In Corporation Tax Bulletin 2019-04 (the Bulletin, available here), the Pennsylvania Department of Revenue (the Department) announced that, effective for tax years beginning on or after January 1, 2020, a corporate taxpayer with $500,000 or more of direct or indirect gross receipts from certain Pennsylvania sources (described below) has nexus for Pennsylvania corporate net income tax (CNIT) purposes even if the corporate taxpayer has no physical presence in Pennsylvania. The Bulletin is the first attempt by the Department to impose CNIT based solely on economic nexus.

Under CNIT law, a corporation has nexus with Pennsylvania and is subject to CNIT if, either directly or through another entity, it engages in any of the following activities: doing business in Pennsylvania, carrying on activities in Pennsylvania that are not protected by Public Law 86-272 (described below), having capital or property employed or used in Pennsylvania, or owning property in Pennsylvania.

In the June 2018 Wayfair v. South Dakota decision, 138 S. Ct. 2080 (2018), the Supreme Court held that physical presence is not required for a state to require sellers to collect sales and use tax from customers located in the taxing state. The Department determined that the Supreme Court’s decision in Wayfair means that CNIT nexus does not require physical presence.

In the Bulletin, the Department explains that, beginning with tax years starting on or after January 1, 2020, there will be a rebuttable presumption that a corporate taxpayer will have nexus with Pennsylvania for CNIT purposes if it has $500,000 or more of direct or indirect sales that would be apportioned to Pennsylvania from the sale, rental, lease, or licensing of tangible personal property; the sale of services; or the sale or licensing of intangibles, including franchise agreements. This rebuttable presumption will apply even if the corporation has no physical presence in Pennsylvania.

When setting the $500,000 threshold, the Bulletin expressly references the CNIT apportionment rules used to determine a corporate taxpayer’s Pennsylvania sales factor. Therefore, corporate taxpayers with no physical presence in Pennsylvania but with Pennsylvania sales must calculate what the numerator of their Pennsylvania sales factor would be to determine whether the rebuttable presumption applies. This will require such a taxpayer to apply Pennsylvania’s market-sourcing rules for the sales of tangible property and sales of services and the ambiguous “cost of performance” rules for other sales. Only if, after applying those rules, the Pennsylvania sales (i.e., the numerator of the Pennsylvania sales factor) are $500,000 or more does the presumption apply. Specifically, because Pennsylvania’s cost-of-performance test for sourcing gross receipts from intangibles is an all-or-nothing test, taxpayers that have gross receipts from intangibles, but that incur a majority of their costs of performance outside of Pennsylvania, may have no sales sourced to Pennsylvania. Litigation is pending in Pennsylvania courts that ultimately will determine how the Bulletin will apply in the cost of performance context.

The Department also acknowledged the continued applicability of Public Law 86-272. Public Law 86-272 prevents states from imposing net income taxes on taxpayers that are engaged in selling tangible personal property in the state if the taxpayer’s only activity in the state is soliciting such sales. In the past, many corporations who were protected from CNIT by Public Law 86-272 did not file returns because they did not have any physical presence in Pennsylvania. However, notwithstanding that these taxpayers still will pay no CNIT because they have Public Law 86-272 protection, if they have Pennsylvania sales of $500,000 (determined as described above) for tax years beginning on or after January 1, 2020, these taxpayers will be required to file CNIT returns.

Interestingly, this Bulletin is not interpreting a change to the CNIT law. The Department essentially is announcing that Wayfair allows the Department to change not only its long-standing interpretation of Pennsylvania law but also the Pennsylvania law relating to economic nexus through administrative announcement. While courts generally have upheld states’ rights to impose corporate taxes based on economic nexus, taxpayers could argue that such a major change should come from the legislature or, at the very least, in the form of more formal guidance.

All corporate taxpayers with $500,000 or more of gross receipts from Pennsylvania customers should be aware of this change in policy to determine whether they could have a CNIT filing obligation for 2020.  Ballard Spahr can assist with any questions about the Bulletin and any other issues related to CNIT or other Pennsylvania taxes.


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