United States: Pennsylvania Provides Guidance On Sourcing Sales Of Services For Corporate Taxes

The Pennsylvania Department of Revenue has released an information notice to clarify the new statutory market-based sourcing rules for the sale of services that went into effect for tax years beginning on and after January 1, 2014.1 Under the statutory change, applicable to Corporate Net Income Tax and Capital Stock/Franchise Tax, the sale of services is no longer subject to the income-producing activity and preponderance cost of performance (COP) rules. The change applies to corporate taxes, but not to pass-through entities to the extent that they are owned by individuals. In addition to providing guidance for sourcing sales from services, the notice addresses apportionment issues involving the sale of intangible property, which continues to be sourced via COP principles.


Previously, Pennsylvania law required that taxpayers source sales of services based on the income-producing activity / COP rule. Specifically, all sales other than sales of tangible personal property were sourced to Pennsylvania if either: (a) the income-producing activity was performed in the state; or (b) the income-producing activity was performed both within and outside the state and a greater portion of the income-producing activity was performed in Pennsylvania than in any other state based on COP.2

Effective for tax years beginning on and after January 1, 2014, sales of services are sourced to Pennsylvania if the service is delivered to a location in the state.3 If the service is delivered to both a location within and outside the state, the sale is in Pennsylvania based upon the percentage of total value of the service delivered to a Pennsylvania location.4 If the state or states of assignment cannot be determined for a customer who is an individual that is not a sole proprietor, a service is deemed to be delivered to the customer's billing address.5 For all other types of customers, a service is deemed to be delivered at the location from which the services were ordered in the customer's regular course of operations.6 If this location cannot be determined, the service is deemed to be delivered at the customer's billing address.7

Application of Market-Based Sourcing for Services

Pennsylvania's market-based sourcing statute does not define the terms "delivered" or "location." However, the notice cites the Pennsylvania Supreme Court's position that the sales factor represents the "contribution of Pennsylvania consumers and purchasers to the entity's sales."8 Further, the legislature passed the market-based sourcing legislation with the intention of having the sales factor reflect the location where the customer for the service resides or is located.9 Because the legislature intended to enact 100 percent market-based sourcing of services, the term "location" must mean the location of the customer.10 Delivery to a location not representative of where the customer for the service is located does not represent completed delivery of the service.11

The notice provides examples of delivery locations of some common services.12 For example, services performed locally are sourced to the customer's home or work address, as applicable. If a service is performed remotely on tangible personal property owned by a customer, the sale could be sourced to the location of the taxpayer (as where a customer drops a car off for repair at a garage and returns for pick-up) or the customer (as when a customer ships a damaged cell phone to a repair facility that repairs and returns it).13 If the service is performed remotely and delivered in the form of an incidental value of tangible personal property, the sale will be sourced to the location where the customer takes physical possession of the property.14 Examples of such sales include research reports printed on paper and a customized market research database provided on a CD.15 The guidance on some of the most common types of services is summarized below.

Transportation Services

Generally, services that involve moving tangible personal property from one place to another are sourced to the address of the recipient of the tangible personal property.16 A third party is sometimes contracted to deliver completed services to the customer. The delivery of the service from the customer's perspective occurs at the location where the customer representative purchasing the service actually receives it.17 The passage of a service to an intermediary is not representative of the market of the service and the service is not sourced to the location of the intermediary.18

Electronic Delivery of Services

Another noteworthy example addresses services that are performed remotely and delivered electronically.19 Streaming video services and online access to a database are both sourced to the location of the purchaser where the service is consumed or used.20 If a service is delivered electronically to locations in Pennsylvania and one or more other states and individual customer addresses are not available, that sale should be apportioned by using IP address records or other network data.21 However, network data should be used only if it corresponds reasonably well to locations where the data is delivered to actual customers.22 If the user of the electronically delivered service is both within and outside Pennsylvania, the service should be sourced among the states in a reasonable and proportionate manner taking into account the usage of the service, the number of recipients, or the value of the service consumed, in each state.23

"Trade or Business" and "Employee" Services

The notice distinguishes between "trade or business" services and "employee" services. "Trade or business" services are services that a company would purchase in the normal course of business.24 Examples include management, payroll, marketing and other related services.25 "Trade or business" services are considered to be provided on behalf of the company and not on behalf of the individual employees.26 Therefore, such services should be sourced based on the location of the company.27

"Employee" services are controlled directly by the employee and are not related to the conduct of the company's trade or business.28 If a service is provided to employees of a company and the service is designed and intended for the employees' personal use and benefit, then the service is sourced to Pennsylvania if that service is delivered to the state.29 "Employee" personal services are often performed first-hand and include consulting, training, speaking, counseling, providing entertainment and other related services.30

Other Types of Services

The notice also addresses several specific types of services such as brokerage, package delivery, subscription, advertising, data processing, Internet access, custom computer software and construction services.31 Certain industries are unaffected by the change in law and will continue to follow specific related statutes, including those involving transportation,32 pipeline or natural gas, and water transportation.33

