Pennsylvania Legislation Provides Updates to Corporate Income Tax Law

The Pennsylvania Governor signed H.B. 1342 to enact changes to the state’s corporate income tax.[1]  Pennsylvania-PA-State-SealThe legislation modifies the corporate income tax in three ways: (1) adopts a bright-line economic nexus standard; (2) adopts market sourcing for receipts from intangibles; and (3) reduces the corporate tax rate and gradually continues to reduce the rate over the next eight years.

Economic Nexus: The law provides a $500,000 “bright line” economic nexus threshold for corporate income tax purposes.  Specifically, the legislation provides a rebuttable presumption that taxpayers with $500,000 or more in sales sourced to Pennsylvania during the current tax year have substantial nexus with the state for that tax year.

Receipts sourcing: The law updates the state’s corporate income tax sourcing statute to adopt market sourcing by eliminating the cost of performance sourcing rules for receipts from intangibles.  The legislature previously amended the corporate income tax sourcing statute (effective for tax years beginning on or after Jan. 1, 2014) to adopt a market sourcing method for sales of services (i.e., sourcing based on where the customer receives the benefit of the service).  The law conforms the sourcing provisions for receipts from intangibles to source such receipts using a market approach.

Tax Rate: The law reduces the corporate income tax rate and provides for a continued gradual reduction over the next eight years.  Pennsylvania’s corporate income tax rate, 9.99% for tax years before the law’s effective date, is reduced to 8.99% for tax years beginning on or after Jan. 1, 2023.  The tax rate decreases by 0.5% annually each year through 2031 until the rate hits 4.99%.

[1] H.B. 1342, 2021-2022 Gen. Assemb., Reg. Sess. (Pa. 2022).

Link to Legislation here.