A number of Pennsylvania State Senators continue to push for legislation to eliminate school district property taxes in Pennsylvania.  They would replace the lost revenues by increasing the statewide Personal Income Tax rate from 3.07% to 4.34%, by increasing the state sales tax rate from 6% to 7%, by broadening the sales tax to apply to more services, by narrowing or eliminating many sales tax exemptions and by limiting the vendor’s sales tax discount to $300 per year.

The Senate Finance Committee is expected to hold hearings on the proposed legislation within the next few weeks.  This legislation could have major impacts on Pennsylvania business and individual taxpayers.  Our summary of the proposal follows below.  If you are concerned about the proposed changes, you should contact your legislators immediately.  If you require assistance in evaluating the potential impact on your company, please contact the author of this article or another member of our State and Local Tax Practice Group.

Senate Bill 76 was introduced in March 2013 by a group of State Senators, lead by Senators David Argall, Mike Folmer, Judith Schwant and John Yudichak.  Similar legislation is before the Pennsylvania House of Representatives as HB 76.  After a number of questions were raised during debate on the House Bill and from other sources, the Senators have proposed an omnibus amendment which they say would address many of the criticisms.  The analysis below addresses the Senate bill as it would stand after enactment with the proposed amendments.

The proposed legislation would eliminate school districts’ authority to impose real estate taxes.  School property taxes would remain in force only to the extent legally required to pay off construction bonds.   On a going-forward basis, school districts would have new authority to levy local earned income and net profits taxes or personal income taxes in order to finance special projects – but only if approved by referendum.

Earned income and net profits taxes, and personal income taxes, levied by school districts after referendum, would comply with the current rules in the Local Tax Enabling Act or in the Tax Reform Code, with one exception.  No credit against a personal income tax would be provided for taxes paid to another state or to a political subdivision outside of Pennsylvania.

Vendor Discount

The sales tax vendor discount, currently 1%, would be limited by SB 76 to only $300 per year.  This discount is intended to compensate vendors for the administration, collection and remittance of the tax.  Effectively, this would push millions of dollars of costs onto the Commonwealth’s businesses, at the same time the tax is made more complicated and difficult to deal with.

Additional Taxable Services

Pennsylvania’s Sales and Use Tax would be broadened to apply to numerous additional services.  The services would be defined by reference to more than 2000 industry codes under the North American Industry Classification System (NAICS).  Some of the new services would be eligible for a “business-to-business” exemption which is discussed below.  Since space does not permit us to list all of the specific codes in this article, the following list attempts to summarize and categorize many of the additional services, but should not be taken in any way as an all-encompassing list:

