Corporations should analyze and model the impact of Pennsylvania's recently enacted tax law changes

Alerts / July 27, 2022

Late in the evening of July 7, 2022, Governor Tom Wolf signed Act 53 of 2022 (Act 53) into law. Act 53 significantly modifies the corporate net income tax (CNIT), subjects certain ride-sharing agreements to sales tax, provides personal income tax benefits related to Internal Revenue Code sections 179 and 1031, and adds and expands certain types of tax credits. Act 53 is the culmination of months of negotiations between the Democratic governor and Republican majorities in both the House and the Senate. Importantly, none of these provisions is retroactive.

This brief article will focus on how Act 53 became law and its CNIT changes. In summary, Act 53 makes the following salient CNIT changes:

  • From 2023 to 2031, the CNIT rate will be reduced from 9.99 percent to 4.99 percent.
  • Generally, adopts market-based sourcing for receipts from sales of intangible property and most loans.
  • Codifies economic nexus.

These provisions take effect in 2023.

These changes subject to CNIT certain licensors and lenders that may not have been previously subject to CNIT. Therefore, any taxpayer – especially one that has engaged in transactions with affiliates – should analyze and model the impact of these changes. Finally, and depending on a taxpayer’s unique facts, taxpayers may be able to engage in planning to mitigate or avoid potential negative impacts of Act 53.

The Act 53 legislative journey

It is interesting to note that neither legislative chamber debated Act 53’s final language on the floor. For that reason, it is reasonable to infer that the Senate and House leaders and the governor negotiated the Act 53 terms as part of a comprehensive budget bill in a year in which Pennsylvania had a multibillion-dollar surplus and more than $2 billion in still-unspent federal stimulus funds. 

In fact, within a matter of hours, both chambers approved and the governor signed into law 48 pages of amendments that were added to a two-page bill. While these amendments were weeks in the making, the speed with which they were proposed and approved highlights the importance of knowing and following the nuances of legislative procedure.


The “keystone” of Act 53 is the manner in which it modified the CNIT. Act 53 modified the CNIT in three primary ways, each of which is intertwined with the other two:

  • Rate reduction.
  • Sourcing changes.
  • Economic nexus.

First, Act 53 reduces the CNIT rate to 8.99 percent in 2023 from its current 9.99 percent rate. In subsequent years, the CNIT rate will be reduced by one-half percent for each year from 2024 on until it reaches 4.99 percent in 2031.

In addition, Act 53 made important CNIT sourcing and nexus changes. All three types of changes are related. From a political perspective, the revenue increases associated with the sourcing and economic nexus changes allowed the rate reduction. The sourcing and economic nexus changes are connected from a technical perspective. For that reason, CNIT taxpayers – and putative taxpayers – should review how Act 53 will impact them from both tax and financial statement perspectives.

The sourcing provisions change the sourcing of receipts from the sale of intangible property and certain financial transactions (recall that Pennsylvania enacted market-based sourcing for “services” a few years ago). Speaking generally, these changes move away from the prior law’s “costs of performance” method to more of a “market-based” method. It will be important to watch how these sourcing changes may impact – or be impacted by – the Synthes case, which was argued in the Pennsylvania Supreme Court a few months ago.

Putting aside any potential Synthes impact, any corporation that has an affiliate that licenses intangible property should review how these sourcing changes – when combined with the economic nexus provisions – may impact its tax posture. That said, in an exception to the market-based sourcing rules, subparagraph (J) sources interest received from a loan to an affiliate to the commercial domicile of the lender.

Subparagraph (K) provides that any receipts not otherwise sourced under the new Act 53 provisions are to be thrown out. This subparagraph is most likely to apply to goodwill and may appear to be unconstitutionally unfair apportionment. While the provision may be unconstitutional in certain circumstances, a taxpayer may nonetheless argue that throwing out receipts results in unfair apportionment under the subparagraph.

The economic nexus provisions impose CNIT on a corporation that has $500,000 or more of receipts sourced to Pennsylvania (under the statutory sourcing provisions). These provisions, therefore, are directly connected to the sourcing changes and designed to subject to CNIT out-of-state licensors of intangible property used in Pennsylvania. The provisions are also designed to subject certain out-of-state lenders to CNIT. Therefore, any taxpayer that licenses intangible property that is used in Pennsylvania or lends funds to a Pennsylvania borrower should review these provisions. A critical component of that review is the manner in which Act 53 distinguishes between transactions with affiliates and nonaffiliates.


Act 53 provides historic CNIT rate reduction and complex sourcing and economic nexus provisions. Every corporation potentially impacted by these historic and complex changes should analyze and model the tax and financial statement impacts of the act on them and determine whether planning may mitigate or eliminate potential negative impacts.

Authorship credit: Michael J. Semes

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