The Pennsylvania Department of Revenue has issued a letter ruling addressing the extent to which it considers support services to canned computer software to be subject to Pennsylvania sales and use tax. See Ruling No. SUT-17-001.

Effective August 1, 2016, Pennsylvania’s sales tax statute was amended to impose tax on an array of digital goods, as well as “maintenance, updates and support” for digital goods, including canned computer software. The term “support” is not defined in the taxing statute or in prior guidance issued by the Department. However, Ruling No. SUT-17-001 broadly defines “support” to include “consulting” and “training” related to canned computer software, in addition to various technical support services. While some questions remain, it appears that the Department’s interpretation of the term “support” may include some services not commonly viewed as computer “support” services.

Finally, the Department clarified that the provisions of its policy statement at 61 Pa. Code § 60.19 no longer apply to the extent they are inconsistent with the current statutory provisions.

On Tuesday, February 7th, Governor Wolf presented his 2017 budget address to a joint session of the Pennsylvania General Assembly.   The Governor’s proposal includes a $1 Billion increase in the tax burden on Pennsylvania businesses and individuals. While the Governor stated that he was proposing no “broad-based tax increases,” his budget does raise revenues significantly while not addressing pension liability. We are currently analyzing the specifics of the Governor’s budget proposal and will provide more information in future posts. For now, however, here are some high level takeaways on the tax front:

  • Severance Tax on Natural Gas Extraction
    • rate of 6.5% of the value of the natural gas, effective July 1, 2017
    • amounts paid in Impact Fees may be taken as credit
    • Tax Impact: $293.8 million
  • Corporate Net Income Tax
    • a net operating loss cap of 30% of taxable income, effective for tax years beginning January 1, 2018 and after
    • a change in the base of the Corporate Net Income tax to combined reporting, effective for tax years beginning after January 1, 2018, in conjunction with a steadily declining Corporate Net Income rate reduction to 6.49% by 2022
    • Tax Impact: $81.2 million
  • Sales and Use Tax
    • elimination of Sales and Use Tax exemptions for custom software and computer services, prepared food sold to airlines, aircraft sales, maintenance and repairs, and certain business storage, effective July 1, 2017
    • Tax Impact: $489.8 million
  • Insurance Premiums Tax
    • application of the Insurance Premiums Tax for most insurance entities that were previously exempt, effective for tax years beginning after January 1, 2018
    • Tax Impact: $141.5 million
  • $25 Police Charge
    • a $25 per person charge for those individuals residing in a municipality relying exclusively on the Pennsylvania State Police

The proposal also includes a $100 million reduction in available tax credits. Further, the Governor estimates that his proposal to raise the minimum wage to $12.00 an hour will generate an additional $95 million in revenue.  This year’s proposed General Fund Budget is $32.3 Billion, an increase of 1.8% over last year.

Also significant is the Governor’s estimated savings of $2 billion from planned consolidation of four state agencies and eliminating shared and duplicative state government functions, divesting unused state property and not filling vacant staff positions. There are already comments from the Republican majority House and Senate questioning whether these actions can provide such savings.

Additionally, the Governor proposed increased funding to support Schools that Teach. This includes:

  • $125 million in new basic and special education funding;
  • $8.9 million in new funding for the Pennsylvania State System of Higher Education universities;
  • $75 million in new early childhood education funding;
  • $3 million for Career and Technical Education Equipment grants; and
  • $62 million for Career and Technical Education.

The Governor stated his proposal also supports his Jobs That Pay initiative as follows:

  • Providing a “one-stop shop” at the Department of Community and Economic Development to provide small businesses with access to services that allow the business to grow;
  • The Manufacturing PA Initiative links job training to careers that provide higher incomes and career advancement; and
  • New policies with regard to funds issued to businesses for job creation and strengthening its “clawbacks” when jobs are not created especially for businesses who relocate from Pennsylvania.

At this juncture, the Pennsylvania Senate and House Appropriations Committees will review the Governor’s proposal and ask questions in budget hearings with state agencies and interested parties who rely on government funding. The General Assembly will respond and work towards an agreed upon spending and revenue plan with the goal of reaching agreement with the Governor to have a budget by June 30, 2017.

