Pennsylvania’s most significant tax developments over the last two years have been concentrated in a few areas: corporate conformity and rate changes, local sales-tax sourcing, Philadelphia business and real estate taxes, Allegheny County property taxes, and several notable court decisions. The summary focuses on select developments that are anticipated to be relevant for local practitioners.
I. Enacted State Tax Changes
A. Act 45 of 2025 – Federal Conformity Changes
Pennsylvania selectively decoupled its Corporate Net Income Tax (“CNIT”) from several federal changes. These changes applied beginning with the 2025 tax year and created several new federal-to-Pennsylvania adjustments.
- Research and experimental expenditures – Taxpayers must add back the federal deduction for domestic and foreign R&E expenditures and may instead deduct those costs for Pennsylvania purposes ratably at 20% per year until fully recovered.
- Qualified production property – Pennsylvania does not follow the new federal immediate deduction under IRC § 168(n). A corporation must add back the federal deduction and depreciate the property under the otherwise applicable federal depreciation rules, without § 168(n).
- Business interest expense – For CNIT purposes, Pennsylvania applies IRC § 163(j) as it existed on December 31, 2024. Later federal changes to § 163(j) therefore do not automatically flow through to Pennsylvania.
B. CNIT Rate Reduction and NOL Expansion
The previously enacted CNIT rate reduction continued during the period. The rate fell to 7.99% for tax years beginning in 2025 and 7.49% for tax years beginning in 2026. It is scheduled to continue declining by 0.50 percentage points per year until it reaches 4.99% in 2031.
The expanded net operating loss rules also began taking effect in 2025. Pennsylvania historically limited the NOL deduction to 40% of taxable income. For losses generated in tax years beginning after December 31, 2024, that limitation begins increasing by 10 percentage points per year, eventually reaching 80%. Pre-2025 losses remain subject to the 40% limitation. This was enacted in 2024, but 2025 was the first year in which the new loss regime became relevant.
C. Act 21 of 2026 – Philadelphia and Allegheny County Local Sales Tax Sourcing
Act 21 of 2026 made a change to the local sales taxes imposed in Philadelphia and Allegheny County. Local sales tax now follows the delivery address of the customer rather than the location of the seller.
- Philadelphia continues to impose a 2% local sales tax, and Allegheny County continues to impose a 1% local sales tax, in addition to the 6% state rate.
- A vendor already required to collect Pennsylvania sales tax must now collect the applicable local tax when a taxable product or service is delivered to a customer in Philadelphia or Allegheny County.
- The legislation was enacted July 12, 2026, with a retroactive effective date for tax years beginning after December 31, 2025. The Department of Revenue announced that it will not begin enforcement of the new collection rule until October 1, 2026.
For multistate sellers, this is more than a rate change. It can require changes to sales-tax engines, customer address data, and sourcing procedures.
D. 2026–27 Budget
Pennsylvania enacted its fiscal 2027 budget in July 2026. The budget continues the scheduled CNIT rate reduction and existing tax-credit programs, including the Working Pennsylvanians Tax Credit and child and dependent care relief. Several more controversial tax proposals were left unresolved, including taxes on recreational cannabis, skill games, and digital advertising. The final budget also did not repeal the data-center sales-tax exemption.
II. Pending and Proposed Legislation
A. H.B. 1678 – Digital Advertising Gross Receipts Tax
H.B. 1678 would extend Pennsylvania’s 5% gross receipts tax to certain digital advertising services. The bill covers items such as banner, search-engine, and interstitial advertising and similar advertising that uses users’ personal information. Advertising displayed on platforms operated by news or broadcast media would be excluded.
The House passed the bill on June 9, 2026, by a 139–63 vote. The proposal also ties the new revenue to additional property-tax relief for residents age 65 and older. A legislative fiscal note estimated approximately $329.4 million of revenue in fiscal 2027 if enacted. The proposal was not included in the final fiscal 2027 budget and remains a proposal rather than enacted law.
