On October 30, 2017, Governor Tom Wolf signed House Bill 542 ("HB 542") into law to make several tax changes that will generate revenue for Pennsylvania's 2017/2018 budget. In addition to imposing entirely new tax obligations on some businesses and clarifying certain tax changes made by Act 84 of 2016, the bill amends existing administrative appeal procedures. A brief overview of some of the noteworthy tax changes is provided below.
Imposing Sales Tax Collection and Reporting Obligations on Platforms
With the passage of HB 542, Pennsylvania becomes the fourth state to impose tax collection or reporting obligations on platforms (e.g., ebay.com, Amazon.com) and individuals who sell through platforms.1 The law imposes obligations on three actors: "marketplace facilitators," "marketplace sellers," and "referrers." "Marketplace facilitator" is defined as a "person that facilitates the sale at retail of tangible personal property."2 A person "facilitates" a sale at retail if the person or an affiliated person:
- lists or advertises tangible personal
property for sale at retail in any forum;3 and
- either directly or indirectly through agreements or arrangements with third parties, collects the payment from the purchaser and transmits the payment to the person selling the property.4
"Marketplace seller" is defined as "a person that has an agreement with a marketplace facilitator pursuant to which the marketplace facilitator facilitates sales for the person."5 "Referrer" is defined as "a person, other than a person engaging in the business of printing or publishing a newspaper, that, pursuant to an agreement or arrangement with a marketplace seller or remote seller, does the following:
- agrees to list or advertise for sale
at retail one or more products of the marketplace seller or remote
seller in a physical or electronic medium;
- receives consideration from the
marketplace seller or remote seller from the sale offered in the
listing or advertisement;
- transfers by telecommunications,
internet link or other means, a purchaser to a marketplace seller,
remote seller, or affiliated person to complete a sale; and
- does not collect a receipt from the purchaser for the sale."6
HB 542 provides an "election" for marketplace facilitators and referrers to either collect sales tax or comply with notice and reporting requirements akin to those upheld by the United States Court of Appeals for the 10th Circuit in Direct Marketing Association v. Brohl.7 In order to come within the scope of HB 542, a marketplace facilitator or referrer must have made retail sales of tangible personal property—or delivered tangible personal property within Pennsylvania—worth at least $10,000 in the preceding 12 calendar months.8
Although HB 542 was likely intended to impose collection or reporting obligations on all sales facilitated to Pennsylvania, the law suffers from the same ambiguity as Washington State's platform legislation. Specifically, HB 542 provides that the "election" for marketplace facilitators to collect or report applies only to (1) sales facilitated for a marketplace seller "that does not maintain a place of business" in Pennsylvania, and (2) a marketplace facilitator's own sales if the marketplace facilitator "does not maintain a place of business" in Pennsylvania.9 Accordingly, it is unclear what obligations, if any, are imposed on a marketplace facilitator with respect to facilitated sales of a marketplace seller located outside of Pennsylvania, and the marketplace facilitator's own sales if the marketplace facilitator is located outside of Pennsylvania.10
The platform legislation component of HB 542 becomes effective February 1, 2018. Marketplace sellers, facilitators, and referrers should determine how this law applies to their business, and consider how (and to what extent) they should prepare to comply with the law.
Amended Definition of Tangible Personal Property
HB 542 attempts to reverse, in part, the impact of a controversial Department sales tax letter ruling issued earlier this year that found help desk services to be taxable as sales of tangible personal property.
Effective August 1, 2016, Pennsylvania expanded the definition of tangible personal property for sales tax purposes to include digital goods and canned software. As part of that change, software delivered as part of a maintenance, update, or support contract for taxable software, etc., was subject to tax. To the surprise of many businesses, the Department then issued a letter ruling in 2017 indicating that this change meant that standalone charges for help desk services were subject to sales tax as charges for "support" of taxable software.
HB 542 attempts to reverse that Department determination by expanding the definition of "tangible personal property" to specifically include support to canned software, but excluding "help desk" and "call center" support if those services are separately invoiced from canned software. The House of Representatives has indicated that this language is intended to clarify the meaning of the previously expanded definition, rather than to change it.
In our view, the "clarifying" definition could ultimately create additional headaches for many businesses. Under the plain language of the statute, prior to the enactment of HB 542, many help desk and call center services should not have been subject to Pennsylvania sales tax, regardless of the method of invoicing, and the Department's ruling to the contrary was ripe for challenge. HB 542, by changing the definition of tangible personal property, now confirms that help desk and support services for canned software will be treated as tangible personal property for sales tax purposes going forward. The only exception from this general rule is for charges for help desk or call center support services that are separately invoiced. Because many businesses sell help desk support as part of a single lump-sum charge, or only break out the separate charges on a contract, the requirement of "separate invoicing" will require those companies to change their billing practices or force their Pennsylvania customers to pay tax on the entire charge.
HB 542 amends Pennsylvania's limitation on net loss deductions in response to litigation involving Nextel Communications that we previously covered here. The bill, which was drafted while the Nextel case was pending, made its changes to the net loss deduction contingent on the Pennsylvania Supreme Court issuing a decision that "all or a part of the net loss deduction" is unconstitutional. On October 18, the Pennsylvania Supreme Court did just that––finding the cap unconstitutional. As a remedy, the court struck the flat cap on the deduction, but maintained the percentage-based cap.
Unless the court changes its holding on re-argument, or changes its position upon consideration of the pending RB Alden appeal (discussed here), this Nextel fix applies to calendar years after 2017. The fix removes the flat-dollar limitation and replaces it with a limitation based on a percentage of the taxpayer's taxable income. In 2018, that percentage is 35%; in 2019 and thereafter it will be 40%. Interestingly, the fix will be effective only when the Department files a notice of the court decision in the Pennsylvania Bulletin. Thus, the Legislature has delegated to the Department some control over the timing of the effective date of the change, which is unusual and which may be constitutionally suspect.
