Quick Summary
Pennsylvania has changed how it sources the Philadelphia and Allegheny County local sales taxes, moving from origin-based to destination-based sourcing — meaning the tax now follows the customer’s location instead of the seller’s.
- Sourcing shift: Local sales tax now follows the customer’s delivery location, not the seller’s, ending decades of origin-based sourcing in both counties.
- Effective dates: The law applies to tax years beginning after Dec. 31, 2025, but the PA Department of Revenue won’t enforce it until Oct. 1, 2026.
- Action needed: Businesses selling into Philadelphia or Allegheny County should review address data, tax systems, invoicing and exemption certificate processes now.
As part of Pennsylvania’s 2026-2027 budget legislation, the state has enacted changes within the Fiscal Code that alter the sourcing of transactions subject to the 2% Philadelphia local sales tax and the 1% Allegheny County local sales tax. The local sales tax sourcing rules were amended to align with Pennsylvania state sourcing rules, therefore moving the Philadelphia and Allegheny County sales tax from an origin-based framework to a destination-based framework. As a result, businesses selling taxable goods or services into those jurisdictions may need to reevaluate how they determine, collect and report local sales tax. Likewise, because the effective date is for tax years beginning after December 31, 2025, the legislation allows for a potential retroactive application to January 1, 2026. Thus, the retroactive application may require businesses to determine whether additional local tax exposure or reporting adjustments exist.
Prior Sourcing Approach
Since the inception of the local sales tax in both jurisdictions, sales were sourced to Philadelphia or Allegheny County if the sale was consummated within either jurisdiction (origin-based sourcing). Meaning that, if a seller was processing a sale within the jurisdiction, then the local tax generally was due, even when the delivery location was in another Pennsylvania location outside Philadelphia or Allegheny County. In practice, this meant that a seller located in Philadelphia or Allegheny County could be required to collect the applicable local tax on all Pennsylvania sales, while a seller located outside the two jurisdictions may not have been required to collect the local portion of the tax — even when the customer was located within Philadelphia or Allegheny County.
New Destination-Based Sourcing
The new legislation changes the sourcing of local sales tax to where delivery of the taxable products or services occurs within the Commonwealth — i.e., a destination-based approach. Accordingly, taxable sales delivered to, or otherwise received by, customers in Philadelphia or Allegheny County are subject to the applicable local tax based on the customer’s location. Thus, all vendors that have established nexus within the state of Pennsylvania, either through economic or physical presence, and shipped products or performed services in Philadelphia or Allegheny County will now be obligated to collect and remit the applicable local sales tax. It also will result in sellers located within either of the two taxable jurisdictions that ship products or perform services for Pennsylvania customers outside Philadelphia or Allegheny County having to no longer charge the tax to those customers.
There are several categories of sales for which the new sourcing rules do not apply. Within the local sales tax statutes, special sourcing rules were written for mobile telecommunication services, motor vehicles, motorboats, aircraft and certain construction materials. The new legislation expressly states that those prior special rules still apply.
Effective Date and Compliance Considerations
As mentioned above, the effective date of the legislation is December 31, 2025, with the potential for retroactive application to January 1, 2026. However, the PA Department of Revenue had begun notifying sales tax license holders that the changes will be enforced effective October 1, 2026.
Our Thoughts On
The change is particularly important for remote sellers, marketplace sellers and businesses with tax calculation systems configured under the prior origin-based approach. Companies selling into Philadelphia or Allegheny County should review customer address data, tax determination logic, invoicing processes, exemption certificate procedures, marketplace collection rules and sales tax return reporting. Businesses that rely on automated tax software should also confirm that local Pennsylvania sourcing rules have been updated to reflect the new destination-based methodology.
Additionally, purchasers located outside of Philadelphia and Allegheny County should be vigilant to ensure that purchases from vendors within the local jurisdictions are adjusted to reflect that the local tax is no longer due as of the effective date.
Pennsylvania’s shift to destination-based local sales tax sourcing represents a meaningful change for businesses with customers in Philadelphia and Allegheny County. By tying local tax obligations to the customer’s location, the legislation may expand local tax collection responsibilities for sellers located outside those jurisdictions.
The Schneider Downs State and Local Tax team is available to assist businesses with adjusting their tax procedures to account for the change. Schneider Downs Tax Advisors run one of the largest regional tax practices in the country, pairing deep technical knowledge with a personal focus for every client. From federal reform and OBBB provisions to R&D credits and state and local tax, we turn complex change into practical, implementable strategy. To learn more, visit our Tax Services page, contact us, or email us directly.
