Pennsylvania Supreme Court Rules in Favor of Market-Based Sourcing

Date March 8, 2023
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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 hbksalt@hbkcpa.com.

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Pennsylvania DOR Reminds Taxpayers of New Online Filing System

Date January 16, 2023
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In communication issued on January 9th, the Pennsylvania Department of Revenue reminded taxpayers that e-Tides, the Department’s prior online tax filing system, will be retired on February 24, 2023. Pennsylvania’s new system, myPATH, commenced operation in late November. Taxpayers that have not established their tax accounts on myPATH should act now to ensure access to the new system.

A myPATH account is required to file returns and make payments for many taxes, including sales tax and employer withholding. In addition, W-2 and 1099 reporting is housed on the myPATH system and the deadline for W-2/1099 reporting is rapidly approaching on January 31, 2023.

In its communication, the Department discusses the myPATH account creation process and provides links to instruction videos and tutorials on myPATH. Taxpayers are advised to make the transition early to allow time to address any account issues and avoid the risk of missing filing deadlines.

The complete communication from the Department can be viewed here.

If you have questions on Pennsylvania’s transition to myPath or other SALT matters, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.

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Pennsylvania Department of Revenue Issues Guidance on Realty Transfer Tax

Date December 9, 2022
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The Pennsylvania Department of Revenue (“Department”) issued Realty Transfer Tax Bulletin 2022-01 on December 5, 2022. The Bulletin addresses issues of tax payment and refund procedures for realty transfer tax (“RTT”). RTT applies to the transfer of real estate unless an exemption applies. The tax generally consists of state (1%) and local (1%) components for a total tax of two percent.

The Bulletin covers refund scenarios when the RTT is paid to the local Recorder of Deeds (“Recorder”) as well as when it is paid to the Department. How the RTT is paid determines the course of action when a refund is requested.

When RTT is paid to the Recorder of Deeds, the local RTT refund must be requested from the Recorder, but the state portion is requested from the Department. When RTT is paid to the Department (usually as the result of an assessment), the refund must be requested from the Department. The taxpayer is responsible for notifying the Recorder of the Department’s refund determination to obtain the local portion of the refund.

RTT refunds can be obtained by either application or petition for refund. The application for refund typically applies to clerical or administrative issues such as calculation errors or duplicate payments. A petition for refund is the statutory method to obtain a tax refund. A petition for refund should be utilized when maintaining the rights to appeal is necessary (for example, statute of limitations).

RTT is commonly paid by both parties to a real estate transaction which can complicate the refund process. The bulletin addresses several scenarios and provides guidance for all parties on how to proceed with their individual refund claims.

The full Realty Transfer Tax Bulletin can be reviewed on the Department’s website.

If you have questions on the Realty Transfer Tax Bulletin or other SALT matters, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.

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Pennsylvania Department of State to Require Annual Reports in 2024

Date November 22, 2022
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The Pennsylvania Department of State (“Department”) currently requires a decennial (every ten years) filing for entities registered to do business in the Commonwealth. The reporting requirements will change significantly in 2024 with the recent passage of House Bill 2057. The legislation creates an annual report filing requirement, like that imposed by most states, for domestic and foreign entities. The new annual report filing requirement applies to, “a domestic filing entity, domestic limited liability partnership, domestic electing partnership that is not a limited partnership or registered foreign association.”

The new annual report filing deadlines are based on entity type with corporations (including nonprofit) due to file by July 1st. Limited liability companies are due October 1st and any other form of domestic or foreign association must file by December 31st. The legislation requires the Department to notify entities of their filing obligations two months prior to the due date of the annual report.

Entities that fail to file annual reports will be subject to administrative dissolution or cancellation. The Department is to provide entities with a period of transition (until 2027) before imposing any dissolution or cancellation for failure to file annual reports. The new annual reporting is a significant change for Pennsylvania entities that will require additional time and planning. Fortunately for entities new to annual reporting, Pennsylvania is allowing long runway to prepare and comply.

For more on the legislation impacting annual reporting visit here.

If you have questions on SALT matters, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.

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Pennsylvania Commonwealth Court Sides with Amazon FBA Sellers

Date September 14, 2022
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On September 9, 2022, the Commonwealth Court of Pennsylvania granted summary relief to the Online Merchants Guild (“Guild”) in its dispute with the Pennsylvania Department of Revenue (“Revenue”). The Guild is made up of members that participate in Amazon’s Fulfillment by Amazon (“FBA”) Program. Merchants (“FBA Merchants”) participating in FBA commit their inventory to Amazon warehouses in Pennsylvania or other states and do not control where the inventory is stored. Revenue viewed participation in FBA by merchants as creating state tax obligations on the basis that inventory stored in the state constitutes physical presence.

