On February 17, 2022, The Pennsylvania Department of Revenue issued Corporate Tax Bulletin 2022-01 providing guidance on the apportionment of income by a taxpayer involved in activities subject to one or more special apportionment formulas.
All states require the apportionment of income for multi-state businesses. Apportionment is the determination of the percentage of a business’s profits that are subject to a given jurisdiction's corporate income tax or other business taxes. Pennsylvania currently requires businesses to apportion income based on a single sales factor methodology, where only a company's sales are considered. A specialized apportionment formula is required in Pennsylvania for companies within certain industries. Airlines, pipeline companies, publishing companies, railroads, and trucking companies are a few examples of industries that require a special apportionment formula.
In certain instances, a taxpayer could be positioned in a business that requires special apportionment as well as the regular method of apportionment required by the state. The matter of Buckeye Pipeline Co v Commonwealth presented such a case. Buckeye was a Delaware Corporation that was doing business in Pennsylvania. The company owned a one-percent interest, as the general partner in four limited partnerships. The sole business of these limited partnerships involved the transportation of petroleum products through 3,500 miles of pipeline situated in ten states, which included Pennsylvania. Buckeye provided complete operational management. In Buckeye Pipeline Co v. Commonwealth, the taxpayer requested the use of pipeline apportionment to apportion all its income. The pipeline apportionment method requested by Buckeye resulted in a tax liability that was more than fifty percent less than the method prescribed by the Commonwealth. Pennsylvania countered that 98.6% of the company's gross receipts were derived from management activities and 1.4% of its gross receipts were derived from pipeline activities. The Commonwealth ultimately adopted a split method of apportionment for similarly situated taxpayers who engage in activities subject to both the standard apportionment formulas as well as one or more of the special apportionment formulas.
The proper interpretation and application of a state’s apportionment methods can often be complex with substantial financial consequences. In today’s complex multi-state landscape, it’s important to surround yourself with trusted State and Local Tax advisors. If your business has questions about the new regulation, HBK’s SALT practice can assist you. Please contact HBK’s SALT Advisory group at HBKSalt@hbkcpa.com with questions.