United States: Pennsylvania Tax Developments

This is a brief update on recent Pennsylvania tax developments. It is intended to provide an overview of issues and cases to watch, as well as administrative and legislative developments.

Department Contacting "Noncompliant" Remote Sellers about Sales Tax Nexus

The Department of Revenue has started contacting remote sellers that have not registered with the Department to collect and remit Pennsylvania sales tax. If your business is contacted, it is important to carefully consider the particular facts of your business before responding.

In 2011, the Department issued a Tax Bulletin to "remind" remote sellers that their activities could create sales tax nexus with Pennsylvania. The bulletin was not prompted by any change in Pennsylvania law.1 The Department set September 1, 2012 as the deadline for remote sellers to register with the Department and begin collecting and remitting Pennsylvania sales tax.2 In the first four months after that deadline, remote sellers collected and remitted more than $23 million of Pennsylvania sales tax.

Now, the Department is contacting remote sellers who haven't registered. The Department has said that "noncompliant" remote sellers "will face a variety of escalating enforcement options over time, including assessment, audit, lien or referral to a collection agency of the Office of Attorney General." According to the Department, it is even considering auditing and assessing "noncompliant" remote sellers for periods prior to the September 2012 deadline.3 However, just because the Department is aggressively enforcing its policy doesn't mean its policy is consistent with the law in all cases.

Takeaway: Remote sellers that do not own property or engage in nexus-creating activities in Pennsylvania—either directly, or through a subsidiary, representative or agent—still have no obligation to collect and remit Pennsylvania sales tax under existing Pennsylvania law, which has not been superseded by the Department's Tax Bulletin. These sellers should not concede nexus when contacted by the Department.

Meanwhile, sales tax click-through and affiliate nexus legislation was recently re-introduced in the Pennsylvania General Assembly.4 This same legislation was introduced last year and did not gain a lot of support. However, as more and more states adopt similar legislation, there is a possibility that this legislation will attract more support in Pennsylvania in the current legislative session.5 We are tracking this legislation and will provide updates if it appears to be gaining momentum.

Department Continues To Apply Market-Based Sourcing; Taxpayers Continue To Get Favorable Settlements

In many audits, the Department has been applying a market-based approach to sales-factor sourcing of receipts from services and intangibles. Many taxpayers have filed appeals because this approach is inconsistent with the current statute. In most cases, taxpayers have been able to resolve these appeals on a very favorable basis.

Pennsylvania's apportionment statute follows UDITPA and requires that receipts from sales other than sales of tangible personal property be sourced to the state where the income-producing activity is performed; or, if the income-producing activity is performed in more than one state, the sale is sourced to the state where the greatest proportion of the income-producing activity occurs based on costs of performance.6 Nonetheless, the Department of Revenue's audit policy has been to source certain sales of services and intangibles to the location where the customer receives the benefit (at least in situations where a significant portion of the "benefit" was received in Pennsylvania). The Department has been issuing assessments applying this market-based sourcing method.

Taxpayers have been challenging these assessments, arguing that the Department's sourcing method is inconsistent with the statute, and, in most cases, taxpayers have been able to negotiate very favorable settlements. Still, the Department continues to issue assessments on this basis.

Takeaway: If your business receives an assessment sourcing receipts from services or intangibles on a market-basis, your first step in developing your appeal strategy should be to consider the settlements that the Department has been entering into with other similarly situated taxpayers. Reed Smith has been keeping track of these for many years, so we have a unique understanding of the fact patterns that have resulted in the most taxpayer-favorable settlements.

While the Department continues to issue ad hoc assessments sourcing receipts from certain services and intangibles on a market basis, the Department has also been involved in drafting legislation that would change the statutory rule to a market-based approach consistent with the Department's audit policy. (See Legislative Update, below.)

Taxpayers Challenging Department's Application of Telecom Gross Receipts Tax

Several taxpayers are challenging the Department's broad interpretation of the telecommunications gross receipts tax in cases pending at Commonwealth Court. These cases could result in refund opportunities for other telecommunications companies.

Pennsylvania's gross receipts tax on telecommunications services is imposed on receipts from landline and cell phone "messages."7 However, the Department of Revenue has been imposing this tax not only on receipts from actual messages, but also on a wide variety of other receipts. For example, the Department has been assessing tax on receipts from equipment sales and rentals, installation and repair services, directory assistance services, and on charges for the unlimited use of private lines. Taxpayers are challenging these assessments in several cases currently pending in the Pennsylvania Commonwealth Court. In all of these cases, the taxpayers are arguing that imposing the tax on any receipts other than those from per-message charges goes beyond the statute. The outcome of these cases could impact all telecommunications service providers with activities in Pennsylvania.

Briefs have already been filed in the lead case, and oral argument is currently scheduled for May. If any of the taxpayers in the pending cases prevail, other telecom providers could be entitled to significant refunds.

Takeaway: To protect their rights, telecom providers that have paid the gross receipts tax on any receipts other than per-message charges should be filing refund claims. Taxpayers that were assessed and are taking a wait-and-see approach to the cases currently pending at Commonwealth Court must also make sure they have raised and preserved all issues in their own appeals so they are well-positioned, regardless of the outcome in the pending cases.