• Intrastate Transportation of Persons – by air, rail, water, bus, taxi, subway, trolley, limousine and horse-drawn carriage.  This would appear to include local transit by bus and commuter rail.
• Recreational Travel and Transport – bus trips, horse-drawn carriage rides, scenic railroad trips, fishing boat charters, dinner cruises, helicopter rides, monorail rides, etc.
• Vehicle Towing Services
• Publishing - newspapers, books, journals, maps, magazines, advertising periodicals, address lists, greeting cards, art prints, calendars, catalogs, clothing patterns, post cards, program booklets, etc.
• Computer Software Production/Publishing – canned applications software, games, operating systems, programming languages, etc.
• Motion Picture, Television and Video Production, Distribution and Related Services – includes movie theater presentations, booking agency services and film/video library services as well as numerous services associated with production, reproduction, etc. of films and videos.
• Financial Planning and Investment Advice
• Legal Services, Except Family & Criminal Law – including real estate title & settlement services, notary, process service, and patent agent services.
• Accounting & Auditing – including tax return preparation, payroll processing and billing services.
• Architectural  – including garden planning, golf course design, land use planning, etc.
• Engineering  – including traffic engineering consulting services.
• Drafting
• Building Inspection
• Surveying and Mapping – including aerial, geological, geophysical, gravity, magnetic, geographic, hydrographic, topographic, etc.
• Lab & Testing – including acoustic lab, biological, electrical, environmental, forensic, hydrostatic, metallurgical, soil and radiation testing and services.
• X-ray Inspection
• Design Services – including interior, automobile, furniture, industrial, packaging and tool design services.  Also, clothing, jewelry and shoe design.
• Artistic Services – including commercial and graphic arts,
• Computer Services – including programming, software analysis, software installation, web design, CAD/CAE/CAM systems integration design and  LAN systems integration design services,   computer systems facilities management and operation services and computer disaster recovery services.
• Business Management &Consulting – including hotel management, medical office management and correctional facilities management.  Also including records management, site selection, compensation, benefits, HR, labor relations, organizational development, marketing, sales management, logistics distribution, and utilities management consulting services.
• Technical Consulting – including environmental, sanitation, agricultural, biological, chemical, economic, energy, geochemical, horticultural, physics, safety and security consulting.
• R&D Labs & Services – including biotechnology, DNA, nanobiotechnologies, agricultural, bacteriological, biology, botany, chemical, computer and related hardware, dental, electronic, food, medical and physics lab services.
• Other Research Services – including archeological, behavioral, business, cognitive, demographic, economic, historic preservation, humanities, social science and sociological research services.
• Advertising & Marketing – including advertising and marketing advice, market research, ad sales and buying services, billboard and other display advertising services, direct mail advertising services, direct distribution services, demonstration services and sign painting services.
• Lobbying
• Political Consulting
• Public Relations
• Polling
• Photography and Video services
• Language Interpreting
• Veterinary and Other Animal Health Services
• Appraisal services
• Arbitration and Conciliation
• Business Brokerage
• Credit Counseling
• Meteorological services
• Employment Agency, Registry, Placement, Search
• Professional Employer Organization (PEO) services
• Customer Service Call Center
• Telemarketing
• Parcel mailing services
• Videoconferencing
• Travel Agency & Tour Operator
• Reservation and Ticket Services
• Packaging and Wrapping Services
• Show Management & Promotion
• Auctioneering
• Textile Cutting, Folding, etc.
• Waste Collection, Hauling – including hazardous waste.
• Charges by For Profit Schools, Colleges, Universities and other Training or Instructional Entities, Other than Tuition & Housing Charges – includes tutoring, exam prep.
• For-profit Care for Elderly and Incapacitated and Other For-Profit Care and Medical-related Services – includes for-profit visiting nurses, home health care, ambulance, blood bank, organ donor, blood pressure screening, pacemaker monitoring and smoking cessation services.  Also, includes charges by for-profit convalescent homes and hospitals, skilled nursing facilities, group homes, intermediate care facilities, alcohol and drug rehab facilities, psychiatric hospitals, continuing care retirement communities, children group homes, senior citizen centers, day care centers, counseling services, and vocational rehab facilities.
• Child Day Care & Babysitting, Nursery School, Pre-School
• Performance & Sports Organization Events & Related Services – except when imposed by an elementary or secondary school,  tax would be imposed on charges for shows by dinner theaters, community theaters, opera companies, summer theaters, ballet companies, orchestras, popular music groups and circuses.  Similarly, tax would apply to charges for admission to professional sporting events, automobile races, horse race tracks, boxing and wrestling events.  Tax would also apply to services to the industries, such as racehorse training, refereeing, boarding of race horses, etc.
• Fair, Festival & Show Management, Promotion & Operational Services – including by operators of arts events, beauty pageants, boxing shows, concert halls, fairs, festivals, and rodeos.  Also, charges by theatrical booking agencies.
• Sports, Entertainment, Theatrical Talent Agency & Management
• Museums, Galleries, Planetariums, Halls of Fame, Historical Sites, Natural Parks, Amusement Parks, Carnival Rides, Game Arcades, Golf Clubs & Driving Ranges, Aquariums, Arboretums, Gardens and Zoos
• Recreational Activities – including charges for/by Fitness Centers, Ice Rinks, Swimming Pools, Tennis Courts, Bowling Alleys, Amateur Sports Teams, Billiard Parlors, Day Camps, Gun Clubs, Fishing & Hunting Guide Services, Horseback Riding, Paintball, River Rafting, Recreational or Youth Sports, Waterslides, Campgrounds and RV Parks.
• Cover Charges to Clubs, Bars, etc.
• Barber & Beauty Salon Services
• Diet & Weight Loss Centers
• Day Spas, Massages, Tanning Salons
• Funeral and Embalming
• Cemeteries, Mausoleums, and Memorial Gardens
• Laundry & Drycleaning – including self-service
• Uniform, Diaper, Linen Supply Services
• Animal Grooming, Boarding, Training, Sitting
• Film & Photo Developing & Printing
• Parking Garages, Lots, Valet
• Astrology Services
• Bail Bonding
• Check Room Services
• Credit Care Notification and Identity Theft Protection Services
• Escort Services
• Personal Fitness Training
• Psychic Services
• Shoeshine Services
• Wedding Planning