B. Data Center Sales-Tax Exemption
Lawmakers in both chambers moved in 2026 to repeal Pennsylvania’s sales-tax exemption for qualifying data-center equipment. H.B. 2198 passed the House 197–5, while H.B. 1667 passed the Senate 44–6 after being amended to include repeal language. The push was driven in part by the growing projected cost of the exemption.
Despite that activity, the final fiscal 2027 budget left the data-center exemption in place. This remains an area to watch because the issue attracted unusually broad bipartisan support even though the repeal did not make it into the budget package.
C. H.B. 2497 – Prediction Markets
H.B. 2497 would establish a state tax and licensing regime for prediction-market platforms such as Polymarket and Kalshi. As introduced, the bill would impose a 20% state tax plus a 2% local-share assessment on platform revenues, together with a $1 million initial licensing fee and a $1 million renewal fee. The Pennsylvania Gaming Control Board would have licensing and audit authority.
The proposal also sits in the middle of the broader federal-state dispute over who has regulatory authority over prediction markets, which makes the legislation notable even apart from the proposed tax.
D. H.B. 2748 – Employer Child Care Contribution Tax Credit
H.B. 2748, introduced in August 2026, would substantially expand Pennsylvania’s employer child care contribution tax credit. For tax years beginning after December 31, 2025, the bill would increase the credit from 30% to 100% of qualifying employer contributions and increase the per-employee amount that can count toward the credit from $500 to $10,000. The bill would cap aggregate credits at $10 million per fiscal year and provide for proration if applications exceed the cap.
III. Significant Pennsylvania Tax Cases
A. National Hockey League Players’ Association v. City of Pittsburgh (Pa. Sept. 25, 2025)
The Pennsylvania Supreme Court unanimously struck down Pittsburgh’s 3% nonresident sports facility usage fee, commonly called the “jock tax.” The fee applied to nonresident athletes and entertainers earning income at publicly funded sports facilities, while Pittsburgh residents instead paid the City’s 1% earned income tax and a 2% school tax.
The Court held that Pittsburgh could not justify the different treatment simply by pointing to other taxes paid by residents. Under Pennsylvania’s Uniformity Clause, the City needed a concrete justification for imposing a different tax burden on nonresidents, and the Court found none. The decision is important beyond professional sports because it is another strong application of Pennsylvania’s unusually robust tax-uniformity doctrine.
B. Mission Funding Beta Co. v. Commonwealth (Pa. Commw. Ct. Aug. 14, 2025)
Mission Funding addressed the interaction between Pennsylvania’s ordinary refund limitations period and the separate rules governing changes arising from a federal audit. The taxpayer sought a Pennsylvania credit after an IRS adjustment, and the Department treated the claim as untimely under the general refund statute.
The Commonwealth Court vacated the Board of Finance and Revenue’s order and remanded. It held that the more specific federal-change provision in Section 406 of the Tax Reform Code could control over the general refund limitations rule. The case is practically important for taxpayers dealing with federal audit adjustments after the normal Pennsylvania refund period has closed.
C. Dow Chemical Co. v. Commonwealth (Pa. Commw. Ct. Dec. 22, 2025)
Dow Chemical was another challenge to Pennsylvania’s former CNIT net-loss carryover limitation. Dow sought relief for its 2013 tax year after the Pennsylvania Supreme Court’s decisions in Nextel and Alcatel-Lucent.
The Commonwealth Court rejected Dow’s attempt to obtain the benefit of Nextel for the earlier year and affirmed the Board of Finance and Revenue. In practical terms, the decision reinforces Alcatel-Lucent’s limitation on retroactive relief for older NOL-cap claims.
D. AmerisourceBergen Sourcing, LLC v. Commonwealth (Pa. Commw. Ct. Dec. 24, 2025)
The Commonwealth Court addressed whether the amount of tax at issue in a Board of Finance and Revenue appeal should be publicly disclosed at the outset of the case. The court concluded that, at least before factual development, the better practice is to permit the amount to remain confidential when the taxpayer follows the court’s public-access procedures. The issue is procedural, but it matters for taxpayers litigating large assessments because Pennsylvania tax appeals are filed in a court of record.
