Pennsylvania passed a $31.5 billion budget on July 14, 2016; although not on time, the delay was nowhere near the magnitude of last year’s nearly nine-month budget impasse. The budget for Fiscal Year 2016-17 increased spending in several areas including public schools, early childhood education and special education.
Transaction-based taxes a major focus
When Governor Wolf presented his budget proposal earlier this year, he included several broad-based tax initiatives. None of these proposals made it into the final budget. Instead, the increased spending will be funded primarily by the following transaction-based taxes and tax increases:
- $1 per pack increase on the sale of a pack of cigarettes (effective August 1, 2016)
- $0.55 per ounce tax at the wholesale level on roll your own and smokeless tobacco
- Wholesale tax of 40% of the wholesale price of e-cigarettes and other vaping devices
- Expansion of the sales and use tax to include digital downloads of media including books, music, games, movies, satellite radio services and streaming services such as Netflix and Hulu (effective August 1, 2016)
Although this budget emphasizes tobacco type taxes, cigars are still not subject to tax in Pennsylvania. Another interesting point on taxing tobacco products so heavily is that this could have a negative impact on revenue. Faced with higher taxes, tobacco users may choose the healthier option to quit using the products or look to purchase these products outside of Pennsylvania.
Sales and use tax changes
Pennsylvania’s new budget also provides some limited exemptions to sales and use taxes such as exemptions for timbering, an exemption for convention center maintenance and an exclusion for corrugated boxes used for delivering products.
One seldom discussed but financially significant change to Pennsylvania’s sales and use tax is the new limitation on vendor discounts for sales and use tax filers. Prior to this budget, Pennsylvania provided an unlimited vendor discount for timely filers equal to 1% of the taxes collected. Starting with this budget, the discount is now limited to the lesser of 1% of the tax collected or $25 per monthly return filers, $75 per return for quarterly filers or $150 per return for semi-annual filers. This new cap on the vendor discount will be greatly felt by large retailers, but Pennsylvania was only one of 13 states that still provided an unlimited vendor discount.
In addition to the transaction-based taxes, Pennsylvania will now impose its 3.07% personal income tax rate on lottery winnings – making California the only remaining state that does not impose its personal income tax on lottery winnings. The new budget also increases the bank shares tax rate from 0.89% to 0.95% and increases taxes on revenue from slot operators who have table games.
Tax Amnesty Program on the horizon
A final piece to this year’s budget puzzle is not a new tax, but rather the opportunity for delinquent or non-filers to become compliant with Pennsylvania tax filings through a Tax Amnesty Program. The Tax Amnesty Program will run over 60 days and will allow taxpayers to file and pay tax liabilities with no penalty and only 50% interest imposed on the liability.
As with all developments in the state capitol, RKL’s state and local tax team will continue to monitor the implementation of the tax changes and initiatives contained in this year’s budget. Readers with questions about Pennsylvania’s new budget, possible additional revenue streams under consideration or the budgetary impact on a specific tax credit program should contact us.