State & Local Tax News

PA Updates Its Corporate Income Tax Nexus Standard

November 7, 2019 by Frank

PA Adopts Wayfair Nexus Decision that Physical Presence is Not Needed for PA to Tax Out-of-State Corporations that Receive an Economic Benefit from Their PA Marketplace Presence

Physically Presence is Not Required

PA declares that corporations do not need to be physically present in Pennsylvania in order to have nexus for corporate tax purposes. Out-of-state corporations doing business in Pennsylvania must file tax reports if they are taking advantage of the Pennsylvania economic marketplace.

Wayfair Decision

As reported in our July 24, 2018 blog, the U.S. Supreme Court decision in South Dakota v. Wayfair would have a profound affect on the nexus standard. “Nexus” being the amount of contact a business would have in a state before being subject to that state’s taxes. Whereas the former standard that a business needed a physical presence in a state before the state could tax it, Wayfair replaced the physical presence test with an economic test.

Pennsylvania states that the decision in Wayfair v. South Dakota made certain that no physical presence standard exists to limit the ability of a state to impose a net income tax on an out-of-state taxpayer. The decision confirmed that out-of-state corporations are doing business in the Pennsylvania and/or carrying on activities in Pennsylvania to the extent they are taking advantage of the economic marketplace. Taxpayers taking advantage of the economic marketplace will be required to file tax reports if they meet the minimum nexus thresholds under the U.S. Constitution.

Economic Presence Test

Pennsylvania will require taxpayers with economic nexus to file corporate tax reports after 2019. Pennsylvania will presume taxpayers without a physical presence have to file a corporate net income tax report if they have $500,000 or more of direct or indirect gross receipts sourced to the state. The presumption is rebuttable.

The gross receipts must be from the:

sale, rental, lease, or licensing of tangible personal property;
sale of services; and/or,
sale or licensing of intangibles, including franchise agreements.

amended law revised the definition of “transient accommodation” to limit it to the rental of a room, group of rooms, or other living or sleeping space for the lodging of occupants, including but not limited to residences or buildings used as residences, that is either:

Obtained through a transient space marketplace; or
Is a professionally managed unit.

The PA Department of Revenue recognizes that taxpayers with or without physical presence in the Commonwealth can still potentially claim exemption from the imposition of the Corporate Net Income Tax under the provisions of P.L. 86-272. Taxpayers claiming P.L. 86-272 (physical presence) protection should still file a tax report and complete the necessary schedules to claim the exemption. Corporation Tax Bulletin 2019-04, Pennsylvania Department of Revenue, September 30, 2019.

Tax Planning Tip #1:

States will continue their efforts to tax out-of-state businesses rather than face the wrath of in-state business when taxes are increased. If you have not already consulted with your tax adviser to determine if you have nexus exposure, you need to do so.

Tax Planning Tip #2:

While reading this post, keep in mind that other states have already changed their nexus standard from physical presence to an economic benefit test, or are considering doing so, thus your activities outside of PA may be creating nexus in those states where you have activities. Refer to Tax Planning Tip #1.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

NJ Amends its Sales Tax Law Regarding Transient Accommodations

October 29, 2019 by Frank

Rental of a Transient Accommodation Obtained Directly from the Owner is No Longer Subject to NJ Sales Tax

Background

In our blog post of October 30, 2018, we alerted our readers that New Jersey had enacted legislation that imposed a fee on transient accommodations on or after October 1, 2018. The new law imposed Sales Tax, the State Occupancy Fee, and the Meadowlands Regional Hotel Use Assessment on charges associated with the rental of transient accommodations.

This law supposedly targeted homeowners who rented their investment properties themselves (classified ads, referrals from friends and family, rental signs on the lawn, Airbnb, VRBO, etc.) rather than using a realtor.

Amended NJ Sales Tax Law on Transient Accommodations

Beginning August 9, 2019, the rental of a transient accommodation obtained directly from the owner is no longer subject to Sales Tax, the State Occupancy Fee, and other applicable taxes and fees, unless it is a professionally managed unit, as defined below.

A rental obtained through a transient space marketplace, which now includes a travel agency, or a rental of property that is considered to be a professionally managed unit, is subject to the applicable taxes and fees.

What is a Transient Accommodation?

The amended law revised the definition of “transient accommodation” to limit it to the rental of a room, group of rooms, or other living or sleeping space for the lodging of occupants, including but not limited to residences or buildings used as residences, that is either:

Obtained through a transient space marketplace; or
Is a professionally managed unit.

Therefore, a transient accommodation that is obtained through a transient space marketplace or is a professionally managed unit is subject to New Jersey Sales Tax, the State Occupancy Fee, and other applicable taxes and fees.

