On September 30, 2019, the Pennsylvania Department of Revenue issued Corporation Tax Bulletin 2019-4 giving guidance on nexus for Corporate Net Income Tax purposes (“Bulletin”).

The Bulletin recites constitutional underpinnings of nexus, noting that the federal underpinnings of a state’s jurisdiction to tax is based on both the Due Process and the Commerce Clauses of the United States Constitution. A state’s jurisdiction to tax under the Due Process Clause “requires some definite link, some minimum connection, between and state and the person, property or transaction it seeks to tax.” Quill Corp. v. North Dakota, 504 U.S. 298, 306 (1974). Traditionally, the Bulletin states, this standard is met by showing that the entity has purposefully directed its activity into a jurisdiction. In the case of sales taxes, the Quill decision made clear that physical presence was a requirement.

For Commerce Clause purposes, a more rigorous standard has been set by precedent. In Complete Auto Transit v. Brady, 430 U.S. 274 (1977), the United States Supreme Court held that in order for a state tax to be valid under the Commerce Clause, it must:

(1) Apply to an activity with a substantial nexus to the taxing state;

(2) Be fairly apportioned;

(3) Not discriminate against interstate commerce; and

(4) Be fairly related to the services the state provides.

Id.

Building upon that foundation, in June 2018, the United States Supreme Court handed down Wayfair v. South Dakota, 138 S.Ct. 2080 (2018). The Bulletin focuses on the Wayfair discussion of “physical presence” not being a necessary factor for nexus. While the Bulletin notes that whether the “physical presence” standard also applied to net income tax (the Quill case dealt with sales tax) was an open question, the Bulletin sets forth the Department’s position that “at least prospectively, no physical presence standard exists for purposes of limiting the ability of a state to impose a net income tax on an out of state taxpayer as long as the constitutional requirements under the Due Process and Commerce Clauses of the United States Constitution are satisfied.” Bulletin, p.2.

The Bulletin states that Wayfair has confirmed that out of state corporations are considered to be doing business in Pennsylvania and/or carrying on activities in Pennsylvania to the extent they are taking advantage of the economic marketplace of the Commonwealth regardless of whether they are physically present in Pennsylvania. Therefore, the Bulletin makes clear the Department will require such taxpayers to begin filing Corporate Tax Reports if they meet the minimum thresholds for nexus under the United States Constitution. In fact, the Department will deem there to be a rebuttable presumption that those taxpayers having $500,000 or more of direct or indirect gross receipts from any combination of the following, sourced to Pennsylvania pursuant to the sales factor rules contained in 72 P.S. §7401, have nexus:

(1) Gross receipts from the sale, rental, lease or licensing of tangible personal property;

(2) Gross receipts from the sale of services; and/or;

(3) Gross receipts from the sale or licensing of intangibles, including franchise agreements.

The Bulletin recognizes that taxpayers without physical presence in the Commonwealth still may have the protection of P.L. 86-272. In that case, taxpayers should continue to file an RCT-101 and compete the necessary schedules to claim the exemption.

Finally, the Bulletin notes that the taxpayers with nexus as provided for in the Bulletin should file Corporate Tax Reports starting on or after January 1, 2020.

If you have questions about the Bulletin or any state tax matter, please feel free to contact a member of the McNees State and Local Tax team.

 

 

Our annual SALT seminar is attended by over 100 people interested in learning about the latest development in Pennsylvania state and local taxes.  Once again, the 2019 McNees SALT Seminar will be held at the Hollywood Casino in Grantville, Pennsylvania.  We are now in the process of planning a seminar that will provide valuable content.   More details will follow, but for now, please save the date of Friday, November 1, 2019!  We look forward to seeing you on November 1!

The Pennsylvania General Assembly recently passed an amendment to the state’s sales tax law that will be of interest to breweries operating taprooms in Pennsylvania. Effective October 1, 2019, breweries must begin collecting sales tax on each individual retail sale to patrons, but on a reduced tax base intended to approximate the amount of tax due at the wholesale level. The change in the law is a compromise measure intended to place breweries and other retail establishments on equal footing. While breweries will have to begin collecting sales tax on their products sold at taprooms, the special tax base makes for a much easier pill to swallow than what was initially floated by the Pennsylvania Department of Revenue (“DOR”).

