By Richard M. Botwright
On Sept. 30, 2019, the Department of Revenue (DOR) issued Corporation Tax Bulletin 2019-4. The bulletin is DOR’s interpretation of the South Dakota v. Wayfair Inc.1 ruling’s impact on Pennsylvania corporate net income tax (CNIT). Bottom line: For tax years beginning on or after Jan. 1, 2020, corporations with $500,000 or more in Pennsylvania receipts might be subject CNIT.2
Why the Bulletin Is Important
The bulletin is important because it broadly interprets the scope of CNIT. CNIT is imposed on any corporation that does business, carries on activities (other than 86-272), employs capital or property, or owns property in Pennsylvania.3 Prior to the bulletin, the Commonwealth did not tax corporations unless they had a physical presence (such as employees or property) in the state. This is often referred to as economic nexus—where a state seeks to tax a corporation based solely on sales to customers in that state.
While the bulletin does not expressly state the reasons for its adoption of economic nexus, it appears to interpret the first prong (doing business) to mean any activity for which the U.S. Constitution allows a state to tax. Indeed, the bulletin would tax corporations to the greatest extent permissible under the U.S. Constitution.4
The bulletin’s interpretation results in a broader application of CNIT, subjecting more corporations to CNIT than previously. For example, a corporation that provides service to Pennsylvania customers, but has no physical connection to the Commonwealth, might be subject to CNIT if it exceeds the $500,000 threshold. Similarly, a corporation that sells products to Pennsylvania customers through the internet might also be subject to tax, even where the corporation lacks any physical connection to Pennsylvania.
Intangible holding companies—corporations that license intangible assets for use in the Commonwealth—provide another example of the potential ramifications of the bulletin. DOR historically did not tax intangible holding companies that were organized and operated exclusively outside Pennsylvania. After the effective date of the bulletin, DOR will likely rely on the bulletin to attempt to tax intangible holding companies.
Should CPAs Adhere to the Bulletin?
Pennsylvania is not the first state to impose economic nexus for corporate net income tax.5 Pennsylvania, however, adopted economic nexus in an unconventional manner. While most states enacted statutes or regulations to impose economic nexus, Pennsylvania asserted its authority through a bulletin. DOR’s authority to adopt economic nexus through a bulletin is suspect.
CPAs must determine whether to file tax returns in various states. The bulletin will require CPAs to determine whether their clients are subject to CNIT. Whether or not a corporation is subject to CNIT requires a detailed analysis of the law and the corporation’s activities in Pennsylvania. Rather than relying solely on the bulletin, the analysis should focus on the existing statutes, regulations, and applicable case law.
1 South Dakota v. Wayfair Inc., 585 U.S. ____, ____, 138 S. Ct. 2080, 2099 (2018) (holding that “the physical presence rule ... is unsound and incorrect”).
2 Corporation Tax Bulletin 2019-4 creates a presumption that corporations with $500,000 or more of Pennsylvania income are subject to CNIT. The bulletin requires corporations to determine the $500,000 threshold using the appropriation apportionment methodology for each type of receipt (e.g., tangible personal property, services, or intangible assets). See P.S. Section 7401(3)2.(a)(16)(apportionment for receipts from tangible personal property), (16.1) (apportionment for receipts from services), and (17)(apportionment rules for receipts that do not fit into either of the prior two categories).
3 72 P.S. 7402(a)(imposing CNIT on corporations that meet certain requirements).
4 Corporation Tax Bulletin 2019-4 states that “the Department [of Revenue] will require taxpayers without physical presence ... but having nexus ... under the Constitution of the United States ... to file [a corporate tax return].”
5 For example, the Massachusetts Department of Revenue recently amended its corporate tax regulations to subject corporations that have “considerable in-state sales derived through either economic or virtual contacts.” See 830 CMR 63.39.1(3)(b)(7).
Richard M. Botwright is of counsel to Stevens & Lee in Reading, Pa., and director in the Griffin/Stevens & Lee Tax and Consulting Network. He is a member of PICPA's State Taxation Committee and Fiscal Responsibility Task Force.
For more information on Pennsylvania tax topics, check out PICPA’s on-demand sessions from the 2019 Conference on Pennsylvania Taxes.
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