Pennsylvania Adopts Destination-Based Local Sales Tax Sourcing

Pennsylvania Adopts Destination-Based Local Sales Tax Sourcing

Businesses should prepare for a significant change in Pennsylvania's local sales tax rules. As part of the fiscal 2026-2027 budget, Act 21 of 2026 shifts local sales taxation for Philadelphia and Allegheny counties from Pennsylvania's long-standing origin-based sourcing methodology to a destination-based approach.

Under the new rules, vendors required to collect Pennsylvania sales tax must collect the applicable Philadelphia or Allegheny County local tax based on where the taxable product or service is delivered rather than on the seller's location. While the law is effective January 1, 2026, the Pennsylvania Department of Revenue has announced it will not begin enforcing the new requirements until October 1, 2026.

Background

Pennsylvania imposes two local sales taxes in addition to the state's 6% sales tax: Philadelphia County tax of 2% and Allegheny County tax of 1%.

Historically, those local taxes were sourced based on the seller's location. As a result, businesses located in Philadelphia or Allegheny County were required to collect local tax on sales delivered throughout the state, while businesses outside those jurisdictions generally were not required to collect local tax on sales delivered into those counties.

Act 21 changes that framework by sourcing local tax based on the customer's location. So, a Philadelphia retailer shipping taxable merchandise to Montgomery County still collects only Pennsylvania's 6% state sales tax. However, a retailer located anywhere in or outside Pennsylvania shipping taxable merchandise to a Philadelphia County customer generally must collect the combined 8% tax rate. That same retailer delivering taxable merchandise to an Allegheny County customer generally must collect the combined 7% tax rate.

Business Implications

The change could eliminate a competitive disadvantage previously faced by businesses in Philadelphia and Allegheny counties. Under the former sourcing rules, businesses in those counties collected local tax on sales delivered outside their counties. Under the new rules, local tax applies only when the sale is delivered into the applicable county.

The change also could reduce local use tax compliance burdens for purchasers making a taxable purchase outside Philadelphia and Allegheny counties but using the taxable purchase in those counties. Historically, vendors located outside those jurisdictions often collected only the 6% Pennsylvania tax, leaving purchasers responsible for self-accruing the additional local use tax. Beginning October 1, vendors should collect the applicable local tax at the point of sale, reducing the need for separate use tax accrual calculations.

Conversely, sellers located elsewhere in Pennsylvania, along with remote sellers already registered to collect Pennsylvania sales tax, might have new collection obligations when making taxable sales into Philadelphia or Allegheny County.

Importantly, Pennsylvania continues to administer and collect both local taxes through the Department of Revenue. Unlike local tax jurisdictions in states like Colorado and Louisiana, businesses will not need separate local registrations, filings, or remittance procedures for sales tax.

Transition and Open Questions

Although Act 21 is effective January 1, 2026, the Department's delayed enforcement date creates uncertainty regarding transactions occurring before October 1, 2026.

Questions remain regarding:

• Potential refund opportunities when local tax might have been over-collected under prior sourcing rules; and
• Application of the new rules to transactions involving multiple points of use (MPU) exemptions when software or software as a service (SaaS) is used across multiple counties.

Compliance Considerations

Businesses should evaluate whether their systems accurately identify delivery locations and apply the correct local tax rate. Areas that could require review include:

• Sales tax engines and automation software;
• Enterprise resource planning (ERP) systems;
• Point-of-sale systems;
• E-commerce platforms;
• Customer address validation procedures; and
• Tax reporting and return preparation processes.