Generally, Pennsylvania imposes sales tax on the sale of liquor and malt or brewed beverages at the wholesale level.  The sale of alcoholic beverages to patrons by bars and restaurants with retail liquor licenses is not subject to tax. A plain reading of the sales tax statute could have permitted the DOR to require the collection of tax on all sales of beer by a manufacturer without a “retail” liquor license. (Brewery and brewery pub licenses are not considered “retail” liquor licenses.) However, sales tax historically was not collected on taproom sales.

Then, in July 2018, the DOR issued Sales Tax Bulletin No. 2018-02, which indicated that, effective January 1, 2019 (later extended to July 1, 2019), Pennsylvania breweries would be required to collect sales tax on all product sold to the public for on-premises or off-premises consumption. Breweries were given an option to include the sales tax in the advertised price of their product or to separately state and charge sales tax on each individual sale.

The sales tax on taproom sales was going to be imposed on the full retail price of the beer.  Thus, taproom sales would have been subject to a much higher effective tax rate than the tax rate imposed on traditional beer sales at the wholesale level. The craft beer industry fought for “tax parity,” and the result was an amendment to the tax code whereby sales tax will be imposed on only 25% of the retail sales price of malt or brewed beverages sold by a manufacturer directly to the ultimate consumer for consumption on or off the premises. This is intended to approximate the amount of tax that would be due at the wholesale level. The tax code amendment is effective for sales occurring after September 30, 2019. The delayed effective date will allow breweries time to update their systems to comply with the new sales tax rules.

 

 

The Pennsylvania State Tax Equalization Board (“STEB”) has released the Common Level Ratio (“CLR”) real estate valuation factors for 2018.  The common level ratio is the ratio of assessed value to market value used to value properties in a particular county for property tax purposes, and is used for purposes of appealing property tax assessments effective for tax year 2020.  Click here to see the 2018 CLR list.  To determine if your property is currently over-assessed – take the properties current assessed value and divide it by the CLR listed for your county.  This will give you your property’s current implied fair market value.  If you know that your property’s current fair market value is for example $100,000 (based on a recent appraisal value) and the current implied fair market value is $200,000, then your property is over-assessed and an annual assessment appeal should be filed to lower your assessed value and consequently your real estate taxes.  If you have any questions regarding the CLR and how to determine if your property is over-assessed, please call Paul Morcom (717-237-5364) or Randy Varner (717-237-5464) to discuss.

The annual assessment appeal deadline of August 1, 2019 for assessed values effective for tax year January 1, 2020 is quickly approaching for the following Pennsylvania Counties:

Adams, Bucks, Butler, Cambria, Chester, Dauphin, Delaware, Erie, Fayette, Franklin, Indiana, Lancaster, Lawrence, Lehigh, Luzerne, Monroe, Montgomery, Northampton and York.

The annual assessment appeal deadline of September 1, 2019 for assessed values effective for tax year January 1, 2020 is on the horizon for the following Pennsylvania Counties:

Armstrong, Beaver, Bedford, Blair, Bradford, Cameron, Carbon, Centre, Clarion, Clearfield, Clinton, Columbia, Crawford, Cumberland, Elk, Forest, Fulton, Greene, Huntington, Jefferson, Juniata, Lackawanna, Lebanon, Lycoming, McKean, Mercer, Mifflin, Montour, Northumberland, Perry, Pike, Potter, Schuylkill, Snyder, Somerset, Sullivan, Susquehanna, Tioga, Union, Venango, Warren, Washington, Wayne and Westmoreland.

There are a few oddball counties that have to be different and thus the annual assessment appeal deadline for Berks County is August 15, 2019 and Wyoming County is August 31, 2019.  Philadelphia County is not a specific date, but instead the annual appeal deadline is the first Monday in October, which is the 7th this year. Allegheny County is the only county that has a deadline, March 31, that is actually during the year that you are appealing. Thus, the appeal deadline for assessed values effective for tax year January 1, 2020 in Allegheny County is March 31, 2020.

