- Pennsylvania: Governor Signs Budget Bill Introducing Many Tax Changes
- July 29, 2013
- Law Firm: McDonald Hopkins LLC - Cleveland Office
On July 9, 2013, Pennsylvania Governor Tom Corbett signed House Bill 465 into law. The bill contains a number of significant changes to the Pennsylvania tax code, including:
- Extension of the franchise tax for two years
- Imposition of a corporate income tax add back requirement for amounts paid to related entities
- Adoption of market-based sourcing for sales tax apportionment purposes
- Extensive changes to the current tax appeals process
To residents of Pennsylvania, many of these changes were not a surprise. Here is a brief overview of some of these changes:
- The Pennsylvania Legislature had intended that the franchise tax be eliminated by 2014, but extended it for revenue-raising purposes. The franchise tax is a tax on corporate entities recognized by the federal government that do business in Pennsylvania. The tax is based on an entity’s qualified capital stock value apportioned to Pennsylvania. For 2013, the rate is set at 0.89 mills, but the rate will be reduced to 0.67 mills in 2014. The rate will be further reduced to 0.45 mills in 2015, followed by total elimination of the tax for taxable years beginning after December 31, 2015. Although the tax is minimal, it is a burden on out-of-state businesses that conduct business in Pennsylvania.
- The bill closes a major corporate loophole by requiring corporations to add back to their income any payments made to related entities located outside of Pennsylvania. Many businesses with locations in different states were taking advantage of Pennsylvania’s tax system that allowed them to avoid Pennsylvania’s state income tax by conducting transactions with affiliated entities, effectively transferring income to entities in other states. H.B. 465 works to end this practice by requiring Pennsylvania corporations to include on their tax returns income transferred out of Pennsylvania through certain affiliate transactions. For taxable years beginning after December 31, 2014, no deduction is permitted for “an intangible expense or cost, or an interest expense or cost, paid, accrued or incurred directly or indirectly in connection with one or more transactions with an affiliated entity.” The statute provides some limited exceptions to this rule.
- Effective for tax years beginning after December 31, 2013, Pennsylvania adopted a market-based sourcing regimen in determining the location of certain sales. The following sales will generally be sourced to Pennsylvania:
1. The sale, rental, lease or other use of real property, if the real property is located in Pennsylvania
2. The rental, lease, or licensing of tangible personal property if the customer first obtained possession of the tangible personal property in Pennsylvania. If the tangible personal property is subsequently taken out of Pennsylvania, the taxpayer may use a reasonably determined estimate of usage in Pennsylvania
3. Services delivered to a location in Pennsylvania
4. Services delivered to a location both within and outside Pennsylvania are apportioned based on the percentage of the total value of the service delivered to the location in Pennsylvania
- The tax appeals system was amended to restructure the Board of Finance and Review into a three-person panel to hear all tax appeals. The panel of the Board of Finance and Review will be made up of three appointed independent tax professionals. The State Treasurer will appoint one of the individuals, while the Governor will appoint the other two. The Governor’s appointees require approval by the senate. Many tax professionals claim that because the appointees will be more connected to the political and election process, they will make more favorable tax rulings for taxpayers.
The bill is not limited to these changes; other changes include items, such as the repeal of the loans tax, rewriting of the bank shares tax, and the exemption of qualified family business interests from the inheritance tax.