This webinar was hosted by McKonly & Asbury Senior Tax Manager and SALT Leader, Michael Eby, and Tax Supervisor, Lindsey Waltemyer. It provides an overview of the enacted 2017-2018 Pennsylvania State Budget; a brief update on recently passed Pennsylvania tax legislation and court decisions of interest; and discusses how states, including Pennsylvania, are addressing these changes at the Federal level in their own respective tax structure.

5. Introductions
Michael Eby
• Senior Tax Manager
• CPA
• Director of State and
Local Tax Practice
Lindsey Waltemyer
• Tax Supervisor
• CPA

6. Agenda
• ‘18-’19 Pennsylvania state budget overview
• Highlights of recent Pennsylvania Department of Revenue updates,
tax legislation and case law
• Impact of federal tax reform on states
• Impact of Wayfair v. South Dakota
• How does Pennsylvania’s tax structure compare to other states?

7. Enacted State Operating Budget
Although “state budget” is often used to refer to the General Fund,
the overall state budget is much larger.
FY 2017-18
TOTAL: $80.7 billion
• $32.0 billion: General Fund
• $28.7 billion: Fed. Funds
• $20.0 billion: Other Funds
FY 2018-19
TOTAL: $84.5 billion
• $32.7 billion: General Fund
• $29.6 billion: Fed. Funds
• $22.2 billion: Other Funds

8. What Sources Does PA Receive Its Revenue From?
• Personal income tax – 41.8%
• Sales & Use Tax – 31.8%
• Other taxes – 9.1%
• Corporate Net Income– 8.5%
• Gross receipts tax – 3.2%
• Cigarette Tax – 3.2%
• Non-tax revenue – 2.4%

9. Governor’s Proposed ‘18-’19 Budget
• $33B General Fund Spend
• New investments in public education
• Increased investment to address opioid crisis
• Increase in minimum wage
• No broad-based tax
• Combined Reporting starting 1/1/2019
• Reduction of the CNI rate starting 1/1/2020
• Natural gas severance tax

10. Enacted ‘18-’19 Budget Highlights
• H.B 2121/Act 1a; Fiscal Code is H.B. 1929/Act 42
• Mostly reoccurring revenue (significant transfers needed in FY 17-18
budget)
• Increases in education spending
• Basic, Special and Higher Ed across the board increases
• $30M for Governor’s PA Smart Program
• $25M increase for EITC
• $2.8M Transfer to the “Rainy Day fund”

11. Enacted ‘18-’19 Budget Highlights (cont.)
• 100% Bonus Depreciation fix (Act 72)
• Corporate Tax Bulleting 2018-03
• Supersedes Corporate Tax Bulletin 2017-02
• Educational Improvement Tax Credit (EITC) program changes
• $25M increase in funding (all for Scholarship Organizations)
• Requirement of businesses to notify DCED within 14 days of award letter if
committing to contributions of less than 50% of awarded amount
• Returning applicants must apply for same program within EITC
• Due date changes for recipient organizations submitting info to DCED

12. Economic Outlook
• Real GDP projected to increase
by 2.3% in 2018 and 2.2% in 2019
• Increased employment rates
(62,000 new jobs in 2017)
• Increase in PA resident wages

13. Department of Revenue Updates,
Legislation, and Case Law

14. Department of Revenue Update
• 1099-MISC withholding
• Effective July 1, 2018 (previously Jan. 1, 2018)
• Withholding on PA sourced payments to non-resident individuals (including SMLLC’s
owned by individuals) and trusts for services and rent
• Required if payments expected to exceed $5,000 to any recipient during the year
• Withholding exemption form (Rev-1832)
• DOR non-resident withholding information website
• Pennsylvania Research & Development credit online application
• Modernization project
• Additional e-tides practitioner capabilities added
• Wayfair bulletin forthcoming from the Department

15. Department of Revenue Update (cont.)
• Sales tax on research subscription software (Letter ruling No. SUT-
17-002)
• Effective May 17, 2017, information retrieval products are subject to
Pennsylvania Sales and Use Tax as tangible personal property.
• This includes software accessed through a subscription, such as research
software. The department considers the subscriber to be exercising a license
to access canned software, which is considered TPP.
• Help Desk services (H.B. 542)
• Effective October 30, 2017, the legislature clarified the previous rule under
Act 84 of 2016 and SUT-17-001.
• Help desk or call center support for canned software is exempted from sales
and use tax when separately invoiced.

16. Proposed Pennsylvania Legislation
• PA 1099-MISC withholding
• H.B. 2027 (Frank Ryan) – eliminate it altogether
• H.B. 2413 (Keith Greiner) – technical corrections
• Single return for estates & revocable trusts in year of death
• H.B. 2303 (Mike Corr)
• Follows Federal

17. Nextel
• Corporate net operating loss (NOL) limitation
• Nextel Communications of the Mid-Atlantic, Inc., v. Commonwealth of
Pennsylvania (6 EAP 2016) 10/18/17
• Dollar cap on the NOL deduction violated the Uniformity Clause of the
Pennsylvania Constitution
• Limits the PA NOL to 30% of taxable income only for 2017.
• Increases to 35% for 2018 and 40% for 2019 and beyond.
• PA Tax Bulletin 2018-02 clarifies that it will not apply the Nextel decision to
taxable years beginning prior to 1/1/2017.

18. Impact of Federal Tax Reform

19. Previous State Conformity
• Starting point determines
the effect of changes
• PA one of few states which
does not conform
• Rolling v. Static Conformity

20. State Impact of Federal Tax Reform
• Est. Percentage change
in state corporate tax
base 2018-2027
• Base-broadening
provisions often flow
through to states, while
rate reductions do not.

