As it is still early 2019, it is important to reflect on recent legislative, administrative, and judicial state and local tax developments in Pennsylvania and Philadelphia. This column will look at some of the most significant and discuss their prospective impacts.
Corporate Net Income Tax
Noteworthy corporate net income tax (CNIT) developments include the Pennsylvania Department of Revenue’s (DOR’s) issuance of guidance on conformity with the Tax Cuts and Jobs Act of 2017 (TCJA) and the aftershocks of the Nextel Communications of the Mid-Atlantic Inc. v. Commonwealth of Pennsylvania
decision on the net operating loss deduction.
– The TCJA permits businesses to fully deduct qualified property (new and used tangible property with a recovery period of 20 years or less) acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023, pursuant to IRC Section 168(k). Initially, DOR announced that it would decouple from this TCJA provision by requiring an add-back of 100 percent of the depreciation deduction, and only allow depreciation deductions for property placed prior to that date.1
Act 72 of 2018 reversed DOR’s policy. For deductions for property placed in service on or after Sept. 28, 2017, Act 72 modified the 100 percent add-back provision by allowing depreciation under the Modified Accelerated Cost Recovery System (MACRS) that would have applied to qualified property pursuant to Sections 167 and 168, and as if Section 168(k) does not apply. If a corporation sells or disposes of the asset, any unused depreciation may be deducted in that year. For property placed in service before Sept. 28, 2017, Act 72 permits an additional deduction in the earlier of the taxable year in which qualified property is fully depreciated for federal income tax purposes, or is sold or otherwise disposed of by a taxpayer to the extent the amount of depreciation claimed under Section 168(k) has not been fully recovered.2
Repatriation transition tax (RTT)
– By modifying Section IRC 965(a), the TCJA imposed a mandatory RTT on specified foreign corporations’ post-1986 accumulated earnings and profits, measured by the higher of accumulated earnings and profits as of Nov. 2, 2017, or Dec. 31, 2017. Section 965(c) provides for a deduction that ensures that repatriated income will be taxed at either 15.5 percent if cash and cash equivalents, or 8 percent if illiquid assets.
DOR’s guidance provides that RTT income under Section 965(a) is subject to CNIT because it is part of the federal taxable income.3
The RTT deduction under Section 965(c) is included in determining Pennsylvania’s tax base, thus reducing the RTT income. The net RTT amount is subject to a dividends-received deduction, based on the percentage of ownership, since Pennsylvania considers Subpart F income as a dividend. The RTT income is not included in the sales factor of the apportionment formula. DOR issued Form REV-798A to aid in calculating RTT for CNIT purposes.
Global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII)
– On Jan. 24, 2019, DOR announced that it would treat GILTI as dividend income that should be included in the CNIT base in the year in which it is recognized for federal income tax purposes. However, the distribution will not be subject to CNIT if, for federal tax purposes, it is considered to be previously taxed income. For dividends received from foreign corporations, Pennsylvania allows a dividends-received deduction for GILTI based on ownership percentages. Because Pennsylvania CNIT is computed without special deductions taken for federal income tax purposes, Pennsylvania does not permit a GILTI or FDII deduction. For apportionment purposes, GILTI is excluded from the sales factor.4
Net operating loss deduction
– In Nextel
, the Pennsylvania Supreme Court held that the $3 million net loss carryover deduction as applied to the taxpayer for the 2007 tax year violated the Pennsylvania Constitution’s Uniformity Clause, but retained the 12.5 percent limitation.5
Act 43 of 2017 increased the percentage limitation based on the taxpayer’s taxable income to 35 percent for 2018 and 40 percent for 2019 and thereafter.
In 2018, DOR announced that it would not apply the Nextel
decision to taxable years prior to Jan. 1, 2017.6
Thus, for tax years beginning after Dec. 31, 2006, through Dec. 31, 2016, taxpayers are permitted to determine CNIT liability by using the greater of the flat dollar cap or the percentage cap as permitted by statute prior to the Nextel
decision. For tax years beginning prior to Jan. 1, 2007, DOR will continue to apply a $2 million flat dollar limitation.7
Sales and Use Tax
On June 21, 2018, the U.S. Supreme Court, in South Dakota v. Wayfair Inc.
, overturned the physical presence standard for sales and use tax nexus.8
In response, more than 35 states imposed economic nexus standards through legislation, regulation, or various administrative guidance.
