Another Wayfair for income taxes move in Pennsylvania gives taxpayers an unsettling choice.
Beginning with the new year 2020, the Pennsylvania Department of Revenue (DOR) will begin enforcing new nexus standards based on factor presence for corporate income tax in Tax Bulletin 2019-04. It’s a move expected to generate challenges.
Under the rule, Pennsylvania joins a small number of states that, in addition to physical presence, establish nexus when one or more of the factors used for apportionment purposes–property, payroll, or sales–exceeds a threshold set by the state. In Pennsylvania, this amount is set at $500,000 in direct and indirect gross receipts sourced to the state.
The Notice states:
“While taxpayers contested for years whether the physical presence nexus standard in Quill was limited to sales taxes or also applied to corporate net income taxes, the decision in Wayfair has made certain that, at least prospectively, no physical presence standard exists for purposes of limiting the ability of a state to impose a net income tax on an out of state taxpayer so long as the constitutional requirements under the Due Process and Commerce Clauses of the United States Constitution are satisfied.”
Taxpayers with or without physical presence in Pennsylvania can still potentially claim exemption from corporate income tax under P.L. 86-272.
The issue here is whether Pennsylvania’s adoption of an economic/factor-based nexus standard by guidance in a bulletin is really enforceable. There is potential for litigation based on the state’s interpretation of what is within their limits given the Wayfair decision from the U.S. Supreme Court.
The bigger question is really whether Wayfair applies to corporate income tax or other state taxes besides sales and use tax. This issue creates uncertainty as to whether taxpayers should file corporate income tax as prescribed in the bulletin.
With these concerning issues, taxpayers without physical presence in Pennsylvania must decide whether they need to file corporate income tax or be subject to penalties and interest for failure to comply. It’s an unsettling choice.
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