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July 18, 2022

Pennsylvania enacts corporate income tax rate reduction and other tax changes

  • The phased-in corporate net income rate reduction does not depend on revenue thresholds being met.
  • The governor's proposed changes to Pennsylvania's related party add-back rules were not included in the final bill.
  • Pennsylvania joins a growing list of states taxing peer-to-peer car-sharing programs.

On July 8, 2022, Pennsylvania Governor Tom Wolf signed into law HB 1342 (Act 53), which includes a long-sought-after reduction to the corporate income tax rate. The law also applies market-based sourcing rules to receipts from sales of intangibles, codifies the Pennsylvania Department of Revenue's economic nexus standard for corporate income taxes, conforms to select Internal Revenue Code (IRC) provisions, imposes sales and use tax on peer-to-peer car sharing, and modifies various tax credit and economic development zone provisions.

Gradual reduction of corporate income tax rate

Starting in 2023, the current 9.99% corporate income tax rate will decrease to 4.99% over nine years. The rate reductions are as follows:

Calendar year




















Market-based sourcing for intangible

Prior law sourced receipts from sales of intangibles (e.g., receipts from patents, royalties, franchise agreements, securities, loan interest) based on a costs-of-performance method. Effective for tax years beginning after December 31, 2022, these receipts will be sourced using the market-based sourcing method. This change aligns the sourcing method for sales of intangibles with the method already being used for sourcing sales of services, tangible personal property and real property.

Specifically, gross receipts from the following will be sourced to Pennsylvania:

  • Lease or license of intangible property to the extent the property is used in the commonwealth
    • This includes sales or exchanges of property where the related receipts derive from payments that depend on the property's productivity, use or disposition
  • Sale of intangible property that is a contract right, government license or similar property authorizing the holder to conduct business activity in a specific geographic area, to the extent it used or otherwise associated with the commonwealth
  • Sale, redemption, maturity or exchange of securities held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business, when the customer is in the commonwealth
  • Interest, fees and penalties imposed on loans secured by real property received by a corporation that regularly lends funds to unaffiliated entities or to individuals
    • The numerator of the sales factor includes interest, fees and penalties imposed in connection with loans secured by real property if the property is located within the commonwealth (the determination of whether the property securing the loan is in the commonwealth is made at the time of the original agreement)
    • If the property is located in the commonwealth and another state, gross receipts are in the sales factor numerator if more than 50% of the fair market value of the real property is located in the commonwealth
    • The gross receipts are in the sales factor numerator if the property is located in the commonwealth and another state, more than 50% of the fair market value or the property is not located in any single state, and the borrower is in the commonwealth
  • Interest, fees and penalties from loans for the sales of tangible personal property if the property is delivered or shipped to a purchaser in the commonwealth
    • Special rules apply to sales of transportation property, aircraft, and motor vehicles
    • A motor vehicle is deemed to be used wholly in the state in which it is registered
    • If the extent of the use of the transportation property in the commonwealth cannot be determined, the property is deemed to be used wholly in the state in which it was delivered or shipped to the purchaser
  • Interest, fees and penalties from loans for sales not previously described if the borrower is in the commonwealth
  • Interest, fees and penalties from credit card receivables and credit card fees charged to cardholders if the cardholder's billing address is in the commonwealth
  • Interest not otherwise described if the lender's commercial domicile is in the commonwealth
    • These receipts are in the sales factor numerator
    • None of the interest that an out-of-state-domiciled affiliated finance company receives from a Pennsylvania business will be included in the sales factor numerator

Intangible property not otherwise described is excluded from the sales factor numerator and denominator. Under this provision goodwill arising from the sale of a business and gross proceeds/gains from hedging transactions will be excluded from the sales factor numerator and denominator.

For purposes of these sourcing provisions, an "unaffiliated entity" is defined as any entity that is not an affiliated entity, as defined under section 401(10).

The law directs the Pennsylvania Department of Revenue (PA DOR) to adopt regulations necessary to implement these provisions.

Corporate income tax nexus

The law codifies the PA DOR's economic nexus standard for corporate net income taxes, which was announced in response to the U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc.1 In Corporation Tax Bulletin 2019-04 (revised August 6, 2020), the PA DOR said it will deem there to be a rebuttable presumption of a filing requirement for corporations without physical presence in Pennsylvania if they have $500,000 or more of Pennsylvania-sourced gross receipts. The new law includes a rebuttable presumption that a corporation with $500,000 or more of sales sourced in the current tax year to Pennsylvania under section 401 has substantial nexus in Pennsylvania without regard to physical presence in Pennsylvania.

