tax applies in addition to the state sales tax.
Personal Income Tax
Pennsylvania individuals currently are entitled to a credit for taxes paid to other states and a credit for foreign taxes paid. Beginning with the 2014 tax year, individuals no longer will be entitled to a credit for foreign taxes.
Changes to the Administrative Appeals Process
Under the new administrative procedures, both the taxpayer and the Board of Finance and Revenue will be allowed to present oral and documentary evidence during the tax appeals process. Previously, only the petitioner presented evidence. In addition, the board now has the flexibility to allow a compromise settlement with the agreement of both parties. The composition of the board also will change.
Credits and Incentives
Various clarifications and technical changes are included for the film tax credit, the job creation tax credit, and to city revitalization and improvement zones. The bill creates a new mobile telecommunications broadband investment tax credit for tax years beginning after Dec. 31, 2013, and an "Innovate Pennsylvania" tax credit program to encourage investment in the state.
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