In Pennsylvania Corporation Tax Bulletin 2019-04,[1] the state of Pennsylvania announced that it will begin treating any corporation with $500,000 of sales into the state as having nexus with the state.  The state bases this revised view of nexus based on the Supreme Court’s rejection of a physical presence requirement for sales tax nexus in the Wayfair  case.[2]

The Department provides the following analysis for why it has concluded physical presence should also no longer be a requirement for income tax nexus:

The Court went on to conclude “that the physical presence rule of Quill is unsound and incorrect.”

As a result, the Commerce Clause analysis set forth in Complete Auto Transit remains valid, but the physical presence rule, which was previously held in Quill to be a necessary part of the substantial nexus prong is incorrect. 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.[3]

The bulletin notes that under Article IV of the Tax Reform Code (TRC), 72 P.S. §§7401 a corporation is subject for the following actions which the bulletin conclude have taken place when a corporation exceeds the $500,000 sales trigger:

• Doing in business in the Commonwealth of Pennsylvania or

• Carrying on business in the Commonwealth of Pennsylvania.[4]

The ruling provides:

For Pennsylvania Corporate Net Income Tax purposes the decision in Wayfair has confirmed that out of state corporations are considered to be doing business in this Commonwealth and/or carrying on activities in this Commonwealth to the extent they are taking advantage of the economic marketplace of the Commonwealth regardless of whether they are physically present in Pennsylvania.[5]

The state notes its reasoning for setting the level at which economic nexus is triggered at $500,000:

While the Court in Wayfair did not express a bright line threshold of economic activity which would satisfy the nexus requirements existing under the Due Process and Commerce Clauses, it did approve the approach of South Dakota whereby an out of state taxpayer was subjected to a sales tax collection requirement where it had in excess of either 200 sales or $100,000 worth of sales of goods or services to South Dakota customers during the course of a tax year. While all taxpayers with nexus under the Constitution of the United States should file a Corporate Tax Report with Pennsylvania, the Department will deem there to be a rebuttable presumption that corporations without physical presence in the state, but having $500,000 or more of direct or indirect gross receipts from any combination of the following, sourced to Pennsylvania per year pursuant to the sales factor rules contained in 72 P.S. § 7401, have a filing requirement with the Commonwealth for purposes of the Corporate Net Income Tax:2

(1) Gross receipts from the sale, rental, lease, or licensing of tangible personal property;

(2) Gross receipts from the sale of services; and/or,

(3) Gross receipts from the sale or licensing of intangibles, including franchise agreements.[6]

Since Congress did impose a set of conditions under which a state cannot impose a state income tax in Public Law 86-272, the state does address that issue in the bulletin.  The bulletin provides:

In interpreting this standard the Department recognizes that taxpayers with or without physical presence in the Commonwealth can still potentially claim exemption from the imposition of the Corporate Net Income Tax under the provisions of P.L. 86-272. To the extent protection under this federal law is claimed, taxpayers should continue to file a Pennsylvania Corporate Tax Report (Form RCT-101) and complete the necessary schedules to claim this exemption from tax.[7]

The bulletin concludes by noting it will apply the revised nexus standard to taxpayers for tax years beginning on or after January 1, 2020.[8]

[1] Corporation Tax Bulletin 2019-04, Pennsylvania Department of Revenue, September 30, 2019, https://www.revenue.pa.gov/GeneralTaxInformation/TaxLawPoliciesBulletinsNotices/TaxBulletins/CT/Documents/ct_bulletin_2019-04.pdf, retrieved October 2, 2019.

[2] Wayfair v. South Dakota, 138 S. Ct. 2080, (2018)

[3] Corporation Tax Bulletin 2019-04, p. 2

[4] Corporation Tax Bulletin 2019-04, p. 2

[5] Corporation Tax Bulletin 2019-04, p. 2

[6] Corporation Tax Bulletin 2019-04, pp. 2-3

[7] Corporation Tax Bulletin 2019-04, p. 3

[8] Corporation Tax Bulletin 2019-04, p. 3