Apportionment of Receipts from Sale of Intangible Property

Sales of intangibles remain subject to the COP sourcing rules. Specifically, sales other than tangible personal property and services are sourced to Pennsylvania if either: (a) the income-producing activity is performed in the state; or (b) the income-producing activity is performed both within and outside the state and a greater proportion of the incomeproducing activity is performed in Pennsylvania than in any other state, based on COP.34

Intangible property includes: (a) patents, copyrights, trademarks, and trade names; (b) money and instruments representing the ownership of money; (c) equity or debt securities, such as stocks and bonds, and derivatives of such securities; (d) credits such as tax credits, energy credits, and billing credits.35 Receipts from intangibles include royalties for the use of intangible property, and interest, capital gains or dividends arising from the ownership, sale, exchange or other disposition of intangible property.36

The notice provides that the income-producing activity occurs at the location where the performance of the activity is accomplished or fulfilled.37 Income-producing activities are identified at the transactional level instead of at the operational level.38 Therefore, activities that a customer would not pay for separately are not income-producing activities because they do not generate income themselves.39 The guidance specifically notes that the operating costs to maintain and update an Internet server device are not incomeproducing activities.40


Because the new sourcing rules for services became effective for tax years beginning on and after January 1, 2014, over the past year, taxpayers have begun to source sales of services based on customer location in Pennsylvania instead of the COP location. The change to market-based sourcing is important to corporate taxpayers, but this change does not apply to pass-through entities to the extent they are owned by individuals. Although many companies already track sales based on customer location or billing address, Pennsylvania's change should trigger a renewed focus on how Pennsylvania sales of services are tracked and recorded.

Pennsylvania's approach is not unique, as the growing trend among states is to source sales according to market instead of COP.41 The increasingly mobile nature of our evolving economy has driven various state and local tax developments in recent years and the sourcing of sales revenue is no exception. As the barriers to operating remotely continue to fall for modern businesses, states can employ market-based sales sourcing to more effectively tax out-of-state companies that generate income from in-state sources. Despite the information provided in the notice, taxpayers may still face uncertainty in the interpretation of key terms related to the sourcing of service revenue, including the definitions of "location" and "delivery."

Lastly, the Department has set forth formal guidance in the notice for sourcing receipts from intangible property. By considering the performance of income-producing activity as occurring when the activity is accomplished or fulfilled at the transactional level, the state is trying to approximate the result achieved through market-based sourcing without actually changing the associated law to authorize such treatment. The Department has consistently applied this methodology and the issue is commonly appealed through Pennsylvania's administrative tax review boards. Against the stark contrast of the state's new market-based sourcing standard, Pennsylvania's proposed treatment of sales of intangibles as stated in the notice is likely to be challenged.


1. Information Notice Corporation Taxes 2014-01, Pennsylvania Department of Revenue, Dec. 12, 2014. Market-based sourcing was enacted by Act 52 (H.B. 465), Laws 2013.

2. 72 PA. CONS. STAT. § 7401(3)2.(a)(17) (applicable for tax years prior to January 1, 2014).

3. 72 PA. CONS. STAT. § 7401(3)2.(a)(16.1)(C)(I).

4. Id.

5. 72 PA. CONS. STAT. § 7401(3)2.(a)(16.1)(C)(II).

6. 72 PA. CONS. STAT. § 7401(3)2.(a)(16.1)(C)(III).

7. Id.

8. Information Notice 2014-01 at 2 (quoting Commonwealth v. Gilmour Manufacturing Co., 822 A.2d 676, 683 (Pa. 2003)).

9. Act 52 (H.B. 465), Laws 2013; Fiscal Note for H.B. 465, July 1, 2013.

10. Information Notice 2014-01 at 2.

11. Id.

12. Information Notice 2014-01 at 3.

13. Id.

14. Id.

15. Id.

16. Id.

17. Id.

18. Id.

19. Id.

20. Id.

21. Information Notice 2014-01 at 4.

22. Id.

23. Id. Any method chosen must be done in a consistent manner from year to year. Id.

24. Information Notice 2014-01 at 5.

25. Id.

26. Id.


28. Information Notice 2014-01 at 6.

29. Id.

30. Information Notice 2014-01 at 5.

31. Information Notice 2014-01 at 7-9.

32. For example, a specific statutory provision applies to railroads, motor carriers, bus lines, airlines, and other transportation companies. 72 PA. CONS. STAT. § 7401(3)2.(b).

33. Information Notice 2014-01 at 9.

34. 72 PA. CONS. STAT. § 7401(3)2.(a)(17).

35. Information Notice 2014-01 at 11.

36. Id.

37. Information Notice 2014-01 at 11-12.

38. Information Notice 2014-01 at 12.

39. Id.

40. Id.

41. States such as Georgia, Iowa, Maryland and Minnesota have long used a market-based sourcing approach, but this approach more recently has been adopted by Alabama, California, the District of Columbia, Illinois, Maine, Massachusetts, Michigan, Nebraska, New York, Oklahoma, Rhode Island, Utah and Wisconsin. Also, the Multistate Tax Compact was revised in 2014 to replace the COP methodology with market-based sourcing. This probably will encourage additional states to adopt market-based sourcing in the near future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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