Sourcing of Sales for Tax Collection Purposes

While a purchaser’s potential direct liability for use tax would be based on “use” within the Commonwealth, SB 76 would provide specific rules to determine when a vendor would be required to collect Pennsylvania sales and use tax from customers.  For services other than telecommunications, collection would be required if the “first use” occurs within the Commonwealth.  For sales of goods, PA tax would be collected where the goods are delivered within the state.  There would be a series of rules to determine the point of delivery when goods are sold, not leased or rented.  In descending order of precedence:

1. PA sale if received by purchaser at seller’s PA business location.
2. PA sale if received by purchaser or purchaser’s donee at some other location in PA – including delivery location designated by purchaser in delivery instructions known to seller.
3. PA sale where actual location of receipt by seller is not known to seller but business records of seller reflect PA address for purchaser.
4. If source could not be determined under 1, 2 or 3, then PA sale if PA address for purchaser is reflected on payment instrument or other address obtained during consummation of sale.
5. If all else fails, sale would be sourced to PA where goods are shipped from PA or first available for transmission from a Pennsylvania location.

While the language is not absolutely clear, it appears that where the location of “first use” of a service could not be determined, PA tax would be collected if the service was provided from a PA location.

Digital Goods

It is not clear whether SB 76 intends to tax digital goods other than computer software.  The language simply is conflicted.

Business-to-Business Exemption

To avoid the worsening of tax pyramiding that would result from taxing all of the additional services sold to other businesses whose products already are generally subject to tax, an amended SB 76 would provide an exemption for certain of the newly-taxable services “performed by a business and rendered to another business.”  The bill as presently drafted does not define “business,” thereby leaving open the question of how services provided by nonprofits would be treated.  Services covered by this “B2B” exemption would include the following categories, which are defined more precisely in the bill by reference to specific NAIC codes:

• Legal Services
• Architectural, Engineering and Related Services
• Accounting, Auditing and Bookkeeping Services
• Specialized Design Services
• Advertising, Public Relations and related services
• Services to Buildings and Dwellings
• Scientific, Environmental and Technical Consulting Services
• Scientific R&D Services
• Information Services
• Administrative Services
• Custom Programming, Design and Data Processing Services
• Parking Lot and Garage Services

Other New Exemptions

While, as discussed below, many current exemptions would be narrowed or eliminated, SB 76 would provide a few other new or expanded exemptions – some related to the newly-taxed services:

• Sales to a supervisor of a home education program.Charges for meals and student fees imposed by elementary and secondary schools.
• Tuition charges by any school.

• Services performed by minors under 18 years of age and not on behalf of another person.
• Services provided by employees to their employers in the ordinary course of employment.
• Goods or Services that are part of a Medicare Part B transaction.

