At a Glance…
Today, the Pennsylvania Senate passed an amended version of House Bill 542 (HB 542), which includes tax code changes that are estimated to generate $571 million in new revenue. (A brief overview of some of the noteworthy changes is included below.) HB 542 passed the Senate with bipartisan support, and our understanding is that Governor Wolf also supports the bill. However, before the bill can move to the Governor and become law, the Pennsylvania House will have an opportunity to either accept, reject, or further amend the bill. The House’s next scheduled session is not until September 11, but they could be called back earlier for a special session.
Marketplace Provider Sales Tax Requirements
HB 542 would require marketplace providers to collect sales tax on each sale that they facilitate for a marketplace seller. The Senate Appropriations Committee estimated that in the 2017/2018 fiscal year alone, this provision would generate $43.5 million in new revenue. This provision follows on the heels of similar provisions seeking to impose sales and use tax obligations on marketplace providers enacted by Minnesota and Washington earlier this year. [See our prior alerts here and here.]
Remote Seller Study
HB 542 also requires that, if no federal legislation regarding remote sellers is enacted by December 31, 2018, Pennsylvania’s Independent Fiscal Office, along with the Department of Revenue (the “Department”), must complete a study to determine the legal and fiscal implications of mandating notice requirements for remote sellers.
Net Loss Changes
HB 542 amends Pennsylvania’s cap on net loss deductions, contingent on the Pennsylvania Supreme Court issuing a decision that “all or a part of the net loss deduction … has been deemed unconstitutional….” See our prior alert on the Nextel Communications case, in which the Pennsylvania Commonwealth Court found the current net operating loss cap in violation of the Pennsylvania Constitution here.
The amendment would be effective beginning with the 2017 tax year, and would remove the flat dollar limitation and replace it with a limitation based on a percentage of the taxpayer’s taxable income. In 2017, that percentage would be 35%, and in 2018 and thereafter it would be 40%. Interestingly, the legislation would be effective only when the Department files a notice of the decision in the Pennsylvania Bulletin. Thus, the Legislature has delegated to the Department some control over the timing of the effective date of the change, which is unusual and which may be constitutionally suspect. Further, the legislation would only be effective if the court’s decision “deems” the “deduction” unconstitutional. Thus, it is unclear if the amendment would be triggered by a decision invalidating the limitation, not the deduction itself. And it is unclear if the amendment would be triggered by a decision affirming in Nextel Communications since that decision did not “deem” any statutory provision “unconstitutional,” but rather held that the current net operating loss was unconstitutional as applied to Nextel Communications’ particular facts.
Imposition of Severance Tax (in addition to Impact Fee)
HB 542 would impose a new severance tax on the extraction of natural gas from unconventional wells. The rate would range from 1.5–3.5 cents per thousand cubic feet of natural gas severed, and would be tied to the average price of natural gas for a particular year (based on the same schedule currently used for the Impact Fee). Notably, under this bill, the existing Impact Fee imposed on natural gas producers would remain intact, which would result in producers paying both the Impact Fee and the new Severance Tax. This would be a major change. Recall that when the Legislature enacted the Impact Fee in 2012, it included a statutory provision that would automatically repeal the Impact Fee in the event a Severance Tax were enacted and imposed, in order to protect producers from this exact situation. HB 542 removes that protection.
Gross Receipts Tax on Natural Gas
HB 542 would bring back the imposition of a 5.7% gross receipts tax on sales of natural gas. Pennsylvania imposed a gross receipts tax on natural gas until 1999, when it was repealed in connection with the deregulation of Pennsylvania’s natural gas industry. HB 542 would essentially bring back that same tax. The tax would be imposed on receipts of natural gas supply companies and natural gas distribution companies from “sales and delivery of natural gas to retail gas customers within this Commonwealth.”
Gross Receipts Tax Increase on Telecom and Electric Companies
HB 542 would increase the gross receipts tax rate on telecommunications companies from 5% to 6%, and would increase the gross receipts tax rate on electric companies from 5.9% to 6.5%.
Help Desk and Call Center Support
HB 542 would reverse the Pennsylvania Department’s position that sales of help desk and call center support are sales of tangible personal property subject to sales tax. (See our prior alert here.)
Under HB 542, the definition of tangible personal property for sales tax purposes is amended to include “support” relating to purchases of canned software, with the exception of “separately invoiced help desk or call center support.” To the extent support relating to canned software is not separately invoiced, but is bundled with other “support” services, such services would be taxable. HB 542, however, does not define or clarify what “support” entails, leaving the term open to the broad interpretation articulated by the Department in its recent guidance.
Electric Grid Virtual Financial Transactions Tax
HB 542 would impose a 5% gross receipts tax on all electric grid virtual financial transactions in the electricity market administered by the regional transmission organization (PJM). The tax would be imposed on, and owed by, the entity initiating the electric grid virtual financial transaction. However, the tax would be remitted to the Department by PJM.
An “electric grid virtual financial transaction” is defined as “an increment transaction, decrement transaction or an up-to-congestion transaction.” This tax seeks to reach the derivative electricity trading on the electric grid energy market administered by PJM, which is headquartered in Pennsylvania.
Tax Appeals Process Reform
HB 542 would also drastically reform the Pennsylvania tax appeals process. Specifically, the bill provides for:
- A Shortened Appeal Period. The period for appealing a Notice of Assessment would be reduced to 60 days (from 90 days), and the period to appeal a decision from the Board of Appeals to the Board of Finance and Revenue would also be reduced to 60 days (from 90 days).
- Unilateral Department Authority to Hold Cases in Abeyance. The Department would be granted unilateral authority to hold a case in abeyance pending the outcome of another case that the Department deems to involve a similar issue.
- Compromise Payments Due within 60 Days. Under HB 542, if the taxpayer and the Department reach a compromise regarding a pending appeal whereby the taxpayer will owe the Department an amount, the taxpayer must remit full payment within 60 days of the compromise. If full payment is not remitted within that time frame, the compromise would be voided and a decision denying the taxpayer’s claim would be issued.
- New Small Claims Procedure. HB 542 would introduce an optional summary claims procedure for claims not exceeding $6,000.