Are MRI Machines Exempt from Sales and Use Tax?

The Saga Continues . . . Taxpayers are again challenging the Pennsylvania sales tax treatment of MRI machines. However, this time the taxpayers are arguing that the MRI machines are exempt manufacturing equipment, rather than property permanently affixed to real property.

In 2011, the Pennsylvania Supreme Court concluded in the Northeastern Pennsylvania Imaging case that the purchase of a magnetic resonance imaging ("MRI") machine is taxable for Pennsylvania sales tax purposes, because an MRI machine is tangible personal property, and does not become a permanent part of the real property when installed in a medical facility. According to the court in Northeastern, MRI machines are "nothing more than cameras."8

Now, in a case pending at Commonwealth Court, a medical practice is arguing that its purchases of MRI and CT machines are not subject to sales and use tax because the machines are used in manufacturing operations. The taxpayer in this new case is relying on a 1974 Pennsylvania Supreme Court decision, in which the court held that the use of cameras and film by a portrait photographer constituted manufacturing for purposes of the sales and use tax exclusion.9

The taxpayer is arguing that the MRI and CT scan process is similar to producing photographs, and that the manufacturing exclusion is broad and is intended to accommodate changes in technology. The commonwealth is arguing that the taxpayer is engaged in providing radiology services (not photography), and that the MRI and CT machines are being used by the taxpayer to provide medical services.

This case is tentatively scheduled for argument in June and could have implications for both sellers and purchasers of MRI and CT equipment and related software.

Legislative Update

For FY 2013–2014, Governor Corbett is proposing his largest budget increase yet—$679 million—taking Pennsylvania's general fund expenditure to $28.4 billion. The governor's budget proposal includes several changes to the tax code. Here are some of the potential changes to watch for:

  • Capital Stock / Franchise Tax Elimination. The governor remains committed to the complete phase-out of the capital stock / franchise tax, which is set to take effect for tax years beginning on or after January 1, 2014.
  • CNI Rate Reduction. The governor's proposal includes a gradual phase-down of the corporate net income tax rate from 9.99 percent to 6.99 percent by 2025.
  • Increase Cap on Net Loss Deductions. The governor's proposal also includes an increase in the annual cap on net loss deductions from $3 million to $5 million.
  • Tax Appeals Commission. The governor's proposal allots funds for the creation of a new, independent, Tax Appeals Commission. This Commission would replace the existing Board of Finance and Revenue, which is currently the final administrative level of review in a tax appeal before going to Commonwealth Court.
  • Remove Oil Franchise Tax Cap. The governor's proposal includes a gradual uncapping of the average wholesale price used to calculate the oil company franchise tax. This is expected to bring in more than $5.3 billion of new revenue in the first five years; it would be the biggest tax increase of his tenure.

In addition to Governor Corbett's tax proposals, here are some other pieces of tax legislation that we are tracking:

  • Related-Party Addback. Two addback bills have been reintroduced into the House. One bill covers related-party intangible expenses and all related-party interest expenses. The other bill covers related-party intangible expenses and interest expenses, but only if the interest is directly related to the related-party intangible expenses. A bill identical to the latter bill passed the House last year but stalled in the Senate. Yesterday, the latter bill was amended by the House Finance Committee to include a number of Gov. Corbett's tax proposals (including a CNI rate reduction and an increased cap on net loss deductions) as well as market-based sourcing of services (see below). We expect to see more movement on this bill in the House soon.
  • Market-Based Sourcing of Services. Department of Revenue officials, industry groups, and others have been working on draft legislation to switch the sales-factor sourcing rule for receipts from services from a cost-of-performance rule to a market-based rule. As noted above, yesterday, the House Finance Committee amended one of the pending addback bills to include this sales-factor sourcing change. That bill would source receipts from sales of services based on where the service is delivered; and if that cannot be determined, the receipts would be sourced based on the address of the customer. (Receipts from sales of intangibles would continue to be sourced using the cost-of-performance test in the current statute.) Now that Pennsylvania's apportionment formula is based entirely on the sales factor, this would be a significant change and would result in a tax increase on out-of-state taxpayers who sell services to customers in Pennsylvania.

Footnotes

1. Pennsylvania Department of Revenue, Sales and Use Tax Bulletin 2011-01 (December 1, 2011).

2. Pennsylvania Department of Revenue, News Release (January 27, 2012).

3. Pennsylvania Department of Revenue, News Release (August 30, 2012).

4. House Bill 1043, referred to Finance, March 21, 2013.

5. Also worth noting is that support for federal legislation in this area—the Marketplace Fairness Act of 2013—still has momentum in Congress.

6. 72 P.S. § 7401(3)2.(a)(17).

7. 72 P.S. § 8101(a).

8. Northeastern Pennsylvania Imaging Center v. Commonwealth, 613 Pa. 560, 577 (2011).

9. Commonwealth of Pennsylvania v. Olan Mills, Inc. of Ohio, 456 Pa. 78 (1974).

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions