Last month, we described the explosive budget fight that Gov. Tom Wolf and lawmakers had been engaged in for months, and which ultimately culminated in an upbeat press release from the Governor’s office in mid-July. In that release, Gov. Wolf applauded what he considered to be the most important budget accomplishments: legalization of medical marijuana; the passage of historic liquor reform; and the enactment of a fair school funding formula.
The budget also addressed numerous other tax related topics, which are outlined in the current issue of the Pennsylvania’s Department of Revenue’s Tax Update. Among the tax changes in the budget are these:
Sales and Use Tax
As of August 1, 2016, electronic, streaming and digitally delivered (downloaded) items are subject to the 6 percent state sales and use tax rate. This includes music or any other audio or video product, such as movies and streaming services, e-books and any otherwise taxable printed matter, apps and in-app purchases, including ringtones, online games, and canned software, as well as any updates, maintenance or support of these items.
Taxes like these are commonly referred to as “Netflix taxes,” and they are controversial. For example, Chicago is currently embroiled in a lawsuit involving the recently passed 9 percent amusement tax that applies to streaming services, like Netflix. PennLive reported that Pennsylvania’s tax is expected to bring in $47 million of revenue, will attach to the purchase of iTunes music and videos, electronic greeting cards and books, the next big Beyonce hit, a Pokemon Go app, and future seasons of Netflix's "House of Cards.” Existing exemptions on products like the Bible, or magazine and newspaper subscriptions, remain in place.
PennLive quoted a senior fellow with the Center on Budget and Policy Priorities' State Fiscal Project, who opined that “[t]axing digital downloads is about as close to a no-brainer in tax policy as there can be… It's a fairness issue for consumers who like traditional products that are already taxed. It's a level playing field issue for retailers… and as more consumers move away from buying things in physical formats, if you don't expand the sales tax to digital goods it means that sales tax revenue is going to erode and it will be harder to pay for the schools, health care and all the other services it funds.”
Cigarette and Tobacco Products Taxes
Also starting August 1, 2016, the state tax on cigarettes is $2.60 per pack, a $1.00 per pack increase. In Philadelphia the tax will be $4.60 per pack.
Effective October 1, 2016, pipe tobacco, chewing tobacco, snuff, and any other tobacco products for chewing, ingesting or smoking, except cigars, will be subject to a $0.55 per ounce tax, with a minimum tax per package of $0.66. Electronic cigarettes, including both the liquid product and the delivery device, will be subject to a 40 percent tax on the wholesale price.
Bank Shares Tax
Effective January 1, 2017, the bank shares tax rate changes from 0.89 percent to 0.95 percent.
In addition, effective January 1, 2018, a phased-in deduction is allowed for Economic Development for a Growing Economy Tax Credit Act (EDGE) corporation equity. The EDGE program is designed to offer a special tax incentive to encourage companies to locate or expand operations in Illinois when there is active consideration of a competing location in another State.
Personal Income Tax on lottery winnings
Retroactive to January 1,2016, the Pennsylvania personal income tax applies to cash prizes from the Pennsylvania Lottery. The state income tax rate is a flat 3.07 percent with no personal exemptions.
- Table Games Taxes: Effective August 1, 2016, and set to expire on June 30, 2019, the 12 percent tax on casinos’ gross table games revenue is increased to 14 percent.
- Inheritance Tax: The exemption for family farms and family businesses are amended to allow for farms and businesses that are transferred “to or for the benefit of” a member of the same family to be exempt from the taxable estate. This language extends the family farm and business exclusions to transfers of trusts for the benefit of members of the same family.
This amendment also adds relatives of a decedent’s spouse to the definition of “members of the same family.”
The farm provision is effective retroactive to dates of death after December 31, 2012, and the business provision is retroactive to dates of death after June 30, 2013.
- Tax Amnesty: The Governor will establish the 60-day tax amnesty period that must end by June 30, 2017. During this time, the Pennsylvania Department of Revenue will waive 100 percent of penalties and half of the interest due on taxes delinquent as of December 31, 2015.
- Research and Development Tax Credit: The sunset provision of December 31, 2015, has been removed from the law.
- Film Production Tax Credit: The scope for eligible production expenses used to quantify the tax credit and permitted uses of the credit against tax liability has been expanded. In addition, the budget allocation has also been increased from $60 million to $65 million per year beginning in the 2017-18 fiscal year.
The budget also allocated resources for new tax credits, including the Mixed Use Development Tax Credit and Computer Data Center Equipment Incentive Program, and reinstatement of the Malt Beverage Tax Credit. Lawmakers repealed the Promoting Employment Across Pennsylvania Tax Credit, and reduced the Keystone Innovation Zone Tax Credit to $15 million per year, down from $25 million.
Beyond these items, provisions addressing the scope and administration for certain development initiatives, like the Neighborhood Assistance Tax Credit, and the City Revitalization and Improvement Zone (CRIZ) and Neighborhood Improvement Zone (NIZ) Programs, have been expanded.