PA Requires Oil and Gas Lessees to Withhold State Income Taxes from Nonresident Lessors
Under Act 43 of 2017 beginning January 1, 2018, anyone that pays Pennsylvania-source non-employee compensation or business income to a non-resident individual or disregarded entity that has a non-resident member, and is required to file a Federal Form 1099-Misc must withhold an amount computed at the specified tax rate (currently 3.07%).
The new withholding obligations clearly apply to most payments to non-resident independent contractors for services in the course of a trade or business. The obligation extends beyond non-resident individuals to payments to a disregarded entity (like an LLC) that has a non-resident member. However, the definition of “payments” does not include a partner or shareholder’s distributive share of income from a partnership or Pennsylvania S corporation.
Any lessee of Pennsylvania real estate who makes a lease payment to a non-resident lessor, defined to include an individual, estate or trust, must withhold Pennsylvania personal income tax on rental payments. Obviously contemplating oil and gas leases, “lease payments” include but are not limited to rents, royalties, bonus payments, damage payments, delay rents and other payments made pursuant to a lease. There is an exception for residential property, but that is property used as the tenant’s residence; not for oil and gas leases on the lessor’s residence.
Withholding is optional for payments of less than $5,000 a year, but the risk is on the payor. The payor is liable for the tax on all payments from which withholding should be made.
For additional information including the timing of payment obligations see the Pennsylvania Department of Revenue’s Informal Notice Personal Income Tax 2017-01 Issued December 2017-01.