On February 20, 2013, Pennsylvania Senator Anthony Williams introduced legislation, SB 202, which would replace Pennsylvania’s corporate net income tax with a Commercial Activity Tax (CAT) similar to the CAT in effect in Ohio. The CAT is based on the principal that businesses should be taxed for the privilege of doing business in a state, measured by gross receipts from business activities in such state.
Senator Williams said, “the current Corporate Net Income (CNI) tax puts local businesses at a competitive disadvantage. Pennsylvania-based businesses are forced to bear the tax burden, however out-of-state businesses can adopt tax strategies to avoid paying the CNI tax. Our current CNI tax rate is 9.9 percent, which is the second-highest state corporate income tax in the United States.”
The proposed Pennsylvania CAT provides for a broad-based, low rate tax on taxable gross receipts that applies to most business types, such as retailers, manufacturers and service providers. Businesses with “substantial nexus” with Pennsylvania and more than $150,000 in taxable gross receipts in a calendar year would be required to pay the tax. Under the proposed CAT, a business will have “substantial nexus” with Pennsylvania if it:
- Uses all or part of its capital in Pennsylvania;
- Is authorized to do business in Pennsylvania;
- Has any one of the following in Pennsylvania in a calendar year:
- at least $50,000 in property;
- at least $50,000 in payroll;
- at least $500,000 in taxable gross receipts;
- at least 25 percent of its total property, payroll, or gross receipts; or
- its domicile; or
- Otherwise has the nexus necessary under the Constitution of the United States to be subject to tax in Pennsylvania.
The gross receipts that would be subject to the proposed legislation are broadly defined to include most types of receipts from the sale or lease of property or the performance of a service. Gross receipts would not include interest (other than from credit sales), dividends, capital gains, wages reported on IRS Form W-2, or gifts. Generally, such gross receipts would be taxable in Pennsylvania only if the property is located in Pennsylvania or if the purchaser ultimately uses the property or receives the benefit of what was purchased in Pennsylvania.
Under the proposed CAT, a taxpayer would pay $150 on the first $1 million of its annual taxable gross receipts. Thereafter, the taxpayer would pay tax at a rate of 0.26 percent of all of its taxable gross receipts per tax period minus the $1,000,000 annual exclusion amount for calendar year taxpayers, and the $250,000 quarterly exclusion amount for quarterly taxpayers (with a three-quarter carry forward for any unused exclusion amount). Under the proposed legislation, the CAT would begin to be phased-in for certain taxpayers starting in 2014.
The proposed CAT would not apply to certain types of businesses that are subject to other provisions of the Pennsylvania tax code, such as financial institutions, insurance companies, nonprofit organizations, and some public utilities.
The bill is currently awaiting hearing in the Senate Finance Committee.
Click here for the full text of S.B. 202.