More Fallout from Wayfair: Pennsylvania Applies Wayfair to Corporate Income Tax
On September 30, 2019, Pennsylvania adopted a new nexus requirement for corporate net income tax. The Pennsylvania Department of Revenue (Department) issued Corporation Tax Bulletin 2019-04 outlining the new requirements. Relying on the South Dakota v. Wayfair, Inc. (Wayfair) decision, the Department indicated that physical presence is no longer required for the state to impose income tax.
Historically, to satisfy the Constitution’s commerce clause, a taxpayer had to have a substantial nexus with a state for the state to impose tax. In Quill Corp. v. North Dakota (Quill), the U.S. Supreme Court established that physical presence was required to satisfy the substantial nexus requirement between the taxing state and taxpayer. In Wayfair, the Supreme Court overturned the bright-line test articulated by Quill and held that physical presence isn’t a requirement for a taxpayer to have substantial nexus with a state. In the year following Wayfair, almost all states enacted remote seller legislation modeled after South Dakota’s statute for sales tax purposes; however, Pennsylvania is the first state to apply Wayfair to income tax nexus.
While no legislation has been passed that outlines a threshold (unlike with sales tax), the Department’s position is that out-of-state taxpayers are doing business within the state when they take advantage of Pennsylvania’s economic marketplace. Under the new rule, a taxpayer with no physical presence and $500,000 or more in gross receipts sourced to Pennsylvania is doing business in the state and must file corporate income tax returns in Pennsylvania.
Taxpayers can likely claim Public Law 86-272 protection under the new nexus standard. However, those who rely on Public Law 86-272 won’t only have a filing requirement in Pennsylvania but will have to ensure that all their activities fall within Public Law 86-272’s scope.
While Pennsylvania is the first state to apply Wayfair to corporate income tax nexus, it’s likely others will follow. In Texas for example, the comptroller’s office proposed an amendment to implement an economic nexus $500,000 gross receipts threshold for its franchise tax. In the proposed rule, a foreign entity with no physical presence in Texas will have nexus in Texas if the entity has $500,000 or more in gross receipts from business in Texas. Unlike Pennsylvania, the comptroller’s long-standing position is that Public Law 86-272 doesn’t apply to franchise tax; therefore, taxpayers won’t be able to seek protection under this exemption.
Coupled with the fact that more states use market-based sourcing for services, this new income tax nexus approach may expand states’ reach, especially to service providers who can’t claim Public Law 86-272 protection.
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