Canned software used by financial institutions excluded from Pennsylvania sales tax

Authored by Frank Czekay and Chuck Lukens

Pennsylvania Act No. 90, signed into law by Gov. Tom Wolf on Nov. 27, 2019, amended section 204 of the tax reform code of 1971 by addressing the applicability of sales and use tax on canned software used by financial institutions.

Takeaway:

• Effective Nov. 27, 2019, the sale at retail or use by a financial institution of canned computer software directly utilized in conducting the business of banking is excluded from sales and use tax.

Key definitions:

• “Financial institution” is defined as an institution doing business in the commonwealth subject to its Bank and Trust Company Shares Tax or the Mutual Thrift Institutions Tax.
• “Directly utilized” in conducting the business of banking is defined as “the purchase of canned computer software by a financial institution used in transactions with customers and service providers. The term does not include the purchase of canned software by entities, other than a financial institution such as holding companies and subsidiaries of a financial institution.”

Points to consider:

• Financial institutions which have paid sales tax or accrued use tax on canned software purchases on or after Nov. 27, 2019, should consider a potential opportunity to recover taxes paid
• Financial institutions should pay close attention to software purchases in the coming year and utilize the newly enacted exclusion to minimize the overpayment of sales or use tax
• Act No. 90 failed to address taxability of costs associated with maintenance and renewal of canned software for financial institutions
• Financial institutions should regularly monitor future guidance from the Department of Revenue regarding the scope and extent of the exclusion

Should you have any questions on this Pennsylvania sales and use tax development or any state tax matter, please contact a member of the Baker Tilly state and local tax team to ensure you are well prepared and in compliance.

For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.