Changes to Local Tax Sourcing in Pennsylvania
The 2026/2027 Pennsylvania budget was passed on July 12, 2026. As part of the budget legislation, changes were made to sourcing rules relevant to the two local jurisdictions that charge an additional sales tax on top of Pennsylvania’s 6% sales tax. Philadelphia charges an additional 2% sales tax and Allegheny County charges an additional 1% sales tax.
A Move to Destination-Based Sourcing
Previously, these localities used origin-based sourcing, which means sales were attributed to the location where they originated. In real terms, for a Philadelphia business selling tangible personal property, this means that all of their sales were subject to the additional 2% sales tax, regardless of where the items were shipped in Pennsylvania.
With the changes now in place, these localities will use destination-based sourcing. For the above example, this now means the sales tax would be calculated based on where the sales are shipped to rather than the vendor’s location. For businesses located outside of Philadelphia or Allegheny County, they will be required to collect and remit the additional tax on sales shipped to locations within these jurisdictions. This change aligns the localities with most states, with only a handful of states still using origin-based sourcing. According to the City of Philadelphia, this will generate more than $1 million in additional revenue for the city while creating a more level playing field for local businesses.
Next Steps for Business Owners
Since the effective date of this change is for tax years beginning after December 31st, 2025, the legislation allows for retroactive application back to January 1, 2026. Businesses should update their processes now for these new rules and may want to review prior sales to determine if they have any possible outstanding liability. We await possible guidance from the Pennsylvania Department of Revenue on what should be done for sales after January 1 and treated under the prior sourcing rules.
For more information, or if you have thoughts and/or questions about the information outlined above, please do not hesitate to contact them; their seasoned and experienced tax professionals are always here to help. You can also learn more by visiting their Tax service page.
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