Resale, Manufacturing & Other Production Exemptions

SB 76 would retain the current sales and use tax exclusions applicable to purchases for Resale and for direct and predominant use in Farming, Manufacturing, Processing, Mining and Public Utility Service.  These exclusions would appear to apply to the newly-taxable services as well as to the tangible personal property and services which currently qualify.  The Resale Exclusion language would be expanded to specifically include services purchased to be resold as-is, and services which become "an integral, inseparable part of" taxable services that are to be sold by the purchaser of the component service.

Repeal of Exemptions

Not only would Pennsylvania’s sales and use tax be expanded by taxing additional services, but additional revenues would be produced by eliminating or narrowing numerous current exemptions and exclusions.

The clothing exemption would be narrowed to apply only to items with a purchase price of less than $50.  The exemption for food and beverages would be limited to items qualifying under the Women, Infants and Children (“WIC”) Program as administered by the Department of Health.

Foods eligible under the WIC program are somewhat limited.  Only certain categories of food qualify and within those categories only certain ingredients and packaging sizes are allowed.  Categories of foods allowed under WIC include:  milk; cheeses; soy beverages; tofu; infant formula, cereal, fruits, vegetables and meats; children’s juices; fresh, frozen and canned fruits; fresh, frozen and canned vegetables; whole grain cereals; whole wheat bread and rolls; whole grain brown rice and oats; soft corn or whole wheat tortillas; juices for adults; canned fish; peanut butter; eggs; and, beans.  Many packaged foods and most specialty foods are excluded.

The following exemptions and exclusions would be eliminated:

• Disposable diapers, wipes, incontinence products, toilet paper, sanitary napkins, toothpaste, toothbrushes and dental floss.
• Nonprescription medicines.
• Newspapers and newspaper advertising inserts.
• Caskets, burial vaults, grave markers and tombstones.
• U.S. and Commonwealth of Pennsylvania flags.
• Textbooks.
• Mail order catalogs and direct mail advertising literature or materials.
• Horses delivered to purchaser or agent prior to shipment out-of-state.
• Materials purchased by non-profit organizations for use in construction and erection of historical commemoration and memorialization.
• Magazine subscriptions.
• Candy and gum.
• Tangible personal property used in production of commercial motion pictures.
• Racehorses and feed, bedding, etc. used for racehorses.
• Used prebuilt housing (mobile and modular homes).
• Airline food and nonalcoholic beverages.
• Investment metal bullion and investment coins.
• Basic Cable television service.
• Provision of driver education car to private or public school.

Upcoming Seminars

Property Tax

Lancaster - May 22; Williamsport - May 30

Randy Varner, Bert Goodman and Tim Horstmann will present morning seminars on the “Nuts and Bolts of Property Tax Assessment” in Lancaster on May 22 and in Williamsport on May 30.  To register, please contact Karen Swaringen at 717-237-5430 or at kswaringen@mwn.com.

Pittsburgh - May 20; Mechanicsburg - June 5; Philadelphia - June 10

Randy Varner and Bert Goodman will present  a half-day PBI seminar on “Recent Developments in Assessment Law in Pennsylvania” in Pittsburgh on May 20, in Mechanicsburg on June 5 and in Philadelphia on June 10.  Log on to PBI’s website to register:  http://www.legalspan.com/pbi/calendar.asp?UGUID=&ItemID=20131205-229194-104342

Sales & Use Tax

Allentown/Bethlehem - June 6, 2014

Jim Fritz, Sharon Paxton and Megan Luck will be presenting a full-day seminar on “Sales and Use Tax in Pennsylvania” in Allentown on June 6.  The program will be sponsored by Lorman Education Services.  For a 20% discount on registration, use the following link:  http://www.lorman.com/seminars/392964?discount_code=A1724773&p=13389&s=direct.

PA TAX LAW NEWS is presented with the understanding that the publisher does not render specific legal, accounting or other professional service to the reader. Due to the rapidly changing nature of the law, information contained in this publication may become outdated. Anyone using this material must always research original sources of authority and update this information to ensure accuracy and applicability to specific legal matters. In no event will the authors, the reviewers or the publisher be liable for any damage, whether direct, indirect or consequential, claimed to result from the use of this material.