In response to South Dakota v. Wayfair, Inc. (Wayfair),¹ the Pennsylvania Department of Revenue (Department) announced (Corporation Tax Bulletin 2019-04: Nexus for Corporate Net Income Tax Purposes (Sept. 30, 2019) (Bulletin)) that it will impose an economic nexus threshold for corporate net income tax (CNIT) purposes beginning January 1, 2020.

The Department will presume nexus for out-of-state corporations that do not have a physical presence in the state but have $500,000 or more in direct or indirect gross receipts from Pennsylvania sources.

Corporations that make sales into Pennsylvania but are not filing CNIT returns should review the Bulletin and determine whether they may now be subject to the CNIT. If so, they may want to consider whether their activities are limited to certain sales solicitation activities for which the protections of P.L. 86-272 apply.

Bulletin 2019-04

Under Pennsylvania law, the CNIT applies to corporations that, directly or indirectly through ownership of another entity, do any of the following:

• Conduct business in Pennsylvania
• Carry on activities in Pennsylvania, such as solicitation that falls outside the protections of P.L. 86-272
• Employ or use capital or property in Pennsylvania

or

• Own property in Pennsylvania²

For CNIT purposes, the Department has determined that Wayfair "confirmed that [out-of-state] corporations are considered to be doing business in [Pennsylvania] and/or carrying on activities in [Pennsylvania] to the extent they are taking advantage of the economic marketplace of [Pennsylvania] regardless of whether they are physically present in Pennsylvania." Consequently, the Department stated it will require taxpayers meeting the minimum thresholds for nexus under the U.S. Constitution to file Pennsylvania CNIT returns.

The Department conceded that Wayfair did not articulate a bright-line threshold of economic activity that would satisfy the nexus requirements existing under the Due Process and Commerce Clauses. Nevertheless, the Department noted, Wayfair "approved" South Dakota's approach (i.e., nexus established for sales and use tax purposes if a remote seller either has 200 separate sales transactions or $100,000 sales of goods/services to South Dakota customers). Like other states, the Department said it will deem there to be a rebuttable presumption of a filing requirement for corporations without physical presence in Pennsylvania if they have $500,000 or more of Pennsylvania-sourced "direct or indirect" gross receipts from (i) the sale, rental, lease, or licensing of tangible personal property; (ii) the sale of services; and/or (iii) the sale or licensing of intangibles, including franchise agreements.

The Department acknowledged that taxpayers eligible for protection under P.L. 86-272 can still claim an exception from the net income tax if they qualify for the protections under the federal law (only engage in specified sales solicitation activities protected under the federal law and accept contracts and ship from locations outside of Pennsylvania).

Implications

The guidance set forth in the Bulletin will increase the complexity of a taxpayer's nexus analysis.

The Bulletin raises questions out-of-state corporations not already filing in Pennsylvania should address:

• How does the guidance in the Bulletin affect future filing decisions to the extent that the guidance conflicts with the current CNIT statutory regime and its accompanying judicial interpretations?
• Does the guidance in the Bulletin go beyond the plain meaning of the limitations set forth in the CNIT statute?
• Pennsylvania's CNIT nexus statute (72 P.S. Section 7402) subjects corporations to the CNIT for activities such as "doing business" and "solicitation." While not statutorily defined, those terms have been interpreted by the Pennsylvania judiciary, making it important to watch how the Pennsylvania courts may interpret these terms in light of their precedent, the Bulletin, and Wayfair.
• The Bulletin concludes by asserting a filing requirement on corporations with nexus in Pennsylvania "under the Constitution of the United States," but no such broad constitutional language is included in 72 P.S. Section 7402.
• Does the Department have the authority under 72 P.S. Section 7402 to apply Wayfair to the CNIT?
• What does the Bulletin mean by "indirect" gross receipts, which is nowhere defined in Pennsylvania's statutes or addressed by case law?
• Given that Pennsylvania's new nexus standard differs from both the standard approved in Wayfair and the standard previously announced in the Department's updated Sales and Use Tax Bulletin 2019-01: Maintaining a Place of Business in the Commonwealth (economic nexus is triggered for remote sellers or marketplace facilitators with more than $100,000 in gross sales in Pennsylvania), will the new CNIT nexus standard withstand judicial scrutiny?
• How will the new nexus standard affect corporations that have engaged in intercompany transactions, which may now trigger a filing requirement under the Bulletin? Pennsylvania is one of two remaining separate-return states where out-of-state holding companies with no connection to the state except income from intangibles are deemed not to have nexus and, therefore, are currently not subject to state income tax (e.g., the Delaware holding company structure). Are such structures now at risk of being fully taxable?
• The new nexus standard will create complexity with respect to sourcing the three revenue streams identified by the Bulletin (the sale, rental, lease, or licensing of tangible personal property; the sale of services; and/or the sale or licensing of intangibles, including franchise agreements), which may be controlled by different sourcing rules. Moreover, did the Bulletin intentionally exclude those revenue streams that it did not specifically identify?

Lastly, Pennsylvania now joins a growing list of states that have incorporated Wayfair's economic nexus principles into the administration of their state income taxes. The other jurisdictions are: Hawaii (enacted law), Massachusetts (amended regulation), City of Philadelphia (amended regulation), and Texas (pending proposed rule amendment).

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ENDNOTES

¹ South Dakota v. Wayfair, Inc., 138 S.Ct. 2080 (2018).

² 72 Pa. Stat. § 7402(a).