On September 30, 2019, the Pennsylvania Department of Revenue issued Corporation Tax Bulletin 2019-4 giving guidance on nexus for Corporate Net Income Tax purposes (“Bulletin”).

The Bulletin recites constitutional underpinnings of nexus, noting that the federal underpinnings of a state’s jurisdiction to tax is based on both the Due Process and the Commerce Clauses of the United States Constitution. A state’s jurisdiction to tax under the Due Process Clause “requires some definite link, some minimum connection, between and state and the person, property or transaction it seeks to tax.” Quill Corp. v. North Dakota, 504 U.S. 298, 306 (1974). Traditionally, the Bulletin states, this standard is met by showing that the entity has purposefully directed its activity into a jurisdiction. In the case of sales taxes, the Quill decision made clear that physical presence was a requirement.

For Commerce Clause purposes, a more rigorous standard has been set by precedent. In Complete Auto Transit v. Brady, 430 U.S. 274 (1977), the United States Supreme Court held that in order for a state tax to be valid under the Commerce Clause, it must:

(1) Apply to an activity with a substantial nexus to the taxing state;

(2) Be fairly apportioned;

(3) Not discriminate against interstate commerce; and

(4) Be fairly related to the services the state provides.


Building upon that foundation, in June 2018, the United States Supreme Court handed down Wayfair v. South Dakota, 138 S.Ct. 2080 (2018). The Bulletin focuses on the Wayfair discussion of “physical presence” not being a necessary factor for nexus. While the Bulletin notes that whether the “physical presence” standard also applied to net income tax (the Quill case dealt with sales tax) was an open question, the Bulletin sets forth the Department’s position that “at least prospectively, no physical presence standard exists for purposes of limiting the ability of a state to impose a net income tax on an out of state taxpayer as long as the constitutional requirements under the Due Process and Commerce Clauses of the United States Constitution are satisfied.” Bulletin, p.2.

The Bulletin states that Wayfair has confirmed that out of state corporations are considered to be doing business in Pennsylvania and/or carrying on activities in Pennsylvania to the extent they are taking advantage of the economic marketplace of the Commonwealth regardless of whether they are physically present in Pennsylvania. Therefore, the Bulletin makes clear the Department will require such taxpayers to begin filing Corporate Tax Reports if they meet the minimum thresholds for nexus under the United States Constitution. In fact, the Department will deem there to be a rebuttable presumption that those taxpayers having $500,000 or more of direct or indirect gross receipts from any combination of the following, sourced to Pennsylvania pursuant to the sales factor rules contained in 72 P.S. §7401, have nexus:

(1) Gross receipts from the sale, rental, lease or licensing of tangible personal property;

(2) Gross receipts from the sale of services; and/or;

(3) Gross receipts from the sale or licensing of intangibles, including franchise agreements.

The Bulletin recognizes that taxpayers without physical presence in the Commonwealth still may have the protection of P.L. 86-272. In that case, taxpayers should continue to file an RCT-101 and compete the necessary schedules to claim the exemption.

Finally, the Bulletin notes that the taxpayers with nexus as provided for in the Bulletin should file Corporate Tax Reports starting on or after January 1, 2020.

If you have questions about the Bulletin or any state tax matter, please feel free to contact a member of the McNees State and Local Tax team.