On July 12, Gov. Josh Shapiro signed Pennsylvania’s 2026-2027 budget act (Act) into law. The enacted budget increases the Commonwealth’s spending by 3.7% to $50.84 billion, less than the $53.3 billion that the governor had requested. Unlike past years, the Act contains very few tax law changes.
Local Sales Tax Sourcing Methodology Changed
Since the 1990s, Pennsylvania has authorized two counties to impose a sales tax: Allegheny (1%) and Philadelphia (2%). Unlike the Commonwealth’s sales tax which uses “destination” sourcing, local sales taxes have employed “origin” sourcing where the sale is sourced to the retailer’s location. Consequently, a retailer in Philadelphia who sells a taxable product to a customer in Montgomery County is required to charge both the state sales tax of 6% and the 2% Philadelphia tax. A business in Montgomery country selling a product to a customer in Philadelphia is only required to charge the 6% state tax (the customer is responsible for paying 2% use tax on their own).
Effective retroactively to Jan. 1, 2026, Philadelphia and Allegheny counties will follow the state’s destination-based sourcing rule. Sales of products shipped to customers in Allegheny or Philadelphia counties will be subject to the respective 7% or 8% sales tax, but businesses in those two counties who sell to customers in other counties will no longer be required to charge the county tax. Out-of-state retailers selling to customers in Allegheny and Philadelphia counties will also be required to charge the applicable county sales tax rate.
This tax law change could help businesses in Allegheny and Philadelphia counties who have been at a competitive disadvantage for the past several decades due to the increased rates of sales tax that they’ve had to charge to customers in other counties. It may also increase local county sales tax collections based on purchases made by residents of Allegheny and Philadelphia Counties from retailers located elsewhere in Pennsylvania or out of state.
Philadelphia Business Income & Receipts Tax Base Decoupling from OBBBA
The Act retroactively decouples Philadelphia’s Business Income & Receipts Tax (BIRT) income tax base from several of the business income tax provisions of the One Big Beautiful Bill Act (OBBBA). Effective for tax years beginning after Dec. 31, 2024, Philadelphia will not follow the new federal rules regarding deductions for research and experimental costs, qualified production property depreciation and the add-backs for depreciation and amortization in the section 163(j) interest deduction calculation base. Affected taxpayers must use the same rules that apply to C corporations for Pennsylvania’s Corporate Net Income Tax, even taxpayers that are not themselves C corporations. The Act also automatically ties the BIRT net income base to any future state-level decoupling changes which are intended to preserve state tax collections.
Note that these changes do not affect the calculation of Philadelphia’s Net Profits tax or any local earned income taxes.
Few Statewide Tax Law Changes
On a statewide level, the Act’s only tax law changes of note are:
- An expansion of the Keystone Opportunity Zone program to include two new expansion zones in Philadelphia and Bucks counties and the creation of a new “Residential Revitalization Keystone Opportunity Zones” in Cambria County.
- The creation of an “Innovate in PA 2.0” tax credit program, which permits insurance companies to purchase up to $125 million in insurance premiums tax credits. Proceeds from the sale will be used to provide grants to biotech startups, workforce development partnerships, regional venture studios and programs that leverage federal research and technology funding.
Many Proposed Tax Law Changes Left on the Table
Several proposed tax law changes were not incorporated into the final bill signed by the governor, including:
- Taxes on “skill games,” which the Pennsylvania Supreme Court recently found to be gambling devices
- Mandatory combined reporting by corporations
- A digital advertising tax
- A proposed increased tax rate on passive investment income of individuals
- Expansion of the state’s false claims act to include taxes
- Changes to the state tax appeals process
- An elective pass-through entity tax
It is possible that some of these proposals could be enacted later this year through separate legislation. If that happens CBIZ’s SALT team will issue an additional article. Please get in touch with a member of our tax team for more information.
Frequently Asked Questions
The budget changes local sales tax sourcing in Allegheny and Philadelphia counties from an origin-based model to a destination-based model, effective retroactively to Jan. 1, 2026. This aligns local sales tax sourcing with Pennsylvania’s statewide sales tax rules.
Businesses will generally charge local sales tax based on where the customer receives the product rather than where the seller is located. Retailers in Philadelphia and Allegheny counties may no longer need to charge county sales tax on shipments to customers outside those counties, while out-of-state sellers shipping into those counties may need to collect the applicable local tax.
The budget retroactively decouples Philadelphia’s BIRT income tax base from several business tax provisions in the One Big Beautiful Bill Act (OBBBA), including provisions related to research and experimental expenditures, qualified production property depreciation, and certain interest deduction calculations.
Yes. The budget expands the Keystone Opportunity Zone program, creates new Residential Revitalization Keystone Opportunity Zones, and establishes the Innovate in PA 2.0 tax credit program to support investment in biotechnology, workforce development, and innovation initiatives.
Several proposals were left out, including taxes on skill games, mandatory combined reporting, a digital advertising tax, an elective pass-through entity tax, changes to the tax appeals process, and other tax policy measures that could still emerge through separate legislation later this year.
© Copyright CBIZ, Inc. All rights reserved. Use of the material contained herein without the express written consent of the firms is prohibited by law. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein. Material contained in this publication is informational and promotional in nature and not intended to be specific financial, tax or consulting advice. Readers are advised to seek professional consultation regarding circumstances affecting their organization.
“CBIZ” is the brand name under which CBIZ CPAs P.C. and CBIZ, Inc. and its subsidiaries, including CBIZ Advisors, LLC, provide professional services. CBIZ CPAs P.C. and CBIZ, Inc. (and its subsidiaries) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations, and professional standards. CBIZ CPAs P.C. is a licensed independent CPA firm that provides attest services to its clients. CBIZ, Inc. and its subsidiary entities provide tax, advisory, and consulting services to their clients. CBIZ, Inc. and its subsidiary entities are not licensed CPA firms and, therefore, cannot provide attest services.
