SALT Blawg – State and Local Tax Blog
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Pennsylvania and Philadelphia have implemented important changes to their taxes, affecting both businesses and individuals. Below are the highlights of those recent changes.
Pennsylvania Tax Changes
Pennsylvania’s 2022-2023 Budget Bill (H.B. 1342), adopted July 8, 2022, implements significant corporate net income tax (CNIT) and personal income tax (PIT) changes for taxpayers. While many taxpayers within Pennsylvania will be happy to hear of these changes, those outside of Pennsylvania may not be so jubilant.
CNIT Rate Reduction
Under the new law, the corporate net income tax rate will be reduced by 1% on January 1, 2023 to 8.8%. The bill also provides for a yearly half percentage point reduction until the CNIT rate reaches 4.99% in 2031. Pennsylvania has long been criticized for its high CNIT rate – consistently ranking among the states with the highest rate nationwide. Once it is fully phased in, this change will bring Pennsylvania to one of the lowest rates nationwide and should help to make it more appealing to businesses.
CNIT Economic Nexus Threshold
The bill also officially implements a $500,000 economic nexus threshold for purposes of the CNIT. During 2019, the Department of Revenue asserted its position that there was a rebuttable presumption of nexus for corporations with more than $500,000 in receipts sourced in Pennsylvania but without a physical presence in Pennsylvania. The bill now officially aligns the law with the Department’s position. Those out-of-state taxpayers that are at or near the threshold should evaluate the impact of the law on their potential CNIT liability.
Market-Based Sourcing for Intangibles
Beginning after December 31, 2022, Pennsylvania will replace its cost-of-performance rule for sourcing intangibles with market-based sourcing. Sales of services have been sourced based on market-based sourcing for almost a decade. However, when the legislature moved to market-based sourcing for services, it left intact the standard cost-of-performance language for intangibles. Once the provision takes effect, the sourcing standards for services and intangible property will be aligned. Out-of-state taxpayers should consider the impact of this change, particularly in light of the adoption of the economic nexus threshold.
Federal Conformity: 1031 Exchanges & IRC § 179
The tax reform changes also make important changes to align Pennsylvania more with the Internal Revenue Code (IRC). For years, Pennsylvania has been an outlier in its failure to recognize 1031 exchanges. IRC § 1031 permits taxpayers to defer gain on the exchange of investment properties. Beginning January 1, 2023, Pennsylvania taxpayers are permitted to defer PIT on like-kind exchanges, in conformity with IRC § 1031.
Additionally, beginning January 1, 2023, Pennsylvania will conform to IRC § 179, which permits individual owners to deduct qualifying property as an expense in the year that it is placed into service. This change eliminates the previous $25,000 limit and permits the full federal limit of $1.08 million.
Philadelphia Tax Changes
The City of Philadelphia adopted its own tax changes, including reductions to the Business Income and Receipts Tax (BIRT), Wage Tax, Earnings Tax, Net Profits Tax (NPT), and School Income Tax (SIT) rates. Philadelphia’s BIRT will be reduced by 0.21% to 5.99%, effective tax year 2023. Meanwhile, beginning July 1, 2022, Philadelphia’s NPT will be reduced to 3.79% and 3.44% for residents and non-residents, respectively. Finally, Philadelphia’s Wage and Earnings taxes will be reduced to 3.79% for residents and 3.44% for non-residents, beginning on July 1, 2022.
Jennifer Karpchuk is co-chair of the State and Local Tax (SALT) Controversy and Planning practice at Chamberlain Hrdlicka. She can be reached at firstname.lastname@example.org.