Tax Notes

Historically, the Pennsylvania Department of Revenue’s policy has been that “a non-Pennsylvania corporation must have some physical presence in Pennsylvania in order to make it subject to corporate net income tax.”1 This policy was consistent with Pennsylvania’s corporate net income tax statute, which only imposes tax on corporations doing business in the state,2 as well as decades of Pennsylvania case law interpreting that statutory language.3

In a recent bulletin, the DOR announced a change in its policy, and took the position that for tax years beginning on or after January 1, 2020, “taxpayers without physical presence in the Commonwealth, but having nexus with Pennsylvania under the Constitution of the United States,” are required to file Pennsylvania corporate tax reports.4 According to the bulletin, “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 receipts . . . sourced to Pennsylvania,” have nexus. The DOR based its change in position on the U.S. Supreme Court’s decision in South Dakota v. Wayfair Inc., which held that the dormant commerce clause does not require a remote seller to have a physical presence in a state for the state to require the remote seller to collect sales tax.

The DOR’s reliance on Wayfair is misplaced. If Pennsylvania statutorily imposed corporate net income tax to the full extent permitted by the U.S. Constitution, the DOR would be justified in looking to Wayfair for guidance. But as explained below, Pennsylvania’s corporate net income tax statute does not impose tax to the full extent permitted by the U.S. Constitution.5 Therefore, Wayfair — which was purely a decision on a matter of constitutional law — does not directly affect who is required to pay corporate net income tax.

Pennsylvania imposes corporate net income tax only on corporations that:

  • do business in Pennsylvania;
  • carry on activities in Pennsylvania (other than solicitation protected by Public Law 86-272);
  • have capital or property employed or used in Pennsylvania; or
  • own property in Pennsylvania.6

While there are several prongs of this standard, the courts have treated them all as synonymous,7 and have repeatedly construed this statutory “doing-business” standard to require
more of a connection with Pennsylvania than the connection required for nexus under the U.S. Constitution.

This article was originally published by Tax Analysts. To read the full article, download the PDF below.

  1. Letter from the DOR to CCH Tax & Accounting (July 31, 2006).
  2. 72 Pa. Cons. Stat. section 7402(a).
  3. E.g., Clairol Inc. v. Commonwealth, 518 A.2d 1165, 1168 (Pa. 1986).
  4. Pennsylvania DOR, Corporation Tax Bulletin 2019-04 (Sept. 30, 2019).
  5. Of course, Pennsylvania’s General Assembly is free to amend the corporate net income tax statute to create this type of nexus provision, as it has done for sales tax and bank shares tax. See notes 22 and 23, infra.
  6. 72 Pa. Cons. Stat. section 7402(a).
  7. See, e.g., Commonwealth v. Reading & Southwestern Street Railway Co., 54 Dauph. 277 (Pa. Com. Pl. 1944) (“From the earliest interpretation of these acts down to the present, all the cases have uniformly held that ‘doing business in this Commonwealth’ and ‘having property employed or used in this Commonwealth’ are equivalent terms”). Although this case, and many others cited in this article, involved Pennsylvania’s now-defunct franchise tax rather than the corporate net income tax, the franchise tax had nearly identical imposition language to the corporate net income tax. See 72 Pa. Cons. Stat. section 7601.