CCH Tax Day Report
Pennsylvania legislation imposes sales and use tax on downloaded videos, games, music, canned software, and other items; creates provisions authorizing a refund for sales or use tax on computer data center equipment; adds exemptions; amends the collection discount provision; imposes criminal penalties for the purchase, installation, or use of automated sales suppression devices; and makes other changes.
Income tax changes (TAXDAY, 2016/07/19, S.27) and property and other tax changes (TAXDAY, 2016/07/19, S.29) made by the legislation are reported separately.
Tax on Downloads
Effective August 1, 2016, sales and use tax is imposed on downloaded videos; photographs; books; any otherwise taxable printed matter; applications (commonly known as apps); games; music; any other audio, including satellite radio service; canned software; and any other otherwise taxable tangible personal property electronically or digitally delivered, streamed, or accessed. These items are taxable as tangible personal property and are considered tangible personal property whether they are electronically or digitally delivered, streamed, or accessed and whether they are purchased singly, by subscription, or in any other manner, including maintenance, updates, and support.
Refund for Data Centers
Beginning July 1, 2017, an owner, operator, or qualified tenant of a certified computer data center may apply to the Department of Revenue for a refund of sales or use tax paid on certain equipment that is used to outfit, operate, or benefit a computer data center and component parts, installations, refreshments, replacements, and upgrades to the equipment. The initial application must be filed by July 30, 2017, and subsequent applications must be filed by July 30 of the following years. The department will notify applicants of the amount of their tax refund by September 30, 2017, and by September 30 of the following years.
Types of equipment for which taxes can be refunded include:
– equipment necessary for the transformation, generation, distribution, or management of electricity that is required to operate computer servers or similar data storage equipment;
– equipment necessary to cool and maintain a controlled environment for the operation of the computer servers or data storage systems and other components of the computer data center;
– water conservation systems;
– software, including enabling software and licensing agreements, computer servers or similar data storage equipment, chassis, networking equipment, switches, racks, cabling, trays and conduit;
– monitoring equipment and security systems;
– modular data centers and preassembled components of any item of computer data center equipment, including components used in the manufacturing of modular data centers; and
– other tangible personal property that is essential to the operations of a computer data center.
The refund is not available for equipment used by a data center to generate electricity for resale to a power utility, with certain exceptions, or to generate, provide, or sell more than 5% of its electricity outside the data center.
To qualify for the refund, a data center owner or operator must apply to the Department of Revenue for certification. The application must include the name, address, and telephone number of the owner or operator; the address of the computer data center site; and anticipated investment or employee compensation information. The department may not certify any computer data center for the refund after December 31, 2029.
For an owner or operator, the qualification period begins on the date of certification of the computer data center and expires at the end of the 15th full calendar year following the calendar year in which the owner or operator filed an application for certification. For a qualified tenant, the qualification period begins on the date that the tenant enters into an agreement concerning the use or occupancy of the computer data center and expires on the earlier of the expiration of the term of the agreement or the end of the 10th full calendar year following the calendar year in which the qualified tenant enters into the agreement. A qualified tenant is an entity that contracts with the owner or operator of a certified computer data center to use or occupy part of the computer data center for at least 100 kilowatts per month for two or more years.
A computer data center must meet the requirements in either (1) or (2) below, after taking into account the combined investments made and annual compensation paid by the owner or operator of the computer data center or the qualified tenant:
(1) On or before the fourth anniversary of certification, the computer data center must create a minimum investment of (a) at least $25 million of new investment if the computer data center is located in a county with a population of 250,000 or fewer individuals or (b) at least $50 million of new investment if the computer data center is located in a county with a population of more than 250,000 individuals. “New investment” means the construction, expansion, or build out of data center space at either a new or an existing computer data center on or after January 1, 2014, and the purchase and installation of computer data center equipment, except software and related items.
(2) One or more taxpayers operating or occupying a computer data center, in the aggregate, must pay annual compensation of at least $1 million to employees at the certified computer data center site for each year of the certification after the fourth anniversary of certification.
Computer data center owners, operators, and qualified tenants must keep records of all investment created by the data center and all tax refunds they receive. Owners and operators must notify the department regarding their satisfaction of the investment or employee compensation requirements on or before the fourth anniversary of certification. A computer data center’s certification can be revoked and refunded taxes can be recaptured if the requirements are not satisfied.
The total amount of tax refunds cannot exceed $5 million in any fiscal year and if the approved refunds exceed that amount the refunds will be allocated among all applicants.
Timbering machinery and equipment: Effective July 1, 2017, machinery and equipment used in timbering and parts and supplies for such machinery and equipment are exempt from sales and use tax. Timbering includes:
– the business of producing or harvesting trees from forests, wood lots, or tree farms for the purpose of the commercial production of wood, paper, or energy products derived from wood by a company primarily engaged in the business of harvesting trees; and
– all operations taking place prior to the transport of the harvested product that are necessary for the removal of timber or forest products from the site, in-field processing of trees into logs or chips, complying with applicable environmental protection and safety requirements, loading of forest products onto highway vehicles for transport to storage or processing facilities, and post-harvest site reclamation, including activities necessary to improve timber growth or ensure natural or direct reforestation of the site.
Timbering does not include harvesting trees for clearing land for access roads.
Returnable or reusable cartons: The exemption for cartons used for deliveries of tangible personal property applies to corrugated boxes used by manufacturers of snack food products to deliver the manufactured product, regardless of whether the boxes are returnable for potential reuse.
Services to property rented to certain exhibitors: After June 30, 2016, services related to the set up, tear down, or maintenance of tangible personal property rented by a Pennsylvania Convention Center Authority to exhibitors at a convention center or a public auditorium are exempt.
For sales and use tax returns due on or after August 1, 2016, the collection discount allowed to licensees as compensation for collecting and remitting the tax is changed from 1% of the amount of tax collected to the lesser of: (1) 1% of the amount of tax collected or (2) $25 per return for a monthly filer, $75 per return for a quarterly filer, or $150 per return for a semiannual filer.
Automated Sales Suppression Devices
Any person who purchases, installs, or uses an automated sales suppression device, zapper, or phantomware in Pennsylvania with the intent to defeat or evade a Pennsylvania tax or other amount due commits a misdemeanor. Furthermore, any person who, for commercial gain, sells, purchases, installs, transfers, or possesses an automated sales suppression device, zapper, or phantomware with the knowledge that the sole purpose of the device is to defeat or evade the determination of a Pennsylvania tax or other amount due commits an offense punishable by a fine of not more than $5,000 or by imprisonment for not more than one year, or both. A person who uses an automated sales suppression device, zapper, or phantomware is liable for all taxes, interest, and penalties due as a result of the use of that device.
If a person is guilty of an offense related to an automated sales suppression device, zapper, or phantomware and the person sold, installed, transferred, or possessed not more than three of such devices, zappers, or phantomware, the person commits an offense punishable by a fine of not more than $5,000. If a person commits an offense related to an automated sales suppression device, zapper, or phantomware and the person sold, installed, transferred, or possessed more than three of such devices, zappers, or phantomware, the person commits an offense punishable by a fine of not more than $10,000.
These provisions do not apply to a corporation that possesses an automated sales suppression device, zapper, or phantomware for the sole purpose of developing hardware or software to combat the evasion of taxes by use of automated sales suppression devices, zappers, or phantomware.
Act 84 (H.B. 1198), Laws 2016, effective July 13, 2016, except as noted, and applicable as noted