21. Pass-Through Section 199A Deduction
• Deduction for 20% of qualified business income, subject to
various limitations.
• Deduction is only allowed in computing and reducing taxable
income, not federal AGI – so only the few states that conform
to Federal Taxable Income would be affected by this change.
• Examples of certain states:
• IA proposal would allow a partial
deduction intended to increase over
time.
• CO, ID, & ND start with Taxable income
and have not decoupled
• OR is expected to decouple
• MN & SC have not updated conformity
post TC&JA

22. Repeal of Section 199 Deduction
• Elimination of Section 199
deduction (DPAD)
• Before 1/1/2018, taxpayers were
entitled (subject to limitations) to a
domestic production activities
deduction of 9% of qualified
production activities income.
• PA conformed to repealed IRC
Section 199 (applies to C corps).

23. Limitation of Interest Deduction
• Corporations: Federal interest deduction limited – Section 163(j)
• Interest is limited to interest income plus 30% of Adjusted Federal Taxable Income
• Since the interest limitation is taken into consideration in computing Federal taxable
income, most states which conform to the TC&JA will conform to this change, unless
specifically decoupling.
• Unallowed interest expense carried forward indefinitely.
• 9 States do not conform by
virtue of static or no
conformity
• CT, GA, IN, TN, WI specifically
decouple from 163(j).
• As a rolling conformity state,
PA conforms to the interest
limitation and has not
decoupled.

24. Limitation of Interest Deduction
• Partnerships & S Corporations: Federal interest deduction applied
at entity level
• Same limit - interest income plus 30% of Adjusted Taxable Income
• Limitation is considered in computing non-separately stated income or loss
(Ordinary business income on form 1065)
• Because of the nature of pass-through entities, certain other rules apply to
prevent unfair circumstances, including carryforward rules at partner level.
• State treatment: since the limitation is included in ordinary business
income, we would expect most states to conform, including Pennsylvania.

25. Limitation of Net Operating Loss Deduction
• Federal NOL deduction limited to 80% of taxable income
• Pennsylvania already has a 35% of taxable income limit for 2018,
as discussed in the Nextel case. It does not follow the Federal
NOL deduction.
• Effect on other states
• 16 states add back Federal NOL.
• 25 states start with Federal taxable income before the NOL.
• Some states modify the Federal NOL.

26. Repatriation Transition Tax (RTT)
• Federal tax reform change
• Imposes a tax on untaxed Earnings and Profits of foreign corporations accumulated
after 1986 and prior to 2018.
• RTT Deduction – effectively reduces the federal tax on the repatriated income from
35% to either 15.5% or 8%, depending on whether the E&P relates to cash and cash
equivalents or other assets.
• May elect to pay their RTT tax over eight years
• Pennsylvania treatment
• RTT Income is subject to CNIT for Pennsylvania
• RTT Deduction – included in determining state tax base and reduces RTT income.
• For PA Personal Income Tax, the deemed dividend is not taxable until actually
distributed.

27. Full Expensing
• Section 168(k) bonus
• For Federal purposes, taxpayers can immediately expense 100% of the cost
of qualified property acquired and placed into service after 9/27/17.
• Previously used assets are now eligible.
• Section 179 Deduction
• Increased to $1 Million Deduction
• Phase-out increased to $2.5M of assets placed in service
• Adjusted for inflation

28. Federal Tax Reform Impact on PA
Individuals
• Little impact, as PA does not conform to Federal tax code
• Section 199A Deduction does not apply
• Full expensing? – no effect
• Section 179 - $25,000 limit still applies
• Section 168(k) bonus – not allowed

29. Federal Tax Reform Impact on PA
Corporations
• Repeal of DPAD (old section 199) increases PA taxable income
• Limitation of interest deduction affects PA starting point
• NOL limitation – no effect
• Full expensing? – yes and no
• Section 179 – presumably follows Federal increase
• Section 168(k) bonus not allowed

30. Wayfair v. South Dakota

31. Case Background
• Previous Rule
• Quill rule – physical presence
• Changing economy – many states had started to challenge this rule
• South Dakota Law
• Requires out of state sellers to collect and remit sales tax if SD sales exceed
$100,000 annually or have at least 200 separate transactions.
• Court ruled in favor of South Dakota, overturning Quill.

32. Issues Addressed
• Specific Circumstances – not a burden to interstate commerce
• Bright line rule – safe harbor for small retailers
• No Retroactivity
• South Dakota adopted the Streamlined Sales & Use Tax Agreement
• Provides for uniform rules to taxation
• Other considerations
• Economic Nexus – What constitutes substantial nexus?
• Fair playing field
• Complexity of Compliance
• Better handled by Congress?

33. Economic Nexus & The States

34. Wayfair v. South Dakota
• Effect of Court Decision on States
• Several states have already followed suit & imposed similar bright-line
requirements
• CT, HI, KY, and ND have online sales tax legislation that took effect July 1
• 2017 Pennsylvania HB 542 requires remote sellers, marketplace facilitators or
referrers with aggregate sales of $10,000 or more in the prior calendar year to
file an election to either collect an remit sales tax or comply with notice and
reporting requirements.
• Additional filing requirements for businesses and potential application to
other tax types

35. Notice & Disclosure Requirements

36. How Does PA Compare?

37. Current Tax Climate

38. Current Tax Climate (cont.)

39. Questions?
Michael Eby
• Senior Tax Manager
• CPA
• Director of State and
Local Tax Practice
• MEby@macpas.com
Lindsey Waltemyer
• Tax Supervisor
• CPA
• LWaltemyer@macpas.com