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.

Background

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...