Revenue began pursuing FBA Merchants through business activity questionnaires that implied enforcement actions were pending for FBA Merchants that did not respond to Revenue’s requests or take advantage of the voluntary compliance program offered in the letter. The Online Merchants Guild filed a petition for review in June 2021 asking the Court to determine whether FBA merchants were subject to Pennsylvania’s tax statutes.

One of the primary questions addressed by the Court was whether participation in FBA gave Revenue jurisdiction and authority to investigate the participating merchants and determine their tax liability. The Court concluded that Pennsylvania statutes, under Section 272, applied to “taxpayers, not individuals or entities Revenue suspects may be taxpayers”. The Court went on to address Due Process Clause concerns that effectively limit Revenue’s ability to request business information from entities. A taxing authority cannot, under due process, subject an entity to taxation unless there is a connection between the entity and the taxing authority (state) and the entity has availed itself to that state’s market (“protections, opportunities, and services”). The Court determined participation in FBA did not come with the expectation by the merchant that its goods “would be purchased by a customer located in the Commonwealth, or has availed itself of the Commonwealth’s protections, opportunities or services.”

The Court ruled in the Guild’s favor on two points essentially providing that Revenue did not have jurisdiction or authority to pursue the FBA Merchants. First, the Commonwealth had not provided anything to the merchants, “for which it can ask [in] return.” Second, the Department of Revenue does not have statutory authority over “persons or records located outside the Commonwealth”. The Court’s ruling is affirmation of the due process clause and may impact other states’ ability to pursue businesses with similar circumstances. Taxpayers should always exercise caution and check with their state and local tax advisor when responding to state tax questionnaires or state tax inquiries.

The full text of the Commonwealth Court ruling can be viewed here.

If you have questions on Pennsylvania’s ruling or other SALT matters, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.

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Pennsylvania Educational Tax Credits

Date July 19, 2022
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The Commonwealth’s Educational Improvement Tax Credits (EITC) and Opportunity Scholarship Tax Credits (OSTC) received significant funding increases in the recently passed budget legislation. The 2022-2023 budget increased total funding for the tax credit programs by $125 million. The increase includes an additional $88 million for scholarship organizations, $7 million for educational improvement organizations, $8 million for pre-kindergarten scholarship organizations and $10 million for the opportunity scholarship tax credit programs.

The popular tax credit programs offer tax credits of up to 90% (for a two-year commitment) of contributions made by businesses to approved organizations. New participants seeking entry into the tax credit programs have faced challenges in recent years due to the high demand for tax credits. The increased funding should allow more taxpayers to take advantage of the educational tax credits. The budget legislation also removes the limitation of the total amount of education tax credits a business can receive (currently $750,000) if all tax credits for scholarship organizations have not been awarded by November 30th. Taxpayers interested in Pennsylvania’s educational tax credits should note the credits are on a first-come, first-serve basis and early application is recommended.

For more information on educational tax credits, visit the Pennsylvania Department of Community and Economic Development website.

If you have questions on Pennsylvania’s EITC or OSTC programs or other SALT matters, please contact the HBK SALT Advisory Group at hbksalt@hbkcpa.com.

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Pennsylvania Reduces Corporate Income Tax, Shifts Burden to Out-of-State Businesses

Date July 15, 2022
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Pennsylvania is joining the ranks of several other U.S. states that are responding to an improved financial standing by lowering tax rates, which they contend will make businesses located there more competitive. A bill approved by the legislature July 7 and signed by Governor Tom Wolf reduces the corporate net income tax rate incrementally over the next six years from its current 9.99 percent to 4.99 percent by 2031. Governor Tom Wolf championed the legislation as part of his 2023 budget proposal.

Like similar bills being passed in other states, HB 1342 looks to shift some of that corporate tax burden to out-of-state businesses selling into Pennsylvania with market-based sourcing and economic nexus rules. Specifically, the bill changes the sourcing of intangible property from a cost-of-performance approach to a market-based approach. Under cost-of-performance, receipts are apportioned to the state based on the location where the taxpayer incurs its expenses providing its services. The market-based approach seeks to match the receipts to the source of the corresponding revenue, which translates into collecting more taxes from out-of-state businesses with substantial economic activity in the state.