E. East Coast Vapor LLC v. Commonwealth (Pa. Commw. Ct. Apr. 24, 2026)
The Commonwealth Court reversed Other Tobacco Products tax assessments imposed on a Harrisburg vape shop that mixed custom e-liquids and sold them directly to in-store consumers. The Tobacco Products Tax Act imposes the tax when an electronic cigarette is first sold to a retailer. East Coast Vapor’s customers, however, were end users rather than retailers.
The court acknowledged that the business model exposed a gap in the statute, but it declined to rewrite the statute to reach a transaction the General Assembly had not taxed. The decision is a useful reminder that Pennsylvania courts continue to construe taxing statutes strictly against the Commonwealth when the statutory language is clear.
IV. Philadelphia Developments
A. BIRT Changes
Philadelphia made two important BIRT changes beginning with tax year 2025. First, the net-income rate fell from 5.81% to 5.71%, and the gross-receipts rate fell from 1.415 mills to 1.410 mills. The City has adopted a longer-term plan for additional reductions.
Second, and more significant for many small businesses, Philadelphia eliminated the longstanding $100,000 BIRT exemption beginning with tax year 2025. Businesses with Philadelphia activity that previously fell below the exemption may now have both a filing obligation and tax liability. To ease the transition, the City announced that businesses that had no BIRT filing requirement in 2022, 2023, and 2024 because of the exemption will be treated as new businesses for estimated-payment purposes when they file their 2025 returns in 2026.
B. Wage, Earnings, NPT, and School Income Tax Reductions
Philadelphia continued modest reductions in its individual and payroll-related taxes. Effective July 1, 2025, the Wage and Earnings Tax rates fell to 3.74% for residents and 3.43% for nonresidents. Effective July 1, 2026, those rates fell again to 3.735% and 3.425%, respectively. Corresponding reductions apply to the Net Profits Tax and School Income Tax.
C. Realty Transfer Tax Increase
Effective July 1, 2025, Philadelphia increased the City portion of its Realty Transfer Tax from 3.278% to 3.578%. With the Commonwealth’s 1% tax, the combined Philadelphia rate is now 4.578%. This is a meaningful transaction-cost increase for both residential and commercial real estate transfers in the City.
D. Use and Occupancy Tax
Philadelphia eliminated the annual $2,000 Use and Occupancy Tax exemption effective January 1, 2026. Businesses using or occupying Philadelphia real estate can no longer reduce their annual U&O liability by that exemption amount.
V. Allegheny County and Pittsburgh Developments
A. Allegheny County Property Tax
Allegheny County increased its county real estate millage from 4.73 mills to 6.43 mills for 2025, an increase of roughly 36%. The 6.43-mill rate remained in place for 2026.
B. Court-Ordered Countywide Reassessment
In August 2026, the Allegheny County Court of Common Pleas ordered the County to replace its 2012 base-year property values with a countywide reassessment. The County must begin the reassessment by 2027 and complete it within five years. The order also requires recurring countywide reassessments every five years thereafter, with a special master overseeing the process.
This is likely the most consequential Allegheny County property-tax development in years. It will affect the distribution of the tax burden among properties even if taxing bodies adjust millage to account for the new values.
C. Pittsburgh “Jock Tax”
As discussed above, the Pennsylvania Supreme Court’s 2025 decision invalidating Pittsburgh’s 3% nonresident sports facility usage fee is the leading Pittsburgh tax case of the period. The immediate impact is on nonresident athletes and entertainers, but the case also provides broader guidance on the limits the Uniformity Clause places on local tax classifications.
VI. Items to Watch
Looking ahead, the most important Pennsylvania items are likely to be implementation of the new Philadelphia/Allegheny destination-based sales-tax sourcing rules, further movement on the digital advertising tax and data-center exemption, and the mechanics of Allegheny County’s court-ordered reassessment. For corporate taxpayers, the practical challenge will be managing the widening gap between federal taxable income and Pennsylvania CNIT after Act 45.
