Pennsylvania Governor Tom Wolf has signed into law omnibus tax legislation to implement the Commonwealth’s fiscal year 2022 – 2023 budget. Among other things, the enacted legislation: (1) cuts the corporate net income tax (CNIT) rate from 9.99% to 4.99% on a phased-in basis; (2) adopts market sourcing rules for intangible-related receipts; and (3) codifies the Pennsylvania Department of Revenue’s (DOR’s) CNIT economic nexus rules outlined in Corporation Tax Bulletin 2019‑04. Notably, the enacted legislation does not include Governor Wolf’s prior proposal to strengthen the Commonwealth’s related party interest and intangible expense addback statute.
CNIT RATE CUT
Pennsylvania’s CNIT rate is currently 9.99%—one of the highest corporate tax rates in the nation. The enacted legislation phases in a decrease of Pennsylvania’s CNIT rate as follows:
- January 1, 1995, through December 31, 2022; 9.99%
- January 1, 2023, through December 31, 2023; 8.99%
- January 1, 2024, through December 31, 2024; 8.49%
- January 1, 2025, through December 31, 2025; 7.99%
- January 1, 2026, through December 31, 2026; 7.49%
- January 1, 2027, through December 31, 2027; 6.99%
- January 1, 2028, through December 31, 2028; 6.49%
- January 1, 2029, through December 31, 2029; 5.99%
- January 1, 2030, through December 31, 2030; 5.49%
- January 1, 2031, and each year thereafter; 4.99%
MODIFICATION OF INTANGIBLES SOURCING RULE
The enacted legislation shifts Pennsylvania’s sourcing regime for receipts from intangibles from a cost-of-performance regime to a market-based regime. The legislation generally sources gross receipts from the sale, lease, or license of intangible property to the location the property is used. Further, the legislation generally sources receipts from a broker’s sales of securities to the location of its customer and receipts from credit card interest, fees, and penalties to the billing address of the cardholder.
The legislation also contains detailed sourcing rules for interest, fees, and penalties earned by a lender, generally sourcing those receipts:
- From loans secured by real property to the location of such real property;
- From loans related to the sale of tangible personal property to the location the property is delivered or shipped; and
- To the location of the borrower (if not otherwise addressed by the legislation).
These sourcing rule changes apply to tax years beginning after December 31, 2022. According to the Senate Appropriations Committee’s Fiscal Note to the legislation, the purpose of the sourcing rule change is to “[a]lign the apportionment rules governing sales of intangible property with the sales of tangible personal property, real property and services to be consistent with market sourcing (i.e., where the purchaser paying for the sale or using the property is located).” As discussed in a prior blog post, the Pennsylvania legislature changed the sourcing regime for services from cost-of-performance to a market-based regime.
Nevertheless, the Pennsylvania DOR has insisted that current law requires the use of a market-based approach to source receipts from certain intangibles, despite the cost-of-performance statutory regime currently in effect. For tax years before 2014, the Pennsylvania DOR also employed a market-based approach [...]