Pennsylvania State and Local Tax Update—Third Quarter 2023

It was another relatively quiet quarter in Pennsylvania, as taxpayers continue to wait for budget negotiations to shake out to see if there will be any impactful tax legislation this year. However, the Pennsylvania Department of Revenue did publish several pieces of guidance.

Shorter Lookback Period

In Pennsylvania Tax Update No. 226, the department announced that for voluntary disclosure agreements entered into on or after Aug. 1, 2023, the lookback period will be three years plus the current year—a difference from the previous period of five years plus the current period due.

For example, a calendar year taxpayer coming into compliance today, in 2023, would need to pay tax plus interest for 2022 (the current period due) plus 2019, 2020, and 2021.

Under the new guidance, a taxpayer with unknown corporate tax liabilities that participates in the voluntary disclosure program is liable only for the unpaid tax during the lookback period and applicable interest; associated penalties are waived.

The new guidance may make participation more attractive for many taxpayers and further increase collections by the department. During Pennsylvania’s 2022-23 fiscal year, $86.4 million in taxes were paid in connection with voluntary disclosures, an increase of more than 11% from the prior fiscal year.

Natural Gas Taxes

In its sales and use tax bulletin released Aug. 2, the department addressed the taxable purchase price for natural gas sold for nonresidential use when the invoice involves charges from two companies: the supplier and the distributor.

The issue was whether charges for distribution, when separately stated and charged by a different party from the supplier, are included in the sales tax base. Such charges delivery are part of the taxable purchase price of natural gas sold to nonresidential customers, even if invoiced separately.

The department relied heavily on the Pennsylvania Supreme Court’s 2009 decision regarding the taxability of electric supply and distribution charges in Spectrum Arena Ltd. Partnership v. Commonwealth because, the court stated, the natural gas industry was deregulated in the same manner as the electric industry.

In Spectrum Arena, the court held that delivery charges for electricity delivered to nonresidential consumers in Pennsylvania are taxable even if separately stated. The department also relied on its statement of policy at 61 Pa. Code Sec. 60.23(d), even though that statement applies only to electricity.

This bulletin seems to be a departure from prior policy and may be subject to challenge based on differences between electricity deregulation and natural gas deregulation. When electricity was deregulated, a revenue neutral provision ensured that the commonwealth would collect the same taxes after the change.

No such provision exists in the law deregulating the natural gas industry, leaving open the argument that delivery charges should be treated differently.

Personal Income Taxes

Personal Income Tax Bulletin 2023-01, released on July 18, updates 2017 guidance on filing and payment obligations when income tax withholding is required from payments made to nonresidents or single-member LLCs owned by nonresidents.

The new guidance clarifies that anyone who pays any class of Pennsylvania source income to a resident or nonresident who must file IRS Form 1099-MISC or 1099-NEC is required to file a copy of such a federal form. If a payee must correct IRS Form 1099-MISC or 1099-NEC, they must forward a copy of the corrected form.

Personal Income Tax Bulletin 2023-02, released on Aug. 3, updates guidance regarding the deduction allowed by Section 179 of the federal tax code for certain types of tangible personal property. Pennsylvania taxpayers can treat the cost of Section 179 property as a currently deductible expense and can offset gains from net profits and net business income.

Deductions for Section 179 property placed in service before 2023 were capped at $25,000 Following a 2022 change to the law, the deduction for property placed in service on or after Jan. 1, 2023, increased to $1 million, adjusted for inflation.

Unused Section 179 property deductions may be carried forward indefinitely until the amount is exhausted. Pennsylvania partnerships and S corporations that elect to expense Section 179 property at the entity level and partners and shareholders must follow the entity’s election for personal income tax purposes.

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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