06 November 2017 Pennsylvania law removes NOL dollar cap and increases its percentage cap, establishes sales tax provisions for marketplace providers, and makes other changes On October 30, 2017, Pennsylvania Governor Tom Wolf signed into law House Bill 542 (HB 542), a $1.6 billion revenue bill aimed at addressing the state's $2.3 billion budget deficit. Most of the anticipated revenue for this bill comes from $1.5 billion generated by borrowing against future revenues due to the state from the 1998 national tobacco settlement.1 H.B. 542 also includes Pennsylvania tax law changes, such as: — Removing the $5 million cap on net operating loss (NOL) deductions and increasing the percentage cap (currently 30% of taxable income) to 35% in 2018 and 40% in 2019 and thereafter — Requiring remote sellers, marketplace facilitators and referrers with aggregate Pennsylvania sales of $10,000 or more in the previous calendar year to elect either to: (1) collect and remit the sales tax; or (2) comply with new Pennsylvania notice and reporting rules — Shortening the time a taxpayer has to file a petition to appeal of a Board of Appeals (BOA) decision to the Board of Finance Revenue (BFR) from 90 days to 60 days. HB 542 removes the $5 million cap on NOL deductions and increases the current cap of 30% of taxable income to 35% for tax year 2018 and 40% for tax year 2019 and thereafter.2 This change responds to the recent Pennsylvania Supreme Court decision in Nextel Communications3 in which the Court held that, as applied to Nextel, "the [net loss carryover deduction] is unconstitutional as written because of its inclusion of the $3 million flat deduction."4 The Court also held, however, that the remedy was to sever only the $3 million flat cap on NOLs — not the entire cap including the percentage cap.5 The fiscal impact of this change is estimated to generate additional revenues of $52.6 million in 2017-18 and $80.3 million in 2018-19.6 HB 542 requires, by March 1, 2018, remote sellers, marketplace facilitators or referrers with aggregate Pennsylvania sales of $10,000 or more in the previous calendar year to elect to either: (1) collect and remit Pennsylvania sales tax; or (2) comply with new notice and reporting requirements.7 The new notice and reporting requirements include: — Posting a notice on the seller's, facilitator's or referrer's platform informing purchasers with a delivery location in Pennsylvania that sales tax may be due and the purchaser must file a use tax return — Notifying each purchaser in writing at the time of sale that sales tax is not being collected and he or she may be required to remit use tax to Pennsylvania — Instructing each purchaser on how to obtain use tax remission information from the Pennsylvania Department of Revenue (department) — Prominently displaying this information on each invoice, order form, sales receipt or similar document — Filing a report with the department no later than February 28 of each year listing the names of purchasers as well as including their mailing address, the address to which the product was delivered, the aggregate dollar amount of purchases, and the name and address of the remote seller, marketplace facilitator or marketplace seller8 This provision is similar to marketplace-provider provisions adopted earlier this year in Massachusetts, Minnesota, Rhode Island and Washington.9 This portion of HB 542 is estimated to generate additional revenues of $10.0 million in 2017-18 and $50.5 million in 2018-19.10 The department believes that sales of support services, such as help desk and call center support, are sales of tangible personal property subject to sales tax.11 Provisions of HB 542 directly overturn this position by expressly removing separately invoiced help desk and call center support services from the definition of tangible personal property.12 This provision is effective immediately.13 HB 542 reduces the time a taxpayer has to file a petition for reassessment, review or adjustment with the BOA from 90 days to 60 days.14 It also reduces the time a taxpayer has to appeal a BOA decision to the BFR from 90 days to 60 days.15 Both provisions are effective in 60 days.16 This provision is estimated to generate additional revenues of $20 million annually for the state.17 — Extends the application date for additional Keystone Opportunity Zones that are currently available from October 2016 to October 2018 — Requires entities paying nonresidents over $5,000 in rent and royalties on Pennsylvania property to withhold personal income tax on those payments — Requires companies that bring out-of-state independent contractors into Pennsylvania for work and pay them over $5,000 to withhold Pennsylvania personal income tax on that compensation — Allows individuals to deduct contributions to an Achieving a Better Life Experience account and exempt undistributed earnings and distributions from that account from Pennsylvania's personal income tax HB 542 demonstrates that, even though the Pennsylvania Supreme Court found a uniformity violation in Nextel, the percentage cap on NOLs deductions will remain. This will result in a financial benefit to the Commonwealth for the next two years. It remains to be seen whether a taxpayer will challenge the constitutionality of the percentage cap and whether that taxpayer will prevail. Furthermore, since the Commonwealth is borrowing $1.5 billion against future revenue to balance the state's budget, taxpayers should expect to see more significant changes in 2018 in another effort to balance the budget. Additionally, under HB 542, remote sellers, marketplace facilitators or referrers must have $10,000 in sales of tangible personal property in order to be subject to the new marketplace sales tax collections and reporting requirements. This $10,000 sales threshold is based on the "worth" of the tangible personal property sold, rather than on the sale price itself.18 This operative term, however, is undefined in the statue. Accordingly, this requirement may present a number of compliance challenges and burdens on the taxpayer, as well as result in possible litigation in the future to determine the term's exact meaning. 1 HB 542 "authorizes the Commonwealth Financing Authority to enter into a sales agreement or issue bonds utilizing a portion of the annual payments from the Tobacco Master Settlement Agreement." Fiscal Note to HB 542 (PN2598), Pennsylvania House Committee on Appropriations, at 6. 2 HB 542 states that this provision shall take effect if all or part of the operation of the NOL deduction has been deemed unconstitutional by a decision by the Pennsylvania Supreme Court. 7 HB 542 (PN2598), Laws 2017, Regular Legislative Session, at 195-199; Fiscal Note to HB 542 (PN2598), Pennsylvania House Committee on Appropriations, at 2. 9 See Massachusetts 830 CMR 64H.1.7 (promulgated Sept. 22, 2017); Minnesota HF 1, Ch. 1 Laws 2017 1st Special Session (enacted May 30, 2017), Rhode Island HB 5175 Sub A, Ch. 302 Laws 2017 (enacted Aug. 3, 2017), and Washington HB 2163, Ch. 28, Laws 2017 3rd Special Session, (enacted July 7, 2017). 14 HB 542 (PN2598), Laws 2017, Regular Legislative Session, at 270-271; Fiscal Note to HB 542 (PN2598), Pennsylvania House Committee on Appropriations, at 6. Document ID: 2017-1857 |