Each county has its own separate set of local rules pertaining to assessment appeals that need to be navigated in order to successfully file an annual assessment appeal.  If you own or lease commercial or industrial properties in Pennsylvania, please make sure that you are aware of these appeal deadlines. Additionally, if you are not sure if you should file an appeal on your property, please contact either Paul Morcom at 717-237-5364 or Randy Varner at 717-237-5464 to determine if an appeal is warranted for tax year 2020.

On July 26th from 12:30 – 1:30 p.m., McNees State and Local Tax team members Randy Varner and Paul Morcom will conduct a webinar for the Pennsylvania Society of Tax and Accounting Professionals.  The webinar will focus on reverse audits and recovering overpaid sales tax.  For more information, go to https://www.pstap.org/professional-education-events/cpe-catalog/?eventid=1389

 

The City of Philadelphia’s Office of Property Assessment has recently begun to send out Notices of Property Market Value for 2020.  If you think your proposed 2020 Market Value is incorrect, you may request an informal review by filing a First Level Review form by May 24, 2019.  If you choose to file a formal appeal, the appeal application must be submitted to the Board of Revision of Taxes on or before October 7, 2019.  Unlike most assessment appeal deadlines in Pennsylvania, which are either August 1 or September 1, Philadelphia’s assessment appeal deadline is the first Monday in October, which is October 7 this year.

Please contact Paul Morcom (717-237-5364) or Randy Varner (717-237-5464) if you have any questions regarding your 2020 Market value or Philadelphia’s appeal procedure.

Property owners in Allegheny County have until April 1, 2019 to file assessment appeals this year.  The usual appeal deadline in Allegheny County is March 31.  However, because March 31 falls on a Sunday the deadline is moved to the next business day, or April 1, 2019.

If you have any questions about appealing your property in Allegheny County, please contact Paul Morcom (717-237-5364) or Randy Varner (717-237-5464).

They’re Off and Running….

 

On January 28-30, 2019 both the House and Senate were back to kick off the 2019/2020 legislative session and wasted no time to introduce bills, which are of interest to tax practitioners. I’ve grouped the legislation by type for ease of reference. As in the movie Groundhog Day, some legislation is back for a second or third round.

Corporate Net Income Tax (CNI)

The House introduced bills to reduce the CNI to:

5.99% (HB70; Rothman); and 3.07% (HB72; Rothman)

 

The Senate joined in with proposals to reduce the CNI:

to 6.99% by reductions of .5%/yr. through 2024 (SB32; Brooks)

 

Also, of note is the resurrection of last session’s trio of bills to conform PA law to the IRC: like-kind exchange bill (HB105; Cox), which will parallel IRC §1031. The Senate companion bill is SB 201 (DiSanto). The NOL bill (SB 202; J. Ward); and Section 179 bill (SB 203; Hutchinson)

 

Deferral of capital gains on sale of stock of a business to an ESOP (IRC §1042)(SB 179; Browne)

Deferral of capital gains on investments in QOZ (SB 180; Browne)

 

Personal Income Tax

Impacts on PIT may be the result of bills which:

authorize per diems to support necessary, ordinary and reasonable   business expense (HB 69; Ryan)

—repeal the 1099-MISC non-resident withholding requirement (HB34; Ryan)

—impose a statute of limitations of 10 years (HB17; Ryan)

— increase the poverty tax exemption by an annual index (HB123; D. Miller) and Senate companion increases the exemption to $10,500 and $34,00 (SB 220; Hughes)

— authorize a delinquent income tax grace period (HB25; Snyder)

—-establish a first responders’ tax credit; (HB 208; Deasy)

 

Other tax credits under consideration will be:

educational investments in economically depressed areas (HB 42; Snyder)

pediatric cancer research (HB174; Caltagirone)

REAP credit eligibility clarification to include “individuals filing jointly”  (HB 241; Pickett)

—film tax credit carry forward, carry back and assignment among a consolidated group (SB225; Killion)

—increases cap on Manufacturing Tax Credit from $4mm-12.5mm (SB 266; Hughes)

—50% of toll expenses (HB 329; Warren)

—Adoption ($1,000) and foster care ($500) (HB296; Toohil)

