With all the extraordinary tax filing extensions this year due to COVID-19, it is important to keep in mind that some states, like Pennsylvania, have extended the deadline for refund petitions. Specifically, the Department of Revenue has administratively extended the due date for many refund petitions for the 2016 tax year until August 20, 2020.1
Some potential Pennsylvania refund opportunities that corporate net income taxpayers should evaluate include:
- Ignore the Statutory NOL Cap – If a corporation’s NOL deduction for 2016 was limited by the statutory cap on the NOL deduction, it may be entitled to a refund because the statutory cap in effect for that year violated the Uniformity Clause of the Pennsylvania Constitution. In fact, there is ongoing litigation in the Pennsylvania courts on the question of whether the state must pay refunds to taxpayers who filed returns computing the tax using the statutory cap.2
- Use Three-Factor Apportionment – Out-of-state corporations in capital or personnel intensive businesses may be entitled to use a three-factor or another alternative apportionment formula as a matter of fair apportionment. While Pennsylvania has statutorily enacted a single-sales factor formula, effective for tax years beginning in 2013, this formula may not fairly reflect the activities that generate income for taxpayers with significant property and payroll outside Pennsylvania.
- Increase NOL Carryover – If a taxpayer’s apportionment increased as a result of Pennsylvania’s statutory switch to market sourcing for receipts from services (which took effect beginning in 2014), it should consider recomputing its net loss carryovers from pre-2014 tax years to avoid distorting the impact of the switch in sourcing methodology. This position will typically be beneficial to out-of-state service providers with losses in pre-2014 tax years.
- Use Cost-of-Performance Sales-Factor Sourcing – Based on the plain language of Pennsylvania’s statute, the statutory switch to market sourcing for receipts from services does not apply to interest, intangibles, and certain other non-service receipts.3 Under the statute, these receipts are still sourced to where a taxpayer performs its activities, rather than to where the delivery location. Sourcing non-service receipts in accordance with the statute will typically be beneficial to out-of-state taxpayers.
- Apply One of the Broad Exceptions to Intangible Expense Addback – The text and legislative history of Pennsylvania’s addback for intangible expenses show that it was designed to only apply in very limited circumstances, so a taxpayer may qualify for one of the broad exceptions, even if it is required to add back its intangible expenses in other states.4
Pennsylvania’s procedure for filing a refund claim is simple. All that is required to perfect a refund claim is to file a completed petition for refund form (Form REV-65) that properly raises and preserves all potential issues that could apply; a taxpayer can then narrow the focus of its claim and provide supporting evidence later in the process.5 Notably, in Pennsylvania, an amended return is not automatically treated as a substitute for a petition for refund.
- Board of Appeals Operations During COVID-19 Pandemic (last updated July 8, 2020).
- The Pennsylvania NOL cap litigation is discussed in more detail in this March 2020 alert.
- See Kyle O. Sollie, Frank J. Gallo, & Michael I. Lurie, Pennsylvania’s New Market Sourcing: Narrower Than You May Think, 76 State Tax Notes 125 (April 13, 2015).
- The broad exceptions to the intangible expense add back are discussed in more detail in our prior Pennsylvania Tax Update.
- See 61 Pa. Code Section 7.14.
Client Alert 2020-462