Q&A with the Pennsylvania Department of Revenue

Scenario: apportion taxable income for CNI Tax

Sep 30, 2013
Scenario:

ABC Corp., a Pennsylvania based corporation, provides cloud-based services to customers located in CA. ABC Corp. has no physical presence in CA, but is subject to the state’s Franchise Tax because it has over $500,000 in sales to CA customers. For tax years beginning on or after January 1, 2011, California defines “doing business” for purposes of Income and Franchise Tax based on a factor presence standard modeled directly on the MTC statute. Companies with property or payroll of $50,000 or sales in excess of $500,000 to California customers will now be determined to be doing business in the state. If more than 25 percent of a company’s sales are in the state, including sales made by independent contractors or agents, the company will be subject to income and franchise tax, regardless of whether or not physical presence has been established.

Q:

Would ABC Corp. be permitted to apportion its taxable income for CNI Tax?

A:

72 P.S. 7401(3)(2)(a)(3)  allows a taxpayer to apportion income if the taxpayer conducts business in another state and is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax or if that state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not.

In this scenario California Statute provides certain requirements for a corporation to be subject to income tax and franchise tax in that state. If the taxpayer’s activity is sufficient to impose tax on the entity then the entity will be allowed to apportion. If the entity does not meet the requirements then this entity would not be allowed to apportion corporate taxable income. A corporation that does not meet these standards but still files a return in California is not allowed to apportion.
 

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These documents provide a summary of the answers provided by the Department of Revenue to the PICPA Committee on State Taxation at its annual question and answer session. These documents are classified as revenue information issued for informational purposes only for the convenience of PICPA members. Pursuant to 61 Pa. Code Section 3.4, these documents should not be relied upon for any purpose or used in tax appeals. Taxpayers requiring a binding opinion on their specific fact situation may request a written letter ruling under 61 Pa. Code Section 3.3.