We will be watching budget hearings and continue to study these proposals and will post regularly throughout the budget process. Please let us know should you have interest in any specific subject that affects your business.

Unclaimed Property Reporting – New Pennsylvania “Due Diligence” Deadline Approaching

In the fall of 2016, a new “due diligence” requirement was added to Pennsylvania’s unclaimed property law. Holders of reportable property valued at $50 or more are now required to send notice to the owner of the property no more than 120 days and no less than 60 days before the holder’s unclaimed property report is to be submitted to the Treasury Department, if they have an address for the owner that is not known to be inaccurate. See 72 P.S. § 1301.10a. The filing deadline for 2016 unclaimed property reports is April 17, 2017. Therefore, the statutory deadline for sending the required notices is February 16.

The required notice must include (1) a description of the property, (2) a description of the property ownership, (3) the value of the property, if known, and (4) contact information for the holder. The written notice must be sent by first class mail unless the owner has previously agreed to a method of electronic notice. Holders are required to submit an affirmation of compliance with the “due diligence” requirements with their unclaimed property reports. No costs or fees may be imposed on property owners with respect to issuance of the required notices.

If a property owner reaches out to the holder before the unclaimed property report is filed, the property will not be reportable as unclaimed property if it is returned to the owner or the owner “indicates an interest in” the property.

 

 

As a result of guidance issued by the Pennsylvania Department of Revenue (“DOR”), solar generators may qualify for the sales and use tax manufacturing exclusion.  Accordingly, solar generators’ purchases of expensive machinery, equipment, parts and foundations, and supplies would be excluded from Pennsylvania’s sales and use tax.

The DOR issued guidance in Sales Tax Bulletin No. 2010-01 and Sales and Use Tax Ruling No. SUT-10-0001 on tax exclusions for Pennsylvania-based solar generators.  As a result of this guidance, taxpayers constructing solar generation facilities in Pennsylvania could qualify for the state sales and use tax manufacturing exclusion.

Eligibility for the Exclusion:

The guidance suggests that in order to qualify as being “engaged in the business of manufacturing electricity,” the following must apply:

  • The electricity production is conducted in an independent, separate and distinct location, utilizing independent, separate and distinct machinery and supplies devoted predominately to electricity producing activities.
  • The electricity production is the responsibility of employees assigned to the job of electricity production and whose duties are predominately related to electricity production.
  • Separate accounting or interdepartmental billing is provided to reflect the cost of operating electricity production activities and to charge these costs against any other business activities conducted by the electricity producer.
  • The electricity production activities are separate and distinct from any other business activities of the electrical producer.
  • Electrical production activities are of sufficient size, scope and character that they could be conducted on a commercially viable basis separate and distinct from any other business activities of the electricity producer.

Accordingly, if a Pennsylvania solar generator meets all of the criteria listed above, it could claim the manufacturing exclusion from sales and use tax on the purchase of equipment, machinery, parts and foundations therefore, and supplies claimed to be directly used in electricity manufacturing.  The particular generator in the ruling planned to sell the output to the public utility.  It seems generators selling to the wholesale market or entities could also qualify; however, the DOR has not issued a specific guidance on this situation.

Claiming the Exclusion:

A contractor building a Pennsylvania solar generation facility could also claim the manufacturing exclusion on the purchase of equipment, machinery, parts and foundations therefore, and supplies to be installed pursuant to a construction contract.  The contractor would have to execute and tender a properly completed Pennsylvania exemption certificate (Form REV-1220) to the Pennsylvania licensed vendor.  The contractor must also obtain a properly completed Pennsylvania exemption certificate (Form REV-1220) from the person/entity with whom he enters into such construction contract in order to protect himself in case of a Pennsylvania sales and use tax audit.

Recovering Pre-paid Sales and Use Tax on Exempt Purchases:

If a Pennsylvania solar generator or a construction contractor has already paid sales and use tax on purchases that could have been exempt from taxation, they may be able to claim a refund of the tax paid on purchases made in the last three years.

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If you have any questions on whether your facility qualifies for the manufacturing exclusion or whether you may be entitled to sales and use tax refunds, please contact Paul Morcom, or any member of McNees’s tax group, to discuss.