Pennsylvania expanding tax to more out-of-state corporations
HARRISBURG – Pennsylvania will start collecting corporate income taxes from companies that don’t have offices, employees or property in the state, making it one of the last states to target such companies.
Pennsylvania announced the change starting in the 2020 tax year through a tax bulletin published Sept. 30. It cites a groundbreaking U.S. Supreme Court decision last year as the legal basis to expand how it applies the tax.
The change will undoubtedly result in more cash for Pennsylvania, which is facing huge demographic challenges in the coming years, as the projected retirement-age population balloons and the working-age population shrinks.
The state Department of Revenue said it does not know how much money in new tax collections to expect.
The new rule is expected to apply to services sold, since federal law prohibits state corporate income taxes on “tangible personal property,” such as office equipment, furniture or clothing.
Until now, corporations without offices, employees or property in Pennsylvania did not have to file a Pennsylvania tax return.
Starting next year, they will have to pay the state’s net corporate income tax if they record more than $500,000 in sales in Pennsylvania.
The new standard established in the Supreme Court’s 5-4 opinion last year in its South Dakota v. Wayfair decision allowed states to require out-of-state online sellers to collect the state’s sales tax from customers and send it to the state.
Most states had viewed prior Supreme Court decisions as limited to sales taxes and continued to apply their corporate income taxes to companies without a physical presence in the state, said Jared Walczak, director of state tax policy for the Washington, D.C.-based Tax Foundation.
However, last year’s decision lifts a constraint that Pennsylvania courts had imposed on how it applied its corporate income tax, Walczak said.
Other states are using the Supreme Court’s decision to expand how they apply their taxes. Hawaii passed legislation in July setting a $100,000 threshold, while Texas is considering adopting a $500,000 threshold for its state franchise tax. Philadelphia adopted a $100,000 threshold for its business tax and San Francisco adopted a $500,000 threshold for several city taxes.
Corporate net income tax collections delivered $3.4 billion to Pennsylvania’s treasury last year, or less than 10% of the state’s overall collection of almost $34.9 billion for its main operating account. Sales and personal income taxes contributed $25 billion.