2017 Pennsylvania Tax Update

The State Budget and More

Building SuccessfulEmployee Relationships

A Cornerstone to Fraud Prevention

and Risk Management

Building SuccessfulEmployee Relationships

A Cornerstone to Fraud Prevention

and Risk Management

2017 Pennsylvania Tax UpdateThe State Budget and More

Introduction

Michael Eby

• Senior Tax Manager

• CPA

• Director of State and Local Tax Practice

• Member of the PICPA State & Local Tax Committee

Agenda

• ‘17-’18 PA state budget overview

• Highlights of key PA tax legislation and pertinent cases

• PA Department of Revenue year in review

• How does PA’s tax structure compare to other states?

Enacted State Operating Budget

• Although “state budget” is often used to refer to the General Fund, the overall state budget is much larger.

FY 2016-17

TOTAL: $79.0 billion

• $31.5 billion: General Fund

• $27.8 billion: Fed. Funds

• $19.7 billion: Other Funds

Enacted Budget Spending Provisions

• $870M general fund increase in actual spend over FY ‘17

• $430M increase in state education, including:• $100M more for basic education

• $25M more for Pre-K Counts

• $25M special education

• $9M more for State System of Higher Education

• State-related universities are flat

• 6% increase to pension

• 19% increase to opioid and heroin treatment

Governor’s Proposed Budget Highlights• No personal income tax increase

• No sales & use tax rate increase

• Sales & use tax base expansion to custom computer programming, data processing, storage services, and aircraft sales & repairs

• Natural gas severance tax of 6.5%

• $100M cut in state-funded tax credits

• Expansion of the insurance premiums tax to some currently exempt insurance entities

Governor’s Proposed Budget Highlights• Corporate Tax Reform

• Mandatory combined reporting

• Gradual reduction in CNI rate from 9.99% to 6.49% by 2022

• Capping net operating losses (NOL) for all C Corporations to 30% of taxable income

• Bringing back the capital stock tax –just kidding!

General Assembly Proposed Funding Measures• Gambling expansion

• Slot machines

• Online gaming

• Taking a loan against the tobacco settlement fund

• Restructuring the sales tax for alcohol sales

• Taxation of space on energy transmission lines

• Gross receipt tax increases on utilities

• Natural Gas Severance Tax

• 12% sales tax on consumer fireworks

In 2016, what did we say to look out for?• Personal income tax rate increase

• Sales & use tax rate increase

• Wide-sweeping sales & use tax base expansion

• Corporate tax reform

• Natural gas severance tax

What Sources Does PA Receive Its Revenue From?

• Personal income tax – 39.9%

• Sales & Use Tax – 31.1%

• Other taxes – 8.8%

• CNI/Capital Stock – 9.2%

• Gross receipts tax – 3.9%

• Cigarette Tax – 4.0%

• Non-tax revenue – 3.1%

Budgeting for Revenue

Legislative, Cases, and Department of Revenue

Updates

Legislative Activity

• CPA license and CPE requirements (Act 73 of 2008 and Act 15 of 2013), effective January 1, 2018:

• 400 hour attest requirement eliminated for CPA license

• No longer need CPA supervision but just verification

• 16 hour A&A CPE requirement eliminated for non-attest CPA’s

• HB 1537/SB 515 –Expansion on NOL Deduction – from 30% to 44%

• HB 542 –Online sales tax notice bill

• HB 1584—Reduction in CNI rate from 9.99% to 5.99%

Legislative Activity

• HB 866 - Local income tax updates

• HB 331 - Federal conformity for like-kind exchanges

• HB 332 - Carryover of losses

• HB 333 - Conformity with Federal Section 179 limits

PA Case Law Developments

• Corporate net operating loss (NOL) limitation

• Nextel v. Commonwealth, 98 F.R. 2012, November 23, 2015

• RB Alden Corp v. Commonwealth, 73 F.R. 2011, June 15, 2016

• Statute of limitations for refunds

• Mission Funding v. Commonwealth, 313 F.R. 2012, December 10, 2015

• Realty Transfer Tax for leased property

• Saturday Family, LP vs. Commonwealth, 148 A.3d 931 2016

Department of Revenue Updates

• Services related to canned software

• Board of Appeals large appeals procedural change

• Assessment appeals reform

• Sales and use tax desk audits

• Schedule C taxpayer increased scrutiny

• Door to door visits from DOR collection agents

• Practitioner access of client tax account statement through Etides

• Increased electronic communication with taxpayers

Pennsylvania Tax Amnesty

• 60 days in April to June 2017

• Abatement of penalties and 50% of the interest

• Pioneer was facilitating agent

• Many notices sent for old delinquencies

• Estimated to raise $100M

___________________________________________

• PA DOL&I amnesty July 1 through September 30 for Unemployment Compensation

Year in Review

• Summer 2016: DOR reached agreement with Airbnb

• August 2016: Sales tax vendor discount max $300/year

• August 2016: Taxation of digital goods (and services related to canned software)

• Fall 2016: PA/NJ reciprocity-off again, on again

• Spring 2017: RCT-101 due date moved back to May 15th for calendar year taxpayers to correspond with Federal due date change

• June/July 2017: Medical marijuana growers and dispensary permits announced

• July 2017: Timbering exemption takes effect

The State Tax Landscape

Across the Nation…

• Economic sales tax nexus • Alabama –Requires out of state sellers with over $250,000 in AL sales

annually to collect and remit sales tax.• South Dakota – Requires out of state sellers to collect and remit sales tax if SD

sales exceed $100,000 annually or have at least 200 separate transactions.• Tennessee and West Virginia

• Use Tax notice requirements-CO, KY, LA, OK, SC, SD, VT

• Challenges to P.L. 86-272 (ex. Ohio CAT)

• Retroactive Legislation (ex. Michigan)

• Continued push to Single Sales Factor and market-based sourcing

How Does PA Compare?

Current Tax Climate

Current Tax Climate

24 44 17 20 45 32

Pennsylvania Resident’s Tax Burden

Corporate Tax Comparison

Sales & Use Tax Comparison

Questions?

Michael Eby

• Senior Tax Manager

• CPA

• Director of State and Local Tax Practice

• Member of the PICPA State & Local Tax Committee

• MEby@macpas.com

Building SuccessfulEmployee Relationships

A Cornerstone to Fraud Prevention

and Risk Management

Building SuccessfulEmployee Relationships

A Cornerstone to Fraud Prevention

and Risk Management

Questions?

Michael Eby

• Senior Tax Manager

• CPA

• Director of State and Local Tax Practice

• Member of the PICPA State & Local Tax Committee

• MEby@macpas.com