Pennsylvania has enacted tax law changes projected to generate $752M in new revenue. The changes include severe restrictions on the vendor sales tax discount for timely filing, imposition of sales tax on digital downloads and software maintenance, and changes to the bank shares tax.

Yesterday, July 13, the General Assembly passed and Governor Wolf signed into law Act 84—tax code changes that are estimated to generate a net $752 million in new revenue.1 The act includes a number of changes that seem simple, but could have a huge impact on taxpayers.

Vendor Sales Tax Discount Capped Before Act 84, vendors who timely reported and remitted sales tax collections to Pennsylvania were permitted to discount their sales tax liability by 1%. For large retailers, this discount produced a large benefit for timely filing. Effective for monthly sales tax returns due August 20, 2016, this benefit is severely limited.

Under Act 84, the discount is now the lesser of 1% of the sales tax collected or (1) $25/return for monthly filers; (2) $75/return for quarterly filers; or (3) $150/return for semiannual filers. In other words, going forward, the discount is capped at $300 annually. For large retailers, this means the loss of a multimillion-dollar benefit. In fact, this change alone is expected to generate more than $55 million annually in new revenue.

There could be a challenge to this cap on the timely filing discount, so it might be worth discussing your options.

Digital Downloads and Software Maintenance Now Taxable Digital downloads were previously not treated as taxable tangible personal property by the Department of Revenue. Act 84 expressly includes digital downloads (such as apps, games and books), as well as video streaming, as enumerated taxable tangible personal property, effective August 1, 2016.

Act 84 also explicitly lists canned computer software as taxable tangible personal property, which is consistent with the holding of the Pennsylvania Supreme Court in Dechert LLP v. Commonwealth.2 Notably, Act 84 also characterizes software maintenance, updates and support for canned software as taxable tangible personal property. This treatment is in direct contradiction with the court’s decision in Dechert.

Bank Shares Tax Act 84 makes a number of changes to the Bank Shares Tax. For example, Act 84 increases the tax rate from 0.89% to 0.95%, effective for the January 1, 2017 tax period (that is, the tax return filed in 2017 based on equity and apportionment in 2016). Act 84 also “clarifies” that the goodwill deduction applies to the computation of both the bank shares tax base and the deduction for U.S. obligations. (In Reed Smith’s view, this point needed no clarification—the statute always allowed a deduction for goodwill from the tax base.) The act also permits taxable institutions to exclude the equity of Edge Act subsidiaries (formed pursuant to 12 U.S.C. § 611) from the bank shares tax base. This exclusion will be phased-in: starting with a 20% exclusion for calendar years beginning on or after January 1, 2018; and increasing to a 100% exclusion for calendar years beginning on or after January 1, 2022.

Act 84 also makes changes to the receipts-factor for computing the Bank Shares Tax. Specifically, it ties the “total receipts” included in an institution’s receipts-factor denominator to all income amounts reported on the institution’s call report. This is a change from the prior law, which computed the receipts-factor on a separate company basis. Act 84 also “clarifies” that an institution with receipts from both investment and trading assets can use Method 1 to compute its receipts-factor.3 Again, like the “clarification” for goodwill, Reed Smith’s view is that no clarification was necessary because the statute, before Act 84, allowed all banks—whether they had both investment and trading assets or not—to use either method.

Changes to Corporate Tax Returns and Amended Returns

Filing Deadline Act 84 extends the deadline to file the Pennsylvania corporate tax report to May 15. As a consequence, the Pennsylvania corporate tax return filing deadline will once again be 30 days after the federal filing deadline. (This change was necessary to take into account the change to the federal corporate income tax filing deadline to April 15 starting in 2016.)

Amended Returns In response to a recent case highlighting some problems with filing amended returns in Pennsylvania, Act 84 now requires the Department of Revenue to act on an amended return within one year of the amended return filing. If the Department fails to act on an amended return within that one-year period, it will be deemed accepted by the Department. Act 84 also allows a taxpayer to file a petition for review with the Board of Appeals, if it disagrees with the Department’s action on an amended return. That petition is due 90 days from the mailing date of the Department’s notice.

It is important to remember that even under Act 84, an amended return is not a substitute for a petition for refund with the Board of Appeals, because an amended report may not be filed if it “takes a position that is contrary to law or published department policy.” As a consequence, a taxpayer that files an amended return runs the risk that the Department will assert that the return is not valid, because it takes a position that is contrary to law or published department policy and, thus, is not covered by the deemed acceptance rule.

Additionally, filing an amended return extends the statute of limitations for assessments by one year from the date the amended return is filed. In contrast, filing a petition for refund with the Board of Appeals does not extend the statute of limitations for assessment.

Due to the restrictions on amended returns, a taxpayer seeking a refund should still file a petition for refund with the Board of Appeals, rather than filing an amended return.

Other Notable Changes

  • Tax Amnesty Program Act 84 authorizes a tax amnesty program allowing delinquent taxpayers to come forward and receive the benefit of: (1) a five-year lookback (instead of indefinite for non-filers); and (2) abatement of half of the interest owed. The program date is yet to be determined, but it will be before June 30, 2017.
  • Tobacco Tax Act 84 increases the tax on cigarettes and subjects e-cigarettes, smokeless tobacco products and roll-your-own cigarettes to tax.
  • Table Games Tax Act 84 increases the tax on gross table game revenue by 2 percentage points.
  • Lottery Winnings Taxable All lottery winnings are now subject to the personal income tax. This change is retroactive to January 1, 2016, and is estimated to bring in $16 million in annual revenue. A similar retroactive provision is being challenged in New Jersey.4