Piggybacking on a landmark U.S. Supreme Court decision last year, Pennsylvania will dramatically expand the number of corporations that have to file state tax returns.
Starting with tax year 2020, corporations with at least $500,000 in annual sales but no physical presence in the state will have to file a Pennsylvania corporate net income tax return, the Department of Revenue announced last week.
The tax is expected to hit companies that, for example, have licensing arrangements in the state, including franchise agreements and software.
“If you’re licensing software, and you have people sitting in Pennsylvania using the software, then you have to file,” said Jay Brower, partner of corporate and individual tax compliance and research services in the Philadelphia office of Marks Paneth LLP, an accounting and advisory firm.
State officials said they had no estimate of how much would be collected by expanding the filing requirement. Among current corporate filers, roughly three-quarters have no tax liability in a given tax year, the Revenue Department said.
“It’s definitely revenue-positive, because you’re going to draw more companies in,” said Frank Czekay, a firm director at Baker Tilly Virchow Krause LLP in Philadelphia and a state and local tax expert.
Pennsylvania collected $3.4 billion in corporate net income taxes in the year ended June 30, up from $2.9 billion the year before. The state’s total tax revenue was $32 billion — sales tax accounted for about $10 billion, and $13 billion came from the personal income tax.
Before this change, corporations with no physical presence in the state did not have to file a Pennsylvania tax return. Companies with a presence in the state were taxed based on the percentage of their overall sales here.
Pennsylvania’s change, published in a Sept. 30 state tax bulletin, applies the Supreme Court’s June 2018 ruling in South Dakota v. Wayfair Inc. to corporate income taxes. The court decided that states can require companies to collect sales taxes and remit them to the state even if the companies have no physical presence in a state. The decision broke a precedent set decades ago, experts said.
Even before the Wayfair decision, most states, including New Jersey, were already demanding income tax filings from corporations that did business in a state remotely, but only a few had a fixed threshold, said Brower, of Marks Paneth.
"Pennsylvania is very late to the game here,” he said.
Pennsylvania’s $500,000 threshold is conservative, meaning it could have been lower, he said. Hawaii, for example, adopted the sales tax standards in Wayfair, $100,000 in sales or 200 transactions.
In response to the Supreme Court’s 2018 decision, Philadelphia this year adopted a $100,000 filing-requirement threshold for its business income and receipts tax. The city had no estimate on how much more money it would collect because of the change.
Pennsylvania had already adopted a $100,000 threshold for sales taxes, but without specifying why, revenue officials said they decided that was too low for income taxes.
The new rule does not mean that every online retailer will have to pay corporate income taxes in Pennsylvania. A federal law exempts “tangible personal property” — things like furniture, jewelry, and shoes — from state corporate income taxes.