Pennsylvania Supreme Court Rules in Favor of Market-Based Sourcing

Date March 8, 2023
Authors Bryan Holm

The Pennsylvania Supreme Court recently issued its greatly anticipated decision in Synthes v. Commonwealth of Pennsylvania which addressed different interpretations of Pennsylvania’s cost of performance (“COP”) statute for sourcing revenue. Understanding how taxes will be sourced for apportionment purposes for companies doing business in multiple states can be confusing. Prior to 2014, Pennsylvania required the sale of services to be sourced to the location of the income producing activity. Whenever the income producing activity occurred within and without the state, receipts were required to be sourced to where the greater of the income producing activity occurred. In 2014, Pennsylvania transitioned to market-based sourcing rules for services- but retained COP sourcing for the sale of intangibles.

In Pennsylvania, the interpretation of COP for revenue sourcing purposes was an ongoing debate. The argument was the substance of differing stances by Pennsylvania’s Department of Revenue and the Office of the Attorney General and reached the state’s Supreme Court via Synthes v. Commonwealth of Pennsylvania.

Synthes is a Pennsylvania-based company that had filed for its 2011 tax year based on a standard understanding of Cost of Performance (COP) for the sale of its services, thereby sourcing its sales to Pennsylvania. But it sought a refund based on its intent to have the DOR’s market-based sourcing interpretation of COP applied, meaning that it would be taxed based on where it provided its services, that is, the states where its services were being bought and used. The Court sided with the DOR, and therefore with Synthes, citing in part “the sourcing of sales of services to the point of delivery to the customer.”

In its February 22 ruling, the court found that, “To determine the Pennsylvania income tax for a corporation doing business in multiple states, the Tax Reform Code for the 2011 tax year employed an ‘apportionment factor,’ which in turn derives from three other factors: sales, property, and payroll. 72 P.S. § 7401(3)2.(a)(9)(A). As is relevant to the case at bar, the ‘sales factor’ is the ratio of ‘total sales of the taxpayer in this State’ compared to the ‘total sales of the taxpayer everywhere.’ 72 P.S. § 7401(3)2.(a)(15). Accordingly, the Tax Reform Code necessitates categorization of which sales are ‘in this State,’ or in the parlance of the parties, which sales should be ‘sourced’ to Pennsylvania.”

In many states, market-based has replaced COP sourcing in determining tax liability. States often cite efficiency as a rationale. While COP receipts source the income from the location of performed services, such as the home base of the seller, the market-based method can source receipts based on the location of the customers receiving the services. It is important to note that the COP language remains applicable as it relates to the sourcing of intangibles prior to 01/01/2023. Despite the legislative change for 2014, there may be refund and tax savings opportunities for corporate taxpayers with intangible income in addition to pass-through entity nonresident owners living in no tax states.

If you have questions, please contact the HBK SALT Advisory Group at

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