Pennsylvania Reduces Corporate Income Tax, Shifts Burden to Out-of-State Businesses

Pennsylvania is joining the ranks of several other U.S. states that are responding to an improved financial standing by lowering tax rates, which they contend will make businesses located there more competitive. A bill approved by the legislature July 7 and signed by Governor Tom Wolf reduces the corporate net income tax rate incrementally over the next six years from its current 9.99 percent to 4.99 percent by 2031. Governor Tom Wolf championed the legislation as part of his 2023 budget proposal.

Like similar bills being passed in other states, HB 1342 looks to shift some of that corporate tax burden to out-of-state businesses selling into Pennsylvania with market-based sourcing and economic nexus rules. Specifically, the bill changes the sourcing of intangible property from a cost-of-performance approach to a market-based approach. Under cost-of-performance, receipts are apportioned to the state based on the location where the taxpayer incurs its expenses providing its services. The market-based approach seeks to match the receipts to the source of the corresponding revenue, which translates into collecting more taxes from out-of-state businesses with substantial economic activity in the state.

As well, inspired by the landmark Wayfair v. South Dakota U.S. Supreme Court decision, HB 1342 creates an economic nexus for businesses based outside Pennsylvania with more than $500,000 in a year in remote sales, that is, sales into the state. The bill also increases several tax credit caps.

The bill won broad support by both parties, passing 38-12 in the Senate and 184-16 in the House. Republican Senate Majority Leader Kim Ward praised the bill as “a comprehensive modification to our taxes in Pennsylvania,” noting that state revenues had been higher than expected and that coupled with funds received through the American Rescue Plan Act allowed the commonwealth to “prioritize job creation and business growth through the reduction of the corporate net income tax.”

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About the Author(s)
Bryan M. Holm, CPA, MST, Manager, State and Local Tax Bryan Holm is a Manager in the Cherry Hill, NJ office of HBK CPA's and Consultants. He joined the firm in 2021 as a member of the HBK State and Local Tax (SALT) team. His background includes work with top 10 accounting firms. Prior to specializing in state and local taxation, Bryan worked in tax resolution for the Internal Revenue Service. He has served clients in a variety of industries including private equity firms, manufacturing, the restaurant industry, retail, construction, and the banking industry. Bryan has provided a variety of state and local tax services to clients, including; Audit Defense, Refund Reviews, Nexus Reviews, Voluntary Disclosure Agreements, Income/Franchise Tax Compliance, M&A Due Diligence, and SALT Consulting and Advisory Services. Bryan has also been a speaker and writer on state and local tax matters.
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