How Wayfair is Being Applied to Corporate Net Income Taxby
Pennsylvania will now require remote businesses to pay corporate net income tax for tax periods beginning on or after January 1, 2020.
The Pennsylvania Department of Revenue now says it can use the Wayfair ruling to require out-of-state businesses to file corporate net income tax in the commonwealth.
The Department asserts “the decision in Wayfair has made certain that, at least prospectively, no physical presence standard exists for purposes of limiting the ability of a state to impose a net income tax on an out-of-state taxpayer so long as the constitutional requirements under the Due Process and Commerce Clauses of the United States Constitution are satisfied.”
Like other states, Pennsylvania only taxes businesses that have nexus, or a connection, with the commonwealth. It’s not necessarily because it doesn’t want to.
In Miller Brothers Co. v. Maryland (1954), the Supreme Court of the United States ruled there needed to be “some definite link, some minimum connection, between a state and the person, property, or transaction it seeks to tax.” In a subsequent decision, Quill Corp. v. North Dakota (1992), the court decided state taxes must not burden interstate commerce.
As a result of these and other decisions, nexus was based solely on physical presence for decades. That changed June 21, 2018, when the Supreme Court overruled the physical presence rule in South Dakota v. Wayfair, Inc., a case centering on South Dakota’s right to require remote retailer Wayfair, et al, to collect and remit sales tax.
In eliminating the physical presence rule, the Wayfair opinion authorizes states to impose a tax obligation on remote businesses (those with no physical presence in the state). Since the decision, 43 states and the District of Columbia have adopted sales tax economic nexus laws or rules basing a sales tax collection obligation solely on a remote seller’s economic activity in the state. Pennsylvania is one of them.
Pennsylvania corporate net income tax is imposed on corporations engaged in any of the following privileges:
• Doing business in Pennsylvania
• Carrying on activities, including solicitation not protected under P.L. 86-272 (Section 381 et seq.), in Pennsylvania
• Having capital or property employed or used in Pennsylvania
• Owning property in Pennsylvania
Although the department believes Wayfair empowers Pennsylvania to require “all taxpayers with nexus” to file corporate income tax returns in the Keystone State, it plans to enforce corporate net income tax nexus only on businesses with $500,000 or more of direct or indirect gross receipts sourced to the state per year. The $500,000 threshold is based on:
• Gross receipts from the sale, rental, lease, or licensing of tangible personal property;
• Gross receipts from the sale of services; and/or
• Gross receipts from the sale or licensing of intangibles, including franchise agreements
A remote business required to file a corporate income tax return may not always owe tax. Pennsylvania can only tax its portion of the company's income.
A Way Out
The Department of Revenue recognizes certain taxpayers can and will claim an exemption under the provisions of P.L. 86-272, which include solicitation and are explained in Corporate Tax Bulletin 2004-01. Remote taxpayers eligible for such an exemption must still file a Pennsylvania Corporate Tax Report for tax periods starting January 1, 2020 or later.
More details about Pennsylvania’s new corporate income tax requirements for remote businesses can be found in the department’s Corporate Tax Bulletin 2019-04.
Other States, Other Remote Tax Requirements
Pennsylvania isn’t the only state applying Wayfair to more than just sales and use tax:
- Hawaii will enforce an economic nexus standard for income tax beginning with taxable years after December 2019, for businesses with more than $100,000 in gross income or at least 200 transactions in the state in the current or preceding calendar year.
- Texas franchise tax applies to remote businesses with at least $500,000 in gross receipts from Texas business during its federal income tax accounting period. The first remote franchise tax reports will be due after January 1, 2020.
- Washington state B&O tax applies to remote businesses whose sales in the state cross a certain threshold. And in both Portland, Oregon, and San Francisco, California, economic nexus rules apply to certain taxes
Gail Cole is a Senior Writer at Avalara. She’s on a mission to uncover unusual tax facts and make complex laws and legislation more digestible for accounting and business professionals — or anyone interested in learning about tax compliance.