Philadelphia Adopts Economic Nexus Provisions for Business Income and Receipts Tax

In response to the South Dakota v. Wayfair decision, Philadelphia, Pennsylvania has amended its tax regulations to apply an economic nexus threshold for purposes of the city’s Business Income & Receipts Tax (BIRT). For tax years beginning January 1, 2019 and after, a business with no physical presence in Philadelphia is considered to have nexus in Philadelphia and is subject to BIRT if it:

  • Has at least $100,000 in Philadelphia gross receipts during any 12-month period ending in the current year, and
  • Has sufficient connection with Philadelphia to establish nexus under the U.S. Constitution.

To determine Philadelphia gross receipts for purposes of the threshold, only receipts from business done in Philadelphia, as determined under the city’s sourcing rules, are considered Philadelphia gross receipts. Receipts from sales of tangible personal property are Philadelphia gross receipts if the goods are physically delivered to a customer in the city. Receipts from sales of services are Philadelphia gross receipts to the extent that the service is performed in the city, except for businesses that qualify as software companies. Receipts of a software company are Philadelphia receipts if the customer receives the benefit of the service in the city (i.e. market-based sourcing).

The Philadelphia Department of Revenue (DOR) has provided guidance regarding if a business exceeds the economic nexus threshold for BIRT in the current year then subsequently falls below the threshold. Beginning with tax year 2020, electronic filers may simply affirm that they have less than $100,000 in Philadelphia receipts and will not be required to file a complete BIRT return. A “No Tax Liability” form is in development for taxpayers who file a paper return.

The DOR has stated that the economic nexus standard will not be retroactively applied for BIRT. For tax years beginning prior to January 1, 2019, the “Active Presence” standard applies in determining whether a company is doing business in Philadelphia. The DOR notes that by establishing an annual threshold for Philadelphia gross receipts, they are effectively clarifying the city’s former “Active Presence” nexus standard for BIRT. “Active Presence” is defined under the BIRT regulations as “Purposeful, regular, continuous efforts in Philadelphia in the pursuit of profit or gain and the performance in Philadelphia of activities essential to those pursuits. The maintenance of an office or property in the City is not necessary to establish “active presence.”

The DOR notes that the amended regulation has no effect on the application of Public Law 86-272. If a seller’s activities in Philadelphia are strictly limited to solicitation of orders for sales of tangible personal property (including activities entirely ancillary to solicitation), that are approved or accepted outside of Philadelphia, and that are filled by shipment or delivery from a point outside Philadelphia, the seller will not be subject to the net income portion of the BIRT under Public Law 86-272.

Note that the BIRT is not a sales tax, and the provisions described above are separate from Pennsylvania’s economic nexus provisions for sales tax. The economic nexus provisions related to sales tax promulgated by the state of Pennsylvania apply to retailers who make sales in the state – in Philadelphia or elsewhere – for sales tax purposes. (The City of Philadelphia’s Policy Regarding Economic Nexus for Business Income & Receipts Tax (BIRT), Philadelphia DOR (12/10/19); Frequently Asked Questions regarding economic nexus in the City of Philadelphia, Philadelphia DOR (12/10/19))

Posted on January 13, 2020