Pennsylvania Tax Update – Finally, a Balanced Budget!
Enacted 2017-2018 State Budget
It’s official now that the Governor signed into law the revenue portion of the state budget yesterday. With the State Legislature passing the budget-related bills last week, essentially the only uncertainty at that point was whether the Governor would actually sign the bills or would instead allow for them to pass into law without his signature, similar to how he handled previous budgets. With his signature, the Governor ended a nearly four month budget stalemate.
During the standoff that ensued beginning from the Governor’s proposed budget back in February until last week, many different revenue measures were proposed. The spending portion of the budget passed relatively timely back in July, but lawmakers struggled to agree on the best avenues to close the over $2 billion shortfall without enacting broad base tax increases or expansions. Among the various revenue proposals that had gained traction at some point in the process were: expansion of the state sales tax base to business storage services, a special 5% hotel and lodging tax, increases or expansion of gross receipts tax to certain consumer utilities, and a Marcellus Shale severance tax. Ultimately, the Legislature was able to achieve its goal of no broad-based tax increases or expansions. However, without the ability to tap into the same fund transfers again next year, this could leave the door wide open for a major stand-off on taxes during what will be an election year for the Commonwealth.
For now, there were a few key highlights from the enacted revenue portion of the $32B general fund budget:
- Expansion of gambling revenue to include internet-based games, slot machines at truck stops, as well as another round of casinos;
- Authorization of a $1.5B transfer from the state tobacco settlement fund;
- A requirement for online market-place facilitators (ex. Amazon, Ebay, etc.) to either collect sales tax on behalf of its affiliated sellers or comply with use tax notice requirements, similar to what a number of states have recently enacted;
- Corporate Net Income Net Operating Losses (NOL) are now capped at 35% of taxable income in 2018, and will increase to 40% of taxable income in 2019. This legislation removes the dollar cap limit option that most companies in Pennsylvania with NOL’s are subject to. More on this under the Nextel decision later.
- Legalization of certain consumer fireworks along with imposing a 12% tax on them;
- Time periods for making appeals to Board of Appeals and Board of Finance & Revenue was decreased from 90 days to 60 days; and
- Separately-stated computer software support services such as help desk or call center support are statutorily nontaxable. This provides much needed clarification regarding Act 84 legislation passed last year, which made digital products subject to sales tax effective August 1, 2016.
State Supreme Court Decision in Nextel
As mentioned earlier, the constitutionality of the NOL dollar cap limit was brought into question two years ago in the Nextel decision at Commonwealth Court (Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth, 129 A.3d 1 (Pa. Commw. Ct. 2015). The court decided in the taxpayer’s favor that the dollar cap limit was unconstitutional, and by Pennsylvania limiting Nextel to the greater of the dollar cap ($3M in 2007) or a percentage (12.5% in 2017) violated the Uniformity Clause. The rationale for the argument was that the law unfairly benefited smaller taxpayers that were able to eliminate up to 100% of their taxable income with NOL’s, because their taxable income fell under the dollar cap limit. The court agreed with the taxpayer and issued a decision for a $4M refund to Nextel.
The Commonwealth appealed the decision to the Pennsylvania State Supreme Court. In a unanimous decision two weeks ago (Nextel Communications of the Mid-Atlantic, Inc. v. Commonwealth of Pennsylvania, No. 6 EAP 2016 (October 18, 2017)), the court agreed with the lower court that the NOL dollar cap was indeed unconstitutional. However, it disagreed with the lower court on the remedy. Instead of granting Nextel a refund, it effectively severed the dollar cap from the statute leaving Nextel with the NOL it had originally been entitled too on the percentage cap limit.
The effect on Pennsylvania taxpayers with NOL’s may be substantial. One of the statistics presented in the case was that of the companies that took NOL deductions in 2007, 98% were subject to the dollar limit opposed to the percentage limit. By effectively eliminating the dollar cap from the statute for previous years, taxpayers who benefited from NOL deductions for years still in statute could face assessments from the Department of Revenue if further action is not taking from the Legislature. As previously mentioned, the Legislature has already addressed the prospective use of NOL’s in the budget it passed last week.
Educational Improvement Tax Credit Program
Approval letters for the Educational Improvement Tax Credit Program (EITC) and Opportunity Scholarship Tax Credit Program (OSTC) began being mailed out by the Department of Community and Economic Development earlier this month despite the final budget not yet being passed. As in previous years, the letters will be going out in several phases over a five to six week timespan based on priority of the applications. Taxpayers completing a second year of a two-year commitment should have received their letters by now. Taxpayers returning for another two-year commitment are next in line to receive their letters, and then the final phase will be for the July 1st applicants.
The EITC and OSTC programs offer a tremendous tax benefit to businesses making donations to certain qualifying charitable educational organizations. For more information on ways your business can be involved in either of these programs, please contact Michael Eby, Senior Manager with McKonly & Asbury and leader of the firm’s state and local tax practice, at firstname.lastname@example.org.
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