Pennsylvania State and Local Tax Update—Second Quarter 2023

While practitioners waited to see if there would be any major changes as part of Pennsylvania’s budget process, the second quarter of 2023 was relatively calm. Still, there were administrative announcements by both the Pennsylvania Department of Revenue and the Philadelphia Department of Revenue that practitioners should be aware of.

First, the state revenue department published its corporation tax bulletin 2023-01 on May 1, providing guidance as to the treatment of electricity for purposes of the Pennsylvania sales factor. Like many states, Pennsylvania uses a single sales factor to apportion net income for corporate net income tax purposes.

In the bulletin, the department announced that, for all open corporate net income tax tax years, it will treat the sale of electricity as the sale of tangible personal property. Since 2014, sales of tangible personal property have been sourced using market-based sourcing, meaning where the property is delivered to the customer.

For corporate net income tax sales factor purposes, electricity will be sourced using the customer’s location. In the case of a partnership with one or more corporate partners, the receipts from the sale of electricity will flow to the corporate partners in the same manner as any other sale of personal property.

The state revenue department also published the new realty transfer tax common level ratio factors. These factors will be used to compute the value of real estate for realty transfer tax purposes for any documents accepted between July 1, 2023, and June 30, 2024. Practitioners should note that because Philadelphia County performed a countywide assessment for 2023, the Philadelphia factor will remain 1.00 until June 30, 2024.

Staying in Philadelphia, the city’s revenue department issued guidance on treating research and experimental expenses for purposes of the city’s business income and receipts tax, or BIRT, and net profits tax, or NPT. The Tax Cuts and Jobs Act of 2017 changed the treatment of certain R&E expenses beginning in 2022 by requiring them to be capitalized and amortized for a period of five years (in the case of domestic research) or 15 years (in the case of foreign research).

BIRT taxpayers must elect to use one of two methods of calculating net income subject to the tax: Method I starts with net income determined under the general accounting method used by the taxpayer, and Method II starts with federal taxable income.

The city will conform to the new R&E expense rules for those using Method II—the federal income tax method—for tax years beginning on or after Jan. 1, 2022. These taxpayers also can use the new rules for NPT purposes. The changes to the federal rules don’t affect Method I taxpayers. If the accounting method of a Method I taxpayer allows immediate expensing of R&E expenses, they’ll be allowed for both BIRT and NPT purposes.

Finally, the Philadelphia Department of Revenue announced further rate reductions for both business and individual income taxes. As of July 1, the wage tax rate and the NPT rate dropped to 3.75% from 3.79% for residents; the rates will remain at 2.44% for nonresidents. Likewise, the rate for the net income tax portion of the BIRT will decrease to 5.81% from 5.99% for all taxpayers effective for the 2023 tax year.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Christopher A. Jones co-leads Ballard Spahr’s tax and real estate team. He advises clients on a wide range of federal, state, and local tax matters, as well as the tax consequences of complex transactions and associated planning opportunities.

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