 

Inheritance Tax

The House will consider bills designed to:

—eliminate the inheritance tax in full (HB77; Rothman)

—eliminate the inheritance tax for children age 21 and under (HB262; Metzgar)

And on the Senate side:

—phase out over 8 years the inheritance tax for siblings (SB27; Brooks)

—reduce inheritance tax on non-sibling relatives and phase out to 0 by 7/1/29 (SB28; Brooks)

Sales and Use Tax

            Both the House and the Senate are attempting to provide some relief for  firefighters:

—exclusion for purchase of firefighting equipment from firefighters’ own DiSanto (SB121)  

funds (HB209; Deasy) with a similar bill authorizing a tax credit of up to $500 (HB 376; Owlettt)

—exemptions on sales of prepared foods by volunteer fire companies (SB 83; Martin)

Solar energy use encouraged via exemption from sales tax (SB 148; Hughes)

—exemption for equipment for the visually impaired (SB 175; Browne)

And the House is looking out for banks in clarifying the application of sales  and use tax on canned and customized software for financial institutions(HB 19; Sankey)

—exemption clarification for traffic signals to include foundations, posts and mast arms ((HB 304; Toohil)

Home safety and school safety are the focuses of a sales tax exemption and a news sales tax imposition:

—exemptions on gun safe and vault purchases (SB103; Hutchinson)

—imposes a new 10% sales tax on video games with adult only or mature ratings (HB109; Quinn)

Realty Transfer Tax

            —exemption for children or surviving spouse if family home is sold within 5  yrs. of death (HB269; Driscoll)

 

 

Property Tax

— imposes real estate tax on PASSHE, state-related colleges, community colleges and independent colleges (HB191; Cruz)

—Authorizes local taxation of natural gas hazardous liquids pipelines (SB 264; Dinniman)

—Requires school boards to calculate and disclose unfunded pension liability

—property tax clean up legislation (HB 330; Emrick)

Tax Increment Financing

            —Includes wage tax revenue (SB 171; Browne) and state and local sales tax  (SB 172; Brown) in tax increment.

 

Property Tax and Rent Rebate Program

Amends the Taxpayer Relief Act of 2006 to:

—increase the income cap from $35,000 to $40,000

—prohibit assignment of rent rebates to a landlord (HB207; Deasy).

—exclude Medicare Part B payments from income(SB 272; J. Ward)

 

State Long-Term Leases

—requires legislative approval of state long-term leases which appear to have been used to circumvent legislative or voter approval of state  debt issuances. (HB 363; Lawrence)

Collection of Delinquent Taxes

—creates independent authority to act as clearinghouse for all state and local delinquent taxes

Constitutional Amendments

            —limits growth in state spending to the lower of two indices: avg. change in personal income for the 3 preceding calendar yrs. OR the avg. inflation rate plus the avg. percentage change in the state population over the  preceding 3 yrs. (SB116; Bartolotta)

—requires a 2/3 vote of the legislature to increase taxes. (SB121; DiSanto)

—exempts 100% disabled vets without the “injury due to war service” (HB 287; Simmons)

— eliminates all property taxes as of 7-1-26 (HB 382; Diamond)

 

Fasten your seat belts and call the State and Local Tax group or the Government Relations practice group at McNees Wallace & Nurick LLC for more information.

The McNees State and Local Tax Group will be presenting two upcoming webinars.  The first, on Thursday, January 31, 2019 from 12:00 p.m. until 12:45 p.m., will be presented by Randy L. Varner and Paul R. Morcom and will cover reverse audits and how they can help your bottom line.  More information, including instructions to register, can be found here:  https://www.mcneeslaw.com/reverse-audits-prnnsylvania/

The second, covering the Pennsylvania 2019-2020 tax proposals and budget, will be held on Thursday, February 7, 2019 from 12:00 p.m. until 12:45 p.m., and will be presented by Randy L. Varner and Sharon R. Paxton.  More information, including instructions to register, can be found here:  https://www.mcneeslaw.com/pennsylvania-tax-outlook-webinar/

We hope that you are able to join us for one or both of these webinars.  Please hurry and register because space is limited!