The Pennsylvania Department of Revenue on September 30 announced it is establishing a rebuttable presumption that taxpayers without physical presence but having $500,000 or more of certain direct or indirect Pennsylvania-sourced gross receipts must file Corporate Net Income Tax (CNIT) reports for tax periods starting on or after January 1, 2020.
Pennsylvania’s move to an economic nexus standard follows Philadelphia’s recent adoption of economic nexus. Click here for our Insight.
The Pennsylvania standard is not described as a safe harbor. The Department states that while “all taxpayers with nexus under the Constitution of the United States should file a Corporate Tax Report with Pennsylvania,” the receipts threshold creates a “rebuttable presumption” of when nexus exists. In light of Wayfair, “taking advantage of the economic marketplace of the Commonwealth” is sufficient to be “considered to be doing business in this Commonwealth and/or carrying on activities in this Commonwealth,” according to the Department.
To the extent protection under P.L. 86-272 is claimed, taxpayers should continue to file a Pennsylvania CNIT report (Form RCT-101) and complete the necessary schedules to claim this exemption from tax.
Economic nexus provisions may be impactful for non-US companies accustomed to being protected from US federal income tax due to the application of income tax treaties preventing the recognition of effectively connected income (ECI) for US federal income tax purposes. Such treaties generally only protect against federal recognition of ECI, unless a treaty specifically includes protection from state taxation. Inbound taxpayers with an economic presence in Pennsylvania could be subject to Pennsylvania tax even if they are protected from US federal taxation.
Taxpayers should consider what impact this development has on the right to apportion income. Under current Pennsylvania law and regulations, a corporation is only considered subject to tax in another jurisdiction that imposes an income or similar tax if the corporation actually files a return, or if the jurisdiction does not impose an income tax, the corporation would be subject to an income tax in such jurisdiction applying Pennsylvania’s nexus rules. Presumably Pennsylvania’s new economic nexus rules are to be considered in making this determination.