Pennsylvania court sides with service provider and DOR on sourcing issue

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July 2020

Overview

The Pennsylvania Commonwealth Court recently concluded that the state’s pre-2014 statute for sourcing gross receipts from the sales of services under an income-producing-activity method required a benefits-received (as opposed to a costs-incurred) analysis, consistent with the Department of Revenue’s long-standing interpretation of the statute. The court found that the Department’s interpretation was entitled to deference, as the agency charged with interpreting the tax law. [Synthes USA HQ vs. Commonwealth of PennsylvaniaNo. 108 F.R. 2016, 07/24/20]

The takeaway

As noted in the case, the Department of Revenue has applied the benefits-received interpretation of the income-producing-activity provision on audit. Typically, when applied to services provided by non-Pennsylvania companies, this results in an assessment. A refund is often the result when it is applied to Pennsylvania-based service providers. The case supports the Department’s interpretation, which has been an unsettled issue between taxpayers and the Department for many years. Note: There is pending litigation on this issue in another case.

Although the Pennsylvania legislature has codified market-based sourcing for services beginning in 2014, the statute continues to utilize income-producing activity based on costs-of-performance language for sourcing transactions involving intangibles. Based on the Synthes decision, taxpayers may consider whether they are appropriately sourcing receipts from transactions involving intangibles.

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Peter Michalowski

State and Local Tax Leader, PwC US

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