PA Tax Update: The Budget, Legislation, & Sales Tax Refunds

Building SuccessfulEmployee

RelationshipsA Cornerstone to Fraud Prevention

and Risk Management

Building SuccessfulEmployee

RelationshipsA Cornerstone to Fraud Prevention

and Risk Management

Building SuccessfulEmployee

RelationshipsA Cornerstone to Fraud Prevention

and Risk Management

PA Tax UpdateThe Budget,Legislation &

Sales Tax Refunds

Introductions

Michael Eby• Senior Tax Manager• CPA• Director of State and

Local Tax Practice

Lindsey Waltemyer• Tax Supervisor• CPA

Agenda• ‘16-’17 PA state budget overview• Highlights of key PA tax legislation, pertinent cases, and DOR

publications• How does PA’s tax structure compare to other states?• Refund opportunities in sales & use tax

Governor’s Proposed State Budget• Although “state budget” is often used to refer to the General Fund,

the overall state budget is much larger.

FY 2015-16TOTAL: $78.6 billion• $29.9 billion: General Fund • $27.9 billion: Fed. Funds• $20.8 billion: Other Funds

FY 2016-17 TOTAL: $80.2 billion (+2.0%)• $32.7 billion: General Fund (+9.4%)• $27.8 billion: Fed. Funds (flat)• $19.7 billion: Other Funds (-5.3%)

Proposed Budget Highlights• Personal income tax increase from 3.07% to 3.4%• Sales & use tax base expansion to cable TV, movie theater tickets, and

digital downloads • Cap on vendor discount for sales & use tax• Natural gas tax of 6.5%• Bank shares tax increase from .89% to .99%• Promotional plays at casinos at 8%• Insurance premiums surcharge of .5%• Cigarette tax increase from $1.60 per pack to $2.60; additional taxes on

cigars, loose tobacco, smokeless tobacco, and electronic cigarettes

Enacted Budget Highlights• $ 31.6 billion general fund • Personal income tax increase from 3.07% to 3.4%• Sales & use tax base expansion to cable TV, movie theater tickets, and digital

downloads • Cap on vendor discount for sales & use tax• Natural gas tax of 6.5%• Bank shares tax increase from .89% to .99.95%• Promotional plays at casinos at 8%• Insurance premiums surcharge of .5%• Cigarette tax increase from $1.60 per pack to $2.60; additional taxes on cigars, loose

tobacco, smokeless tobacco, and electronic cigarettes

Other Budget Provisions• Tax Amnesty Program• Corporate tax report due date change• Removes PIT exemption for PA lottery winnings• Added sales and use tax exemptions for corrugated boxes and

harvesting timber • Table games tax increase by 2%• Extension of PA Research & Development credit• $25 million more for EITC• Other tax credit programs expansions

Looking Ahead…• Personal income tax rate increase

• Sale & use tax rate

• Wide-sweeping sale & use tax base expansion

• Corporate tax reform

• Natural gas severance tax

Legislation, Cases,and DOR Updates

PA Legislative Highlights• S.B./H.B. 76 – property tax elimination• Increase PIT to 4.95%• Increase to sales & use to 7%• Sales & use tax expansion• Property tax relief isn’t as good as it sounds!

• H.B 1888 –tax amnesty• H.B. 1198—Amended corporate returns• H.B. 561—exempts military pay from local EIT

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

• Local Tax Enabling Act• Fish v. Township of Lower Merion, 128 A.3d 764 (Pa. 2015)

Department of Revenue Updates• Corporate Tax Notice 2016-1 – Add-back of related party

intangible expenses

• Airbnb agreement

Sales Tax Developments in Online Commerce• Alabama – “Bright-line” Nexus• Requires out of state sellers with over $250,000 in AL sales annually to collect

and remit sales tax.

• South Dakota – New Law • 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.• The law allows South Dakota to sue any retailers not in compliance. There is

pending litigation on this topic, with the state suing major retailers.

How Does PA Compare?

Current Tax Climate

Current Tax Climate

Pennsylvania Resident’s Tax Burden

Corporate Tax Comparison

Sales & Use Tax Comparison

Budgeting for Revenue

What Sources Does PA Receive Its Revenue From?

• Personal income tax – 40.9%• Sales & Use Tax – 31.0%• Other taxes – 10.2%• CNI/Capital Stock – 8.3%• Gross receipts tax – 4.2%• Cigarette Tax – 3.8%• Non-tax revenue – 1.6%

Sales & Use Tax Refunds

Why Should Sales & Use Tax Be Important For Almost All Businesses?• It’s audited more frequently than any other tax type by jurisdictions

across the country.

• Unlike income tax, a mistake made in handling sales tax could lead to your business having to pay for someone else’s tax liability.

• As a “trust fund” tax, corporate officers of the company could be held personally responsible for significant sales tax liabilities.

• If your company is not taking advantages of available exemptions and exclusions, you will be at a competitive disadvantage in the marketplace.

Use Tax• What is use tax?• The responsibility of the purchaser or “user”• Corresponds with sales tax rate

• Determine if use tax is due on your purchases when:• No sales tax is charged• The incorrect rate is charged• If you ultimately use your purchase in a different state from the one in which

you purchased it

Opportunities to Save• Key exemptions and exclusions:• Manufacturing and processing• Trucking operations• Construction contracts• Custom software/computer services• “Cloud computing” used outside PA regardless if the server is

located in PA• Professional services• Landscaping and snow removal

Opportunities to Save• Key exemptions and exclusions (continued)• Employee cost of help supply and building cleaning services• Non-profit and government purchases• “Special resale”• Bulk sale• Bad debt expense

Reasons to Bring in Help• It is difficult to master sales & use tax without consistent experience

• Sales & use tax laws are constantly changing

• “Fresh set of eyes” can bring a different perspective

• A resource to bounce issues off of

• Key contacts with the taxing jurisdictions

What Does a Sales & Use Tax Review Entail?• No cost preliminary review

• SALT group comes on site to review one year’s worth of purchase invoices, intercompany agreements, prior audits, etc.

• Brief meeting with management to discuss business operations

• We will identify some key exposure items in addition to potential refund opportunities and provide those to you

• We would provide recommendations based on our findings

• There is always value in a sales tax review, even if a refund on previous purchases is not pursued

Why McKonly & Asbury’s State & Local Practice is Different?

Questions?

Michael Eby• Senior Tax Manager• CPA• Director of State and

Local Tax Practice• MEby@macpas.com

Lindsey Waltemyer• Tax Supervisor• CPA• LWaltemyer@macpas.com

Building SuccessfulEmployee

RelationshipsA Cornerstone to Fraud Prevention

and Risk Management

Questions?

Michael Eby• Senior Tax Manager• CPA• Director of State and

Local Tax Practice• MEby@macpas.com

Lindsey Waltemyer• Tax Supervisor• CPA• LWaltemyer@macpas.com

Building SuccessfulEmployee

RelationshipsA Cornerstone to Fraud Prevention

and Risk Management