Addition of Qualified Manufacturing Deduction
HB 542 adds a new corporate net income tax deduction for amounts invested in "qualified manufacturing innovation and reinvestment." The deduction is calculated by taking 5% of the "private capital investment utilized" (a term that is undefined by the bill), in the creation or renovation of a manufacturing facility per tax year for five years. To qualify for the deduction, taxpayers must seek preapproval from the Department and agree to invest at least $100 million during the first three years after beginning to construct or refurbish a manufacturing facility in the Commonwealth. Taxpayers then have an additional two years to complete the project.
Shortened Tax Appeal Period
HB 542 reduces the period for appealing a Notice of Assessment to the Department's Board of Appeals to 60 days (from 90 days), while the period to appeal a decision from the Board of Appeals to the Board of Finance and Revenue is also reduced to 60 days (from 90 days). These changes apply to "petitions filed with the Department on or after 60 days" from the date the bill was enacted into law. It remains unclear, however, how this language should be applied to petitions filed with the Board of Finance and Revenue. Taxpayers should err on the side of caution and begin filing petitions using the new 60-day rule immediately.
New 1099-MISC Withholding Requirements
Taxpayers filing Form 1099-MISC who pay at least $5,000 annually to any one nonresident individual or pass-through entity with a nonresident member, are now required under HB 542 to withhold income tax from such payments. With respect to payees who receive less than $5,000 annually from the taxpayer-payor, withholding is discretionary. However, payments to the United States and Pennsylvania governments are exempt regardless of their aggregate value. This change takes effect 60 days from the law's enactment.
Wrapping Supply Exemption Expanded
HB 542 explicitly expands the sales and use tax exemption for wrapping supplies to include beer kegs. This is the second significant expansion of the wrapping supply exemption in the past few years. The last expansion came through litigation in which the Pennsylvania Supreme Court held that returnable shipping pallets are nontaxable wrapping supplies, reversing the Department's published letter rulings that they were returnable containers and therefore taxable. See our prior alert on that litigation here.
HB 542 May Face Constitutional Challenges
In addition to the tax changes discussed above, HB 542 regulates consumer fireworks. This is particularly noteworthy because the inclusion of the firework-related provisions could render the entirety of HB 542 unconstitutional under the "single subject" rule or the "original purpose" rule (or both) contained in Article III of the Pennsylvania Constitution. The single-subject rule requires that every bill passed must contain only one subject.11 HB 542 could violate this rule because it contains more than one subject: (1) eliminating the prohibition in the Health and Safety Code against Pennsylvania residents purchasing, possessing, and using consumer fireworks, and (2) enacting various changes to the Tax Reform Code.
The original-purpose rule requires that a bill must not be altered or amended to change its original purpose. The original purpose of HB 542 was to require remote sellers to notify Pennsylvania customers that use tax may be due on their purchases. After various amendments, the final purpose goes far beyond those remote seller notice requirements. Importantly, when the courts have found a violation of the single-subject rule or the original-purpose rule, they have tended to invalidate the entire Act and force the legislature to go back to the drawing board.
1 HB 542, Part V-A. Minnesota, Rhode Island, and Washington have enacted similar "platform" legislation.
2 HB 542, Part V-A, Section 213(C)(1)–(2).
3 "Forum" is defined as "a place where sales at retail occur, whether physical or electronic. The term includes a store, a booth, a publicly accessible internet website, a catalog, or similar place." HB 542, Part V-A, Section 213(B). There is little doubt that the legislature enacted this law to reach Internet platforms, but the term "forum" explicitly applies to e-commerce and traditional commerce. This broad definition is required to comply with the Internet Tax Freedom Act (an act of the United States Congress) that prohibits discriminating between e-commerce and traditional commerce. See Pub. L. No. 105-277, tit. XI, 112 Stat. 2681 (1998) (as amended); see also Performance Mktg. Ass'n, Inc. v. Hamer, 998 N.E.2d 54 (Ill. 2013) (state's "click-through nexus" rule, which imposes a use tax collection obligation upon a retailer who has a contract with a person located in Illinois under which the person refers potential customers to the retailer by a link on the person's Internet website, was a discriminatory tax in violation of ITFA, because no similar obligation was imposed on equivalent "offline" arrangements).
4 HB 542, Part V-A, Section 213(C)(1)–(2).
5 HB 542, Part V-A, Section 213(D).
6 HB 542, Part V-A, Section 213(G)(1)–(4). This definition does not explicitly provide that this is a conjunctive test; however, given that the law does not preface the list of included activities with the phrase "any of the following" (or a similar phrase—coupled with the fact that Pennsylvania law mirrors the laws passed in Rhode Island and Washington, both of which impose a conjunctive test—this definition should be read to require all four requirements be satisfied in order to be deemed a "referrer."
7 814 F.3d 1129 (10th Cir. 2016), cert. denied, 137 S. Ct. 591 (2016).
8 HB 542, Part V-A, Section 213.1(A).
9 HB 542, Part V-A, Section 213.1(C)(1)–(2).
10 Similar ambiguity exists with respect to the "election" provided to "referrers." See HB 542, Part V-A, Section 213.1(D).
11 See, e.g., Leach v. Commonwealth, 141 A.3d 426 (Pa. 2016) (invalidating entirety of Act 192 of 2014—which criminalized theft of secondary metals and also gave people standing to challenge local gun-control regulations—instead of arbitrarily deciding which portions of Act to preserve).
This article is presented for informational purposes only and is not intended to constitute legal advice.