What Type of Rental Is NOT Subject to the NJ Amended Sales Tax Law?

The following rentals are no longer subject to Sales Tax, the State Occupancy Fee, and other applicable taxes and fees as long as the owner does not offer three or more units for rent (a professionally managed unit):

A rental of a transient accommodation obtained directly from the owner (such as through local newspaper ads, personal referrals, signage, etc.); or
A rental of a transient accommodation which is not obtained through a transient space marketplace.

In addition, rentals executed by a real estate broker remain not subject to the taxes and fees.

When Is a Rental Considered Obtained Through a Transient Space Marketplace?

A rental is “obtained through a transient space marketplace” where the agreement for the rental is made through the marketplace or travel agency and where payment for the accommodation is made through a means provided by the marketplace or travel agency, regardless of who receives the payment. Transient space marketplaces will continue to collect Sales Tax, the State Occupancy Fee, and other applicable taxes and fees imposed on a transient accommodation when the rental is “obtained through a transient space marketplace.”

However, a transient space marketplace does not include a marketplace or travel agency that exclusively offers transient accommodations in New Jersey that are owned by the owner of the marketplace or travel agency.

What Is a Professionally Managed Unit?

A professionally managed unit is a transient accommodation that is directly or indirectly owned or controlled by a person who offers three or more units for rent in New Jersey, and the rental unit does not share living or sleeping space with other units. A professionally managed unit is a transient accommodation that is subject to the applicable taxes and fees, regardless of how the rental is obtained.

An owner who offers three or more units for rent in New Jersey and who directly rents (such as through local newspaper ads, personal referrals, signage, etc.) continues to be required to collect Sales Tax, the State Occupancy Fee, and other applicable taxes and fees because the transient accommodation is a professionally managed unit.

Are Lessors Required to Register with NJ?

An owner who offers three or more units for rent in New Jersey must be registered to collect the applicable taxes and fees unless all of the rentals are obtained through a, transient space marketplace or through a real estate broker. In addition, transient space marketplaces, including travel agencies, must be registered to collect the Sales Tax, the State Occupancy Fee, and other applicable taxes and fees on all transient accommodations obtained through the transient space marketplace. However, d address any conflicts; work with the Office of Chief Counsel to see if they need legislation to use tax data to identify potential conflicts; and better manage the OES, both in terms of requiring employee compliance and management review.

Tax Planning Tip #1:

Lessors of rental properties in NJ need to consult with their tax advisor ASAP. Determinations need to be made if the lessors are subject to the amended NJ sales tax law on transient rentals, if they need to be registered to collect the sales tax, if they need not be registered by nevertheless are required to collect and remit the sales tax, and due to the effective dates of the previously enacted law and the amended law, renters may be entitled to refunds and how lessors should handle those refunds as well as the filing of a Final Tax Return if appropriate.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA LESSEES REQUIRED TO WITHHOLD PA PERSONAL INCOME TAX ON LEASE PAYMENTS MADE TO NON-PA COMMERCIAL LANDLORD

October 8, 2019 by Frank

Lessees Required to Withhold PA PIT on Lease Payments Made to non-PA Commercial Landlords

PA 72 P.S. §7324.4 Withholding Requirement

PA 72 P.S. § 7324.4 states “Every lessee of Pennsylvania real estate who makes a lease payment in the course of a trade or business to a nonresident lessee shall withhold Pennsylvania personal income tax on rental payments to such nonresident lessor.”

Who Is Subject to this Withholding?

This withholding requirement only applies to non-resident individuals, estates or trusts or disregarded entities owned by such non-resident entities.

Who Is Not Subject to this Withholding?

Payments to any of the following are not subject to this withholding requirement: Partnerships, Corporations, Multi-Members LLCs, Residents, and disregarded entities (LLCs) owned by partnerships, corporations, multi-member LLCs or residents.

What is Subject to Withholding?

Lessor withholding only applies to commercial lease payments (which are broadly defined). Residential lease payments are exempt from the withholding requirement.

Any Threshold Withholding Requirement?

The PA Dept. of Revenue states that withholding is optional if annual lease payments are less than $5,000. Out-of-state lessors may prefer that PA personal income tax be withheld to lessen their PA tax remittance requirement.

Tax Planning Tip #1:

PA lessees should protect themselves from failure to withhold. To determine if the lessor is a non-resident individual of PA or a disregarded entity owned by one, have the lessee complete PA Form REV-1832, 1099-MISC Withholding Exemption Certificate form. This form lists the reasons the payee is not subject to the PA 3.07% withholding tax. The payee simply checks the appropriate box which the landlord can normally accept in good faith.