Under the new law, corporate net income tax applies to corporations that have "substantial nexus" with Pennsylvania. The law defines "substantial nexus" as "a direct or indirect business activity that is sufficient to grant the commonwealth authority under the [US] Constitution … to impose tax … and for which a basis exists … to apportion or allocate the corporation's income to [the] commonwealth." Business activities include (1) leasing or licensing intangible property that is used in the commonwealth, (2) regularly engaging in transactions with in-state customers involving intangible property (such as loans), or (3) selling intangible property that was used by a corporation in the commonwealth.

The newly added nexus provisions do not apply to affiliated entities domiciled in a foreign nation that has entered into a comprehensive income tax treaty with the US providing for the allocation of all categories of income subject to tax, or withholding of tax, on royalties, licenses, fees and interest in order to prevent double taxation of the foreign entity.

These changes apply to tax years beginning after December 31, 2022. A potential refund opportunity may exist for corporate taxpayers that filed Corporate Net Income Tax reports beginning in 2020, in accordance with Corporate Tax Bulletin 2019-4.

As a result of the rules for sourcing interest received from an unaffiliated entity, an out-of-state domiciled affiliated finance company should not have nexus with Pennsylvania through its lending activities with an affiliate based or operating in the commonwealth.

IRC conformity — personal income tax

For personal income tax purposes, the law conforms to the following IRC provisions:

  • IRC Section 179 expense deduction, thus conforming to the federal limitation, which is currently $1.08 million (an increase from Pennsylvania's current $25,000 limitation)
  • IRC Section 1031 like-kind exchanges, allowing the deferral of gain and loss when real property is exchanged for like-kind property

Both these changes apply to property placed in service/transactions occurring in tax years beginning after December 31, 2022, respectively.

The law also makes a technical change, codifying in the Pennsylvania Tax Reform Code the personal income tax treatment of forgiven Paycheck Protection Program (PPP) loans, which follows the federal tax treatment of exempting forgiven PPP loans from income tax and allowing a deduction for expenses paid with forgiven PPP loan proceeds. The law repeals similar provisions that were added to the Fiscal Code by Act 1-2021.

Other tax changes

The new law makes other tax changes, including the following:

  • Imposes sales and use tax and the $2 per day fee under the public transportation assistance fund on peer-to-peer car sharing, whether through a shared vehicle owner, marketplace facilitator or rental company maintaining a place of business in the commonwealth, effective January 1, 2023
  • Excludes from the 2% vehicle rental tax a shared vehicle rented through a peer-to-peer car-sharing program, effective January 1, 2023
  • Provides that the resale exemption will not apply to the purchase price or repair of a shared vehicle by a shared vehicle owner
  • Extends the length of the computer data center equipment sales and use tax exemption to 25 years (from 15 years)
  • Increases the cap on the R&D credit to $60 million per year (from $55 million per year), with $12 million (from $11 million) allocated for small-business applicants
    • Applies to fiscal years beginning after June 30, 2022
  • Modifies the film production tax credit by
    • Increasing the cap on the credit to $100 million per year (from $70 million per year), with $5 million reserved for Pennsylvania film producers
    • Changing the definition of "multifilm" to "multifilm production" and expanding the definition to include films directly or indirectly produced by the same taxpayers that have no less than 80% common ownership
    • Defining Pennsylvania film producers
  • Increases the cap on the tax credit for the entertainment economic enhancement program to $24 million per year (from $8 million per year), for fiscal years beginning after June 30, 2022
  • Clarifies that an affiliate of a qualified business in a keystone opportunity zone (KOZ) is entitled to the same tax exemptions, deductions, abatements and credits provided to the qualified business, if the affiliate also meets the requirements of a qualified business in 73 P.S. 820.307(a)
  • Extends the deadline for a political subdivision to apply for designation as a KOZ to October 1, 2023 (from October 1, 2022)
  • Establishes the airport land development zone program


After many years of considering corporate net income tax rate reductions, Pennsylvania corporate net income taxpayers will see the rate reduced over the next nine years. Unlike other states that have recently enacted reductions in their income tax rate, Pennsylvania's rate reductions are scheduled and do not depend on revenue thresholds being met in order to take effect.

The reduction in the corporate income tax rate generally aligns with Governor Wolf's budget proposal released in February, albeit accomplished on a different timeline. The enacted legislation does not include changes to the commonwealth's related-party addback provisions, which the governor had sought.

Taxpayers required to collect and remit the tax on peer-to-peer car-sharing programs will need to update their systems and processes to account for the tax.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation Group
Corporate Income Tax
   • David Dudrear (
Sales and Use Tax
   • Jeanne Hill (


1 South Dakota v. Wayfair, Inc., 138 S.Ct. 2080 (2018).