Although there were no historic changes to the taxing regime contained in Pennsylvania’s 2022-2023 budget, there were still some significant legislative modifications to tax rates and nexus standards as well as the enactment of new corporate income, sales and use, and personal income taxes.
Changes to the Corporate Net Income Tax include a reduction from the current 9.99 percent rate. The rate for tax years beginning after December 31, 2022 will be 8.99 percent. It will then reduce 0.5 percent each subsequent year until it reaches 4.99 percent for tax years beginning on or after January 1, 2031.
While the reduction in the corporate income tax rate is a move in the right direction and should encourage business development in the State, it is arguably symbolic as businesses have already implemented planning to minimize their liability. Arguably, the shift to a single sales factor provided relief to businesses located in Pennsylvania years earlier by allowing them to apportion a significant amount of income outside Pennsylvania to states with a lower rate.
Perhaps more noteworthy than the reduction in the corporate income tax rate, the budget also codified the State’s economic nexus standard. While the Department of Revenue adopted an economic nexus standard years earlier, the budget now makes the administrative policy law.
Businesses with at least $500,000 of sales apportioned to Pennsylvania will now have nexus with the State. Also included in the budget are activities that have been identified as creating a substantial presence in the State, thereby creating nexus. Those activities are as follows:
- Licensing or leasing intangible property that is utilized in Pennsylvania;
- The sale of intangible property that was used by the corporation in Pennsylvania; and
- Regularly engaging in intangible sales activities with customers located in Pennsylvania.
Applying these new nexus-creating activities to businesses not currently filing tax returns in the State will require the Department of Revenue’s involvement. Regulations will be needed to provide guidance for business affected by this new law.
A companion provision to the nexus standard relates to the apportionment of intangible income associated with the licensing of intangible assets. Taxpayers will source intangible income from the licensing of assets as well as income generated from the sale of contractual rights, securities factoring, and secured and unsecured loans, using a market sourcing methodology. The use of market sourcing for intangible income will be effective for tax years beginning after December 31, 2022.
The budget also adopts a throw out provision for any receipts that are not addressed in the legislation. Noticeably absent from the sourcing rules is goodwill. Historically, goodwill has been included in the receipts factor. Going forward, receipts from the sale of goodwill may not be included in either the numerator or denominator of the receipts factor. The elimination of goodwill from the denominator could result in a significantly higher tax for businesses in the year of a sale where a significant amount of purchase price is allocated to goodwill.
The budget also enacted several changes to the Personal Income Tax Code in Pennsylvania. The notable changes are as follows:
- Conformity with IRC section 179. Pennsylvania decoupled from this section and limited a taxpayer’s deduction to $25,000. The new law now increases the 179 deduction to $1,080,000 effective for tax years beginning after December 31, 2022.
- IRC section 1031 conformity for tax years beginning after December 31, 2022. Property placed in service after December 31, 2022 will qualify for the deferral of gain on the sale of real property if the proceeds are reinvested in a similar property.
Unfortunately, the legislation did not enact a pass-through entity level tax, similar to other states, as a means to address the SALT limitation enacted by Congress.
I expect that we will see additional guidelines issued by the Department of Revenue related to the administration of these law changes. If or when these administrative guidelines are issued, we will provide an update.
If you have any questions or would like to discuss this topic in further detail, please reach out to Thomas Frascella, Director, State and Local Tax, at Email or contact any member of our State and Local Tax team.