As well, inspired by the landmark Wayfair v. South Dakota U.S. Supreme Court decision, HB 1342 creates an economic nexus for businesses based outside Pennsylvania with more than $500,000 in a year in remote sales, that is, sales into the state. The bill also increases several tax credit caps.

The bill won broad support by both parties, passing 38-12 in the Senate and 184-16 in the House. Republican Senate Majority Leader Kim Ward praised the bill as “a comprehensive modification to our taxes in Pennsylvania,” noting that state revenues had been higher than expected and that coupled with funds received through the American Rescue Plan Act allowed the commonwealth to “prioritize job creation and business growth through the reduction of the corporate net income tax.”

For more information on Pennsylvania corporate income tax, contact us at hbksalt@hbkcpa.com or visit our website here.

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Pennsylvania DOR Updates Notice of Taxable and Exempt Property

Date June 30, 2022
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The Pennsylvania Department of Revenue has issued an update to its Notice of Taxable and Exempt Property. The Commonwealth is required to periodically update this list which addresses different categories of property and provides taxability on an item-by-item basis. The Notice is also incorporated into the Retailer’s Information Guide (REV-717) published by the Department.

The updated Notice provides for tax treatment of new items and/or clarification or changes from prior versions. This year’s version includes the addition of guidance on non-fungible tokens (“NFTs”) which are taxable in Pennsylvania. The changes and clarifications in the notice address treatment of CBD that is vaped, flea-related pet supplies, residential fuel, and specified farming supplies.

The state’s current Retailer’s Information Guide can be accessed here.

The current Notice of Taxable and Exempt Property is available here.

If you have questions on the taxability of goods or services in Pennsylvania or other SALT matters, please contact HBK’s SALT Advisory Group at hbksalt@hbkcpa.com.

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Philadelphia Passes Tax Cuts and Breaks for Businesses and Residents

Date June 29, 2022
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Philadelphia’s 2023 budget, passed by the City Council on June 23, will include tax cuts on business income and wages. The city’s business income and receipts tax rate will be reduced from 6.2 percent to 5.99 percent. Taxes on wages are being reduced as of July 1, 2022, for residents from 3.8398 percent to 3.79 percent, and for non-residents from 3.4481 to 3.44 percent. Mayor Jim Kenney heralded the changes to wage taxes, considered among the highest in the nation, as being reduced to their lowest levels in more than 50 years.

In a related move, the Council passed an ordinance designed to move the city toward market-based sourcing for business income and receipts taxes on sales of intangibles and services by providing exclusions for receipts on intangibles used outside the city limits.

Market-based sourcing generally taxes services based on where the benefit of the service is received. In moving toward market-based sourcing, service businesses in Philadelphia will only be required to pay business income and receipts tax on sales delivered to customers located within the city. Market-based sourcing is the trend in state and local taxation. The transition to market-based sourcing should help level the playing field for Philadelphia-based service providers with companies located outside of Philadelphia.

For more information on how rulings and legislation related to state and local taxes might impact your business, contact us at hbksalt@hbkcpa.com or visit our website here.

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Philadelphia Looking to Shift Tax Burden to Out-Of-City Businesses

Date May 12, 2022
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On May 9, Philadelphia Mayor Jim Kenney said the city will ask state lawmakers to pass legislation that would allow the city to adopt market-based sourcing for its business income and receipts tax (BIRT). The market-based approach would source receipts to where a customer is located.

Kenney’s statement read, “This change in policy is meant to promote fairness by leveling the playing field for Philadelphia-based service providers with companies based outside of Philadelphia,” noting that it would match the state’s corporate income tax sourcing rules.

According to a city spokesperson, Philadelphia doesn’t currently have a projection for how shifting to market-based sourcing would affect its business income tax collections, but the plan is consistent with city officials’ goals, which include shifting its BIRT tax liabilities and the related tax burden to out-of-city businesses.

The proposal was part of a broader announcement in response to an increase in the aggregate value of property assessments of 21 percent since the previous assessments of 2020 that would hike property tax collections by a projected $460 million over the next five years. The mayor proposed $200 million in property tax relief through a higher homestead exemption and boosting funds for other programs. As well, he suggested a cut in the residential wage tax rate to 3.7% from 3.8398% and the nonresident wage tax rate to 3.44% from its current 3.4481% over the next two years as a means of providing $260 million in tax relief.

If you have questions on the Philadelphia legislation or other SALT matters, please contact HBK’s SALT Advisory Group at hbksalt@hbkcpa.com.

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