PA DOR Will Apply $500,000 Economic Nexus Rule for Corporation Income Tax Filings in 2020

The Pennsylvania Department of Revenue recently issued Corporate Tax Bulletin 2019-04[i], which implemented a $500,000 economic nexus threshold for Corporate Net Income Tax purposes.

The bulletin was issued after the decision in Wayfair v. South Dakota[ii] where the United States Supreme Court decided that a physical presence in a state is not required in order for there to be nexus with the state for sales tax purposes. In its opinion, the Supreme Court failed to create any bright-line threshold of sales activity which would satisfy nexus requirements under the Due Process and Commerce Clauses of the United States Constitution. However, it did not rule against the approach of South Dakota, where out-of-state taxpayers who had in excess of either 200 transactions or $100,000 worth of sales of goods or services were deemed to have economic nexus with the state for sales tax.

There has been some uncertainty amongst taxpayers as to whether the physical presence standard overturned in Wayfair also applied to corporate net income tax. The Pennsylvania Department of Revenue analyzed the decision and determined that it allows the state to impose nexus on an out-of-state taxpayer without a physical presence for Corporate Net Income Tax purposes.

Ultimately, the Department decided that corporations with no physical presence that have $500,000 or more of direct or indirect gross receipts will have a filing requirement for corporate net income tax from any combination of the following:

                (1) Gross receipts from the sale, rental, lease, or licensing of tangible personal property;

                (2) Gross receipts from the sale of services; and/or

                (3) Gross receipts from the sale or licensing of intangibles, including franchise agreements.[iii]

Lastly, the Department acknowledged that corporations without a physical presence may still potentially claim exemptions under Public Law 86-272 but should continue to file a FORM RCT-101 and complete the necessary schedules to claim this exemption.

The bulletin states the Department will require taxpayers to apply this revised nexus standard starting on January 1, 2020.

 

[i] Corporation Tax Bulletin 2019-04, September 30, 2019

[ii] Wayfair v. South Dakota, 138 S. Ct. 2080, (2018)

[iii] Corporation Tax Bulletin 2019-04, p. 3

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