PICPA’s Questions for the Department of Revenue
June 30, 2011
This document provides a written summary of answers provided by the
Department Revenue to the PICPA Committee on State Taxation at its annual
question and answer session with the Department on June 30, 2011. This
document is classified as revenue information issued for informational purposes
only for the convenience of PICPA's members. Pursuant to 61 Pa. Code §3.4, this
document should not be relied upon for any purpose or used in tax appeals.
Taxpayers requiring a binding opinion on their specific fact situation may
request a written letter ruling under 61 Pa. Code §3.3.
I. CORPORATION TAXES
1. XYZ Corp., a DE corporation, operates exclusively in NJ. XYZ Corp. sells tangible
personal property. A, an employee of XYZ Corp., resides in Pennsylvania. Some
evenings and weekends A may take home unfinished work, and/or make business related
telephone calls. Please explain under what circumstances would the in-state activities of
A be sufficient to create CNI Tax and/or CS/FF Tax nexus for XYZ Corp.
Answer
It depends upon the specific facts. If the employee is required to perform duties on behalf
of his employer from his Pennsylvania home, the Department would consider XYZ Corp
to have corporate tax nexus. There may be other facts that would also lead to a nexus
determination, including the frequency of the activity in Pennsylvania, use of employer
owned equipment in Pennsylvania, reimbursement of expenses incurred by the employee
in Pennsylvania, etc.
2. After the 2002 amendment of the definition of business income, please explain the
Department of Revenue’s position as to when a complete or partial liquidation of a
business would still constitute non-business income under the Laurel Pipe Line, RossAraco and Canteen decisions.
Answer
Nonbusiness income is limited to that income that is not apportionable under the United
States Constitution. If the income is apportionable to any other jurisdiction, it is
apportionable business income for Pennsylvania purposes.
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3. In view of the Commonwealth Ct. decision in Glatfelter, 362 F.R.2007, please comment
on the Department’s position as to the circumstances in which a transaction may constitute
nonbusiness income.
Answer
Nonbusiness income is limited to that income that is not apportionable under the United
States Constitution. If the income is apportionable to any other jurisdiction, it is
apportionable business income for Pennsylvania purposes.
4. With the change in administrations, please explain when the Department of Revenue will
issue the long awaited cost of performance regulations.
Answer
The Department has no plans to issue a sales factor regulation in the foreseeable future.
5. Please state whether the Department of Revenue treats the sale of electricity as the sale of
tangible personal property, intangible personal property, or as a service for CNI Tax and
CS/FF Tax purposes.
Answer
For purposes of the capital stock franchise tax manufacturing exemption, the
Commonwealth Court in The Potomac Edison Company v. Commonwealth, 50 Commw.
CT. 1 (1980), held that making electricity was not manufacturing. For purposes of
sourcing sales for apportionment purposes, it is the Department’s position that the sale of
electricity more closely resembles the sale of a saleable commodity, than it does a service,
and the use of the intangible provisions of 72 P.S. §7401(a)(17) is inappropriate.
6. Please state whether the Department of Revenue treats the sale of natural gas as the sale of
tangible personal property, intangible personal property, or a service for CNI Tax and
CS/FF Tax apportionment purposes.
Answer
The Tax Reform Code provides:
All business income of natural gas companies subject to regulation by the Federal Power
Commission or by the Pennsylvania Public Utility Commission shall be apportioned to
this Commonwealth by multiplying the income by a fraction, the numerator of which
shall be the cubic foot capacity of the taxpayer's pipelines in this Commonwealth, and the
denominator of which shall be the cubic foot capacity of the taxpayer's pipelines
everywhere, at the end of the tax period. 72 P.S.§7401(3)2.(c)(2).
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7. For CNI Tax and CS/FF Tax purposes, please indicate whether gross proceeds or net gains
from the sale of derivatives, e.g., futures, options and swaps, are includable in a
corporation’s sales factor. (Assume that the derivatives are not securities.)
Answer
To the extent they are not classified as a security, net gains are used in computing the sales
factor.
[Note: there is a question as to whether these items are a security excluded from the sales
factor.]
8. DEF Corp., a PA based corporation doing business throughout the world, licenses a
trademark to GHI Corp, an OH based corporation. Under the terms of the licensing
agreement GHI Corp. pays DEF Corp. a royalty based upon a percentage of sales of
products upon which the trademark is placed. DEF Corp. maintains the trademark at its
PA headquarters. GHI Corp. manufactures products using DEF Corp.’s trademark. GHI
Corp. manufactures products at its own facilities in PA and OH. In addition, the
corporation contracts with a manufacturer located in China to manufacture certain
products with the trademark. GHI Corp. sells the manufactured products throughout the
world and pays DEF Corp. royalties based upon a percentage of those sales.
a.
Assume that GHI Corp. is able to provide DEF Corp. with (1) a breakout of sales based
upon where the products were manufactured, and (2) a breakout of ultimate product sales
by location, for purposes of computing DEF’s sales factor numerator for CNI Tax and
CS/FF Tax purposes, please explain whether DEF Corp. would source royalties to PA
based upon (1) the corporation’s domicile, (2) where the products giving rise to the
royalties were manufactured, (3) where the products giving rise to the royalties were sold,
or (4) OH, the commercial domicile of GHI, Corp.
b. Assume that GHI Corp. is only able to provide DEF Corp. with a breakout of sales based
upon where the products were manufactured, for purposes of computing DEF’s sales
factor numerator for CNI Tax and CS/FF Tax purposes, please explain whether DEF
Corp. would source royalties to PA based upon (1) the corporation’s domicile, (2) where
the products giving rise to the royalties were manufactured, or (3) OH, the commercial
domicile of GHI, Corp.
c. Assume that GHI Corp. is not able to provide DEF Corp. with (1) a breakout of sales
based upon where the products were manufactured, or (2) a breakout of ultimate product
sales by location, for purposes of computing DEF’s sales factor numerator for CNI Tax
and CS/FF Tax purposes, please explain whether DEF Corp. would source royalties to
PA based upon the corporation’s domicile, or (2) OH, the commercial domicile of GHI,
Corp.
