Authored by Ilya Lipin and Frank Czekay
For taxpayers doing business in Pennsylvania and Philadelphia, 2017 brought a significant number of changes to sales and use tax, corporate net income tax, the tax procedure, new nonresident withholding requirements, the electronic payment mandate in Philadelphia and changes to Philadelphia's credits and incentives program.
Below, we highlight some of the key developments that will affect taxpayers’ obligations for 2017 and 2018 tax years, and beyond.
Marketplace sales: Effective March 1, 2018, remote sellers, marketplace facilitators or referrers with aggregate sales of $10,000 or more during the immediately preceding 12-calendar-month period had to file an election with the Department. Using the Annual Marketplace Sales Election, Form Rev-1830, taxpayers had to elect either to: (1) register to collect and remit sales tax imposed, or (2) to comply with the notice and reporting requirements.
The initial election had to be made prior to March 1, 2018, and will be effective April 1, 2018, through June 30, 2019. If an election is not submitted, the remote seller, a marketplace facilitator or a referrer is deemed to have elected to comply with the notice and reporting requirements. An election may be changed from notice and reporting requirements to collection and remittance at any time during a fiscal year. It is important to note that there are no other consequences to not making the election, i.e., penalties, other than the default election to comply with the notice reporting.
“Marketplace facilitator” is a person who assists with the sale at retail of tangible personal property by listing or advertising sale at retail in any forum and collecting payment from the purchaser and transmitting the payment to the person selling the property. “Marketplace seller” is a person who has an agreement with a marketplace facilitator pursuant to which a marketplace facilitator assists with the sales for the person. A “referrer” receives consideration to advertise a seller’s products and transfers a buyer to the seller, facilitator or other party to complete a sale, without collecting a receipt from the purchaser. Finally, “remote seller” is a person who does not maintain a place of business in Pennsylvania that through a forum sells tangible personal property at retail subject to sales tax. Taxpayers have different election and filing criteria depending into which category they fall.
It is important to note that a filing of the election form does not constitute registration for a Pennsylvania sales, use or hotel occupancy tax license.
Notice and reporting requirements
The new notice and reporting requirements may cause businesses electing not to register and collect sales tax to make changes to their sales function, invoicing and websites. In general, these requirements include:
- Notifying buyers that a use tax may be due in connection with the purchase and delivery because sales tax was not collected at the time of the purchase;
- Providing a yearly summary of purchases to the buyer; and
- Providing a summary to the Department relating the purchases, delivery address and buyer’s information.
Act 43 provides that recordkeeping requirements noted in 72 P.S. sections 7271 and 7272 apply to remote seller, marketplace facilitator or referrers.
Failure to comply with the selected election could result in a penalty assessment of up to $20,000 per violation per year or 20 percent of sales in Pennsylvania, whichever is less.
Corporate net income tax
Depreciation decoupling: In Corporation Tax Bulletin 2017-02, the Pennsylvania Department of Revenue announced that effective after Sept. 27, 2017, it will not allow any depreciation deduction on qualified property on which 100 percent bonus depreciation was taken for federal purposes under IRC section 168(k) until the disposal of such property. Thus, taxpayers who take advantage of the full expensing provisions allowed by the Tax Cuts and Jobs Act will be required to add back the amount of the 100 percent bonus depreciation taken when calculating their Pennsylvania corporate net income tax. However, the Department stated that it would continue to allow depreciation for property placed in service prior to Sept. 27, 2017.
This new Bulletin contradicts the Department’s Corporation Tax Bulletin 2011-01, which permitted recovery of:
- 100 percent bonus depreciation in the year such depreciation was claimed and allowed for federal income tax purposes;
- Previously disallowed and unrecovered 30 and 50 percent bonus depreciation of qualified property was a complete write-off of the remaining basis of such property for federal income tax purposes pursuant to an accounting method change in accordance with IRC section 481(a).
Net operating losses: In Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, Pa. Sup. Ct., No. 6 EAP 2016 (Oct. 18, 2017), the Pennsylvania Supreme Court held that the net operating loss carryover provision allowing corporations to carry over loss from prior years up to the greater of $3 million or 12.5 percent of their taxable income violated Pennsylvania constitution’s uniformity clause as applied to the taxpayer’s 2007 tax year. As a remedy, the Court struck the fixed-dollar limitation and only retained the 12.5 percent limitation. Thereafter, in the Corporation Tax Bulletin 2017-01, the Department announced that consistent with the Nextel decision, for the 2017 tax year only, the net loss carryover limitation of 30 percent of taxable income will be available. As of the date of this release, the Department has not announced whether they will pursue assessments under the open years against taxpayers that utilized the flat-dollar limitation.
Act 43 of 2017 removed the fixed-dollar cap limitation on net loss carryovers, but retained the limitation based on the percentage of taxpayer’s taxable income, which in 2018 is increased to 35 percent of the taxpayer’s taxable income from the current 30 percent limitation, and in 2019 and thereafter to 40 percent.
Effective Dec. 29, 2017, Act 43 reduced the period the taxpayer has to file a petition for reassessment and petition of review of tax adjustment to 60 days from 90 days after the mailing date of the respective notice. Similarly, the period to appeal the decision from the Board of Appeals to the Board of Finance and Revenue drops to 60 days from 90 days after the mailing date of the Department’s notice of the decision and order. The change does not apply to appeals to BFR of tax types not subject to the general administrative appeal statute 72 P.S. section 9704(b), such as malt beverage tax, property tax rebate, liquid fuels tax and amended corporate tax reports pursuant to 72 P.S. section 7406.1(g)(1).
Due to the expedited deadlines, taxpayers should consider whether they have sufficient resources to put together a timely appeal to the assessment.
Pennsylvania new nonresident withholding requirements
Please refer to our recent insight.
Philadelphia electronic payment mandate
Starting with payments due in April 2018 for the 2017 tax year, taxpayers who owe $5,000 or more on their Business Income and Receipts Tax or Net Profits Tax are required to pay those taxes electronically.
The payments may be made by eCheck and ACH free of charge. ACH payments require enrollment. Payments may also be made by a credit or debit card for a fee.
Credits and incentives
In addition to credits and incentives provided by Pennsylvania, the city of Philadelphia offers its own credits, grants and other incentives. For instance, the Jump Start Philly program exempts qualifying businesses from paying the Business Income and Receipts Tax during the first two years of operation. Additionally, fees are waived for eligible new businesses for a variety of licenses and registrations, including the Commercial Activity License. The Philadelphia Job Creation Tax Credit provides for a credit of $5,000 per qualified job created or 2 percent of the annual wages paid.
For more information on this topic, or to learn how Baker Tilly tax 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.