On July 8, after years of attempted tax cuts, the Pennsylvania legislature finally adopted a change to Pennsylvania's corporate net income tax (CNIT) and adopted other provisions targeted at reaching out-of-state companies doing business in the Keystone State. (See H.B. 1342.) Here are the top three corporate tax takeaways from the bill:

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1. CNIT Reduction

Pennsylvania has long been criticized for its growth-inhibiting high tax rate of 9.99 percent. Pennsylvania's CNIT rate has consistently ranked it at the very top among states with the highest corporate income tax rates nationwide. The new bill lowers the CNIT rate incrementally, until it bottoms out at 4.99 percent in 2031. Upon being fully phased in, Pennsylvania's CNIT rate will rank among the lowest nationwide.

The lower CNIT rate could make Pennsylvania more attractive to businesses looking to relocate, given that neighboring states have significantly higher tax rates. This should also help Philadelphia as it hopes to attract more businesses. Philadelphia has been impacted by its own high business income and receipts tax rate, the effect of which has been further exacerbated by the high CNIT rate.

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2. Economic Nexus

While the CNIT rate is going down, the number of taxpayers that it applies to should be increasing. The bill creates a $500,000 economic nexus threshold for purposes of the CNIT and codifies the following business activities as establishing substantial nexus: leasing or licensing intangible property utilized in Pennsylvania; regularly engaging in transactions with Pennsylvania customers involving intangible property, including lending to unaffiliated entities or individuals; and selling intangible property that was used by the taxpayer in Pennsylvania.

While the economic nexus provision is a new law, the threshold is not a new concept. During 2019, the economic nexus threshold was announced by the Pennsylvania Department of Revenue in Corporation Tax Bulletin 2019-04 (TB 2019-04). Many have questioned the department's authority to administratively create an economic nexus threshold —and that ability may still be questioned for pre-2023 tax years. However, taxpaying businesses that have $500,000 in sales in Pennsylvania beginning in 2023 are on notice to evaluate their potential CNIT liability.

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3. Intangibles Sourcing

For almost a decade, intangibles in Pennsylvania have been sourced based on costs of performance, while services have been sourced based on market-based sourcing. The new legislation brings the two into harmony—both services and intangibles will now be sourced based on market-based sourcing.

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