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Answer
The issues raised in this question are not general in nature. The person asking this
question should consider making full disclosure of the facts, including the taxpayer’s
identity, and submitting these issues as letter ruling request to the Department.
9. For CNI Tax and CS/FF Tax apportionment purposes, please explain whether the sale or
licensing of canned software delivered electronically is treated as the (1) sale of tangible
personal property or (2) the sale/licensing of intangible property.
Answer
The sale or licensing of canned software is the sale of tangible personal property.
10. Please explain what appeal rights a corporate taxpayer has if the Department of Revenue
refuses to accept all the changes reported on an RCT-128C. (If the Department concludes
that a corporate taxpayer does not have any appeal rights, please explain how that policy is
consistent with the Due Process Clauses of the U.S. and Pennsylvania Constitutions, as a
corporate taxpayer is required to file an RCT-128C under 72 Pa.C.S. § 7406.)
Answer
Section 406(b) of the Tax Reform Code provides:
(b) If, as a result of such final change or correction, a corporation should report any
change in the amount of the taxable income of any corporation upon which tax is
imposed by this article, the Department shall adjust the corporation's tax on the
Department's records to conform to the revised tax as reported and shall credit the
taxpayer's account to the extent of any overpayment resulting from the adjustment. The
Department shall then have the power, and its duty shall be, to determine and assess the
taxpayer's unpaid and unreported liability for tax, interest or penalty due the
Commonwealth, or to credit the taxpayer's account.
If the Department assesses the taxpayer pursuant to TRC section 406(b), the taxpayer may
petition for reassessment under TRC section 2702.
11. On its 2008 RCT-101 filed on 4/15/09, ABC Corp. reports and remits a self-assessed CNI
Tax in the amount of $100. As a result of the receipt of an RAR on 4/1/11, ABC Corp.
filed a RCT-128C on 4/15/11 resulting in a reduction of 2008 CNI Tax. ABC Corp.
requested that the $20 overpayment of 2008 CNI Tax be credited to the corporation’s
2009 CNI Tax to satisfy a deficiency. For purposes of determining whether any interest is
due on the 2009 payment, please explain whether the Department of Revenue treats the
$20 payment as being made on 4/15/09 or 4/15/11.
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Answer
In the above example the Bureau of Corporation Taxes would identify the date associated
to the $20 overpayment that developed from the filing of the RCT-128C as 4/15/09. The
due date for the 2009 tax deficiency is 4/15/10. Since the date associated to the
overpayment is prior to the due date for the 2009 tax year, no interest would be charged on
the application of the overpayment credit.
12. PQR Corp. does business in PA and is required to file a RCT-101. For federal income tax
purposes, PQR Corp. files as part of the STU Corp. consolidated group. None of the other
members of the STU Corp. consolidated group are required to file in PA. For federal
income tax purposes, STU Corp. prepares its federal Form 1120, Schedule UTP,
Uncertain Tax Position Statement, on a consolidated basis. Please advise (1) whether
PQR Corp. is required to file (1) a copy of the consolidated Schedule UTP or (2) a pro
forma separate company Schedule UTP with its pro forma federal Form 1120.
a. If PQR Corp. is required to file a pro forma separate company Schedule UTP, please
discuss whether how the corporation should prepare that schedule, e.g., only include
those uncertain tax positions reported on the consolidated Schedule UTP that relate to
that entiy.
b. If none of the items reported on the consolidated Schedule UTP relate to PQR Corp.,
please discuss whether the corporation is required to file either a copy of the consolidated
Schedule UTP or a pro forma separate company Schedule UTP.
Answer
The taxpayer is required to file a pro forma separate company Schedule UTP including
those uncertain tax positions taken by the taxpayer in the preparation of the pro forma
separate company Federal return. In addition, any corporation that is part of a
consolidated group required Schedule UTP must provide a copy of the consolidated
Schedule UTP. In cases where there are no uncertain tax positions associated with the
taxpayer, the taxpayer must include a statement to this effect.
13. Please discuss whether Department of Revenue intends to assert IRC § 7701(o)
(Clarification of Economic Substance Doctrine) as a basis for challenging certain
intercompany transactions for CNI Tax purposes.
Answer
No
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14. Please explain under what circumstances, if any, Pennsylvania would permit or require an
adjustment to an NOL carryover from a closed year being applied in an open year. For
example, assume company A reported losses in each of years 2001 through 2004. The
losses are applied against income reported in years 2005 through 2009. In 2011, the
Department conducts a review or audit of the open tax years 2007 through 2009. Would
the Department audit go back into closed years 2001 through 2004 to determine if the
amount of the loss generating the carryforward was correct? Would the Department audit
go back into closed years 2005 through 2006 to determine if the amount of NOL
deduction utilized was correct? Would the Department adjust the loss deduction in years
2007 through 2009 to reflect any errors in such prior years? Would the answers be
different for any loss years which come