Press Room: Tax Release

February 11, 2015

Corporate Income/Franchise Tax: Pennsylvania Market-Based Sales Factor Sourcing

Governor Tom Corbett originally signed Act 52 (Act) into law on July 9, 2013. Included in the Act were new sourcing rules related to sales of services (or service revenue). Specifically, the Act provided a new market-based methodology for sourcing service revenue effective tax years beginning after December 31, 2013. Under the old law, all receipts from sales other than sales of tangible personal property were sourced using a cost of performance methodology. Recently (December 14, 2014), the Pennsylvania Department of Revenue (Department or DOR) released Information Notice Corporation Taxes 2014-01 which provides guidance on the new market-based sourcing rules for purposes of its corporate net income tax and capital stock/foreign franchise tax laws.

Intent of the Law

Pennsylvania is the latest jurisdiction to follow the recent state trend by moving away from cost of performance to market-based sourcing in an attempt to shift the tax burden from in-state taxpayers to out-of-state taxpayers. In shifting to market-based sourcing, Pennsylvania intends to source sales based on the location of the marketplace where the consumer receives the benefit. By changing to market-based sourcing, it is possible (if not more likely) that out-of-state taxpayers will be required to source more of their sales to Pennsylvania, thus increasing their sales factor and ultimately increasing their Pennsylvania tax liability.

Statutory Rules

The Department defines delivery as occurring at a location where a person or entity may use the services. If a service is provided to a customer who is present in the state of Pennsylvania, the service is considered to have been delivered to Pennsylvania. If the state or states of delivery cannot be determined, the service is considered to be delivered at the customer’s billing address. 

In cases where a service is provided to multiple states, the sales from that service should be apportioned using a reasonable and consistent method. The notice provides that taxpayers may source the sales based on expected usage, actual usage, or value of the usage.  It is very important to note that once a method is selected, that method becomes binding for all subsequent years. Thus, the method selected requires careful planning as it will impact all future tax years. At the time of this release, the Department was still discussing internally procedures to put in place to address the possibility of unwinding or providing relief for taxpayers whose facts or business changed in subsequent years after the selection of their initial binding method. Based on Andersen Tax’s discussions with the Department, we have learned that DOR’s informal procedures require taxpayers to send letters to both the Corporate Tax Bureau and Office of Chief Counsel explaining their facts and detailing why a change in method would be warranted. Note, a taxpayer may NOT change or utilize a different methodology on its returns until the taxpayer receives formal approval from the Department.


It is important to note that Pennsylvania’s transition to market-based sourcing only applies to the receipts from services. Sales of intangibles (patents, copyrights, trademarks, etc.) are still sourced using the Commonwealth’s current cost-of-performance rules, which source intangible revenue to the location of the income-producing activity. Note, however, that the DOR has interpreted the income producing activity to occur at the location where performance is fulfilled. Therefore, intangible revenue should be sourced to the location the intangible is used by the customer.

It is critical for taxpayers to have a good understanding of the new sourcing rules in Pennsylvania. Taxpayers providing services that previously had minimal-to-no Pennsylvania sourced income (and thus minimal liability) under the old cost-of-performance rules may now have more significant sourced income and Pennsylvania liability under the new market-based sourcing rules.

Specific examples provided by the Department can be found by clicking here.