Effective July 1, 2019, Pennsylvania will impose an economic standard for sales and use tax nexus on persons who in the past 12 months made more than $100,000 of gross receipts sales into Pennsylvania.9
The new economic nexus provisions are intended to work together with the already existing Marketplace Sales Act passed under Act 43 of 2017. Act 43 requires a remote seller, marketplace facilitator, or referrer who does not maintain a place of business in Pennsylvania but had aggregate taxable sales in Pennsylvania of at least $10,000 in the prior 12 months, on or before March 1, 2018, to file an election with DOR to either collect and remit sales tax or to comply with the notice and reporting requirements.10
In SUT-18-004, DOR held that a taxpayer who offered private housecleaning services throughout Pennsylvania, and booked these services from its Allegheny County office, had to charge the local sales tax on any taxable services it provides to its customers, regardless of where the customer is located, because all the sales originated from a taxable county.11
Personal Income Tax and Withholding
Repatriation transition tax
– For individuals, since the repatriation transition tax is imposed on a “deemed dividend” that does not involve an actual distribution, it is not a dividend for Pennsylvania personal income tax purposes. The tax will apply when actual distribution is made out of earnings and profits to the taxpayer. Pass-through entities should adjust RTT income out of the Pennsylvania tax base by using Schedule M of PA-20S/PA-65 and including a statement with the return.12
– Similar to RTT, Pennsylvania does not consider GILTI (a “deemed dividend” that does not involve an actual distribution of cash) to be a dividend for personal income tax purposes. However, when actual distribution of cash occurs, it will be subject to personal income tax as a dividend and should be reported regardless of whether or not a taxpayer receives Form 1099-DIV.13
– In 2017, Act 43 introduced personal income tax withholding obligations on certain payments of nonemployee compensation and lease payments made to nonresidents. DOR issued Form REV-1832, 1099-MISC Withholding Exemption Certificate
, to assist with documentation and compliance.
The Pennsylvania Supreme Court held that the Philadelphia Beverage Tax (PBT) – often referred to as a soda tax – which imposes a 1.5 cent tax per fluid ounce, was not preempted by the Sterling Act and was not duplicative of the Pennsylvania sales tax. The court ruled that the PBT and the commonwealth’s sales tax have different subjects, measures, and payers, and accordingly distinct legal incidences.14
Effective July 1, 2018, Philadelphia Bill No. 180167 increased the rate of the Philadelphia Realty Transfer Tax from 3.10 percent to 3.278 percent. The increased rate will remain in effect through Dec. 31, 2036, and will be reduced to 3.178 percent effective Jan. 1, 2037, and thereafter.
On Jan. 29, 2019, Philadelphia finalized its Business Income & Receipts Tax (BIRT) economic nexus regulations to reflect the Wayfair
ruling. Effective for tax years beginning Jan. 1, 2019, a business lacking physical presence in Philadelphia will be deemed to have nexus, and will be subject to BIRT, if it has generated at least $100,000 in Philadelphia gross receipts during any 12-month period ending in the current year, and has sufficient connection with Philadelphia to establish nexus under the U.S. Constitution.15
Taxpayers and practitioners should review and understand the applicability of these important recent developments to ensure a successful 2019 and beyond.
1 Corporation Tax Bulletin 2017-02, Dec. 22, 2017.
2 Corporation Tax Bulletin 2018-03, July 6, 2018.
3 Information Notice Corporation Taxes and Personal Income Tax, 2018-01, April 20, 2018.
4 Corporation Tax Bulletin 2019-02, Jan. 24, 2019.
Nextel Communications of the Mid-Atlantic Inc. v. Commonwealth of Pennsylvania, Pa. Sup. Ct., No. 6 EAP 2016 (Oct. 18, 2017).
6 Corporation Tax Bulletin 2018-02, May 20, 2018.
South Dakota v. Wayfair Inc., 585 U.S. ___ (2018).
9 Sales and Use Tax Bulletin 2019-01, revised Jan. 11, 2019.
10 72 P.S. Section 7213.1(a); Sales & Use Tax Bulletin 2018-01, Jan. 26, 2018.
11 Sales & Use Tax Letter Ruling, No. SUT-18-004, Oct. 23, 2018.
12 Information Notice Corporation Taxes and Personal Income Tax, 2018-01
13 Corporation Tax Bulletin 2019-02.
Williams v. City of Philadelphia, Pa. Nos. 2 & 3 EAP 2018, July 18, 2018.
15 Amendment to BIRT Section 103: Economic Nexus, Jan. 29, 2019.
Ilya A. Lipin, JD, is a manager at Baker Tilly Virchow Krause LLP in Philadelphia. He can be reached at firstname.lastname@example.org.
Frank P. Czekay, CPA, JD, is a firm director at Baker Tilly Virchow Krause LLP in Philadelphia. He can be reached at email@example.com.