Tax Planning Tip #2:

Determine the annual lease payment to the non-resident lessor. If not more than $5,000 in a calendar year, no withholding is required. If it is unknown whether the $5,000 threshold will be met, the PA DOR encourages withholding.

Tax Planning Tip #3:

If lessor will likely be paid more than $5,000 or if the lessee wishes to withhold, register for a 1099 withholding account on E-Tides. Withhold tax at 3.07% rate for lease/rental payments made to non-PA resident lessors on PA situs property.

Copyright © 2019 Keystone Financial Solutions, Inc. All rights reserved. BE SURE TO READ THE DISCLAIMER PAGE: Content in this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher of this blog makes no representations as to the accuracy or completeness of any information herein, will not be liable for any errors or omissions, and shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA MOTOR VEHICLE UNDERSTATED VALUE PROGRAM REVISITED

September 19, 2019 by Frank

Philadelphia Inquirer Interested in PA Motor Vehicle Understated Value Program

Do You Want to Become Famous?

Do you want to become famous and to see your name mentioned in a story in the Philadelphia Inquirer? Okay, we exaggerate. You likely will not become famous if your name were included in a newspaper article.

Opportunity to Share Your Personal Experience with a Reporter

We were contacted by a reporter from the Philadelphia Inquirer about our October 2018 blog posting. The posting dealt with the PA DOR & PA Dept Motor Vehicles assessing PA residents sales tax on private car sales after-the-fact. These are situations where the all-knowing PA DOR (tongue-in-cheek) makes a tax assessment on a private car sale where PA determines that the stated value of the car on the title transfer paperwork was understated and additional PA sales tax is due.

The reporter would like to speak with persons who received one of these deficiency notices and what happened next. If you had such an experience, please call me a 610-594-2601 so we can discuss your situation and if the reporter wishes to speak with you directly.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA REQUIRES PA COMPANIES TO WITHHOLD PA PERSONAL INCOME TAX ON PAYMENTS MADE TO NON-PA BASED CONTRACTORS

September 17, 2019 by Frank

Brief Overview of the PA PIT Withholding Requirement When PA-Based Companies Make Payments to Non-PA-Based Contractors

PA 72 P.S. §7316.2 Withholding Requirement

PA 72 P.S. § 7316.2 states that a person that (1) makes payments of income from sources within PA to a non-resident individual or an entity that is disregarded that has a non-resident member and (2) who is required to file Form 1099-MISC with the PA Department of Revenue, shall deduct and withhold the PA Personal Income Tax (PIT) at the rate of 3.07%.

Who Is Subject to this Withholding?

This withholding requirement applies to payments made to non-resident individuals, estates or trusts or disregarded entities owned by such non-resident entities.

Who Is Not Subject to this Withholding?

Payments to any of the following are NOT subject to this withholding requirement: Partnerships, Corporations, Multi-Members LLCs, Residents, and disregarded entities (LLCs) owned by partnerships, corporations, multi-member LLCs or PA residents.

What Types of Payments Are Subject to Withholding?

Payments for services rendered in PA by non-residents of PA are subject to the PIT withholding requirement.

Withholding Examples

Ex. 1: PACo, a business located in West Chester, PA, hires Stephanie, a MD resident individual, to perform customer surveys from her home in MD. PACo (the payor) pays Stephanie (the payee) $10,000 for her consulting services. PACo will report the $10,000 on Form 1099-MISC since it exceeds the $600 dollar filing requirement threshold.

However, since Stephanie performed no services within PA, she is not subject to PA PIT withholdings.

Ex 2: If we change the facts to show that Stephanie spent time in PA to perform some of her services, then PA withholding is required for the services provided within PA by this non-resident individual. PACo has the compliance burden of devising a process to substantiate the time Stephanie spent in PA to perform her services and withhold PA PIT on the fees she earned for her work performed within PA.

Ex 3: The facts are the same as in Example 2, except Stephanie is a single owner of her LLC and the LLC (not Stephanie) was contracted to perform the consulting services in PA.

The PA payor is required to withhold PA PIT because the LLC is a disregarded entity.

What Types of Payments Are Not Subject to Withholding?

Payments made related to goods or materials (inventory), sale of property, and interest and dividend income are not subject to the PA withholding tax requirement.

Tax Planning Tip #1:

PA payors should protect themselves from failure to withhold. To determine if the payee is a non-resident individual of PA or a disregarded entity owned by one, have the payee complete PA Form REV-1832, 1099-MISC Withholding Exemption Certificate form. This form lists the reason(s) the payee is not subject to the PA 3.07% withholding tax. The payee simply checks the appropriate box which the landlord can normally accept in good faith.

Tax Planning Tip #2:

Estimate the annual calendar year payments to the non-resident payee. If not more than $5,000 in a calendar year, no withholding is required. If it is unknown whether the $5,000 threshold will be met, the PA DOR encourages withholding.

KEEP IN MIND THAT IF IT WAS ANTICIPATED THAT THE PAYEE WOULD BE PAID LESS THAN $5,000, BUT THAT THRESHOLD WAS EXCEEDED, THE PAYOR IS LIABLE FOR THE FULL 3.07% PIT WITHHOLDING AMOUNT ON THE ENTIRE MONIES PAID TO THE PAYEE.

Tax Planning Tip #3:

If payee will likely be paid more than $5,000 or if the payee wishes to have tax withholdings, register for a 1099 withholding account on E-Tides. Withhold tax at 3.07% rate for payments made to non-PA resident service providers working in PA.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA DEPT. OF REVENUE NOT REFUNDING TAXES WITHHELD

September 3, 2019 by Frank

Taxes Withheld May Not be Refundable in PA

Real Life Scenario #1

You put in your retirement papers to start receiving pension benefits or you decide to withdraw IRA retirement monies.

You are a PA resident and you request to begin receiving your company pension plan. The employer will likely request at what income tax rate do you wish to have your federal and state income taxes withheld. The employer may have default rates. If you do specify the desired withholding rate, the employer will use the default rate.

Do you consult with your tax professional as to how to respond? Likely not because it is a simple form that likely appears not to have much significance. If too many taxes are withheld, your think you will get a refund. If too little taxes are withheld, you believe you may have a small underpayment penalty.

Real Life Scenario #2

You instruct your financial advisor/broker to begin to make RMDs (required minimum distributions) from your retirement account. You instruct your broker to withhold federal taxes at the rate of 30% (your federal effective rate) and PA taxes at 10%. You realize that the PA statutory rate is 3.07%, but you despise making quarterly estimated tax payments for the dividend and capital gains that will be reported to PA. Your thinking is that the rate differential will be used to apply against the taxes due on those sources of income.

Again, you do not consult with your tax professional.

What Is the Problem?

The problem is that one of the few benefits of residing in PA is that many forms of retirement are non-taxable. Pension benefits and RMDs are generally not taxable for PA personal income tax (PIT).

Let’s assume that the payor of the pension plan or RMD properly shows the pension or IRA distribution on Form 1099-R as non-taxable for PA and also reflects the PA taxes withheld on those distributions.

Your PA-40 PIT income tax return claims the tax withheld from your retirement proceeds because those taxes were actually withheld from the gross retirement proceeds. You paid those taxes and now you want those taxes applied against your total PA taxes due. Seems perfectly logical.

All is seemingly well, but then that letter from the PA Department of Revenue arrives in the mail. PA is challenging those withheld taxes on your non-taxable retirement benefits. The PA DOR requests a letter from your employer or broker stating that the taxes withheld were done so in error and should not have been withheld. (After all, everyone knows that those retirement benefits are non-taxable and no taxes should be withheld). The DOR further states that without that letter, the withheld taxes will be ignored. Or, the DOR instructs the taxpayer to prove that those withheld taxes were remitted to PA. After all, simply showing the amount of withheld taxes in the tax withholdings box is not proof that the taxes were remitted to PA.

So you call your employer or broker and tell them that you need this letter stating that they made a mistake. This can be a challenge. First of all, the payor of the retirement funds did not make a mistake. You the taxpayer made the mistake by instructing that PA PIT be withheld. While an employer may be willing to sign such a letter for a long-term and valued employee, a brokerage firm may not wish to issue such a letter stating that it made an error when it merely followed your instructions.

Okay. So you cannot obtain the letter admitting a withholding error, surely the payor can provide proof of payment to PA. Again, it is very doubtful that the corporate office of a Wall Street brokerage firm will take such action due to your error. An employer . . . maybe?

Frantic Call to Tax Professional

Realizing that the PA DOR is about to deny these withheld taxes and will be sending you a tax assessment along with interest and penalties, you now decide its time to call your tax professional to decry the authoritarian and oppressive actions of the PA DOR and get your return accepted without any adjustment.

You are likely not going to be pleased when your tax professional explains that a fee will be charged to represent your issue with the PA DOR, the likelihood of not being successful at the DOR department dealing with your tax account, how PA’s appeal process is draconian, and the cost of going to appeals.

Tax Planning Tip:

When life events occur, be sure to share those with your tax professional at your earliest convenience. Preferably, before the event, such as when you decide to retire. You did not wake up one morning and retire, get married, have a child, etc.

If pre-retirement planning had been done, the withholding rate for PA retirement funds would have been discussed as being zero, and the above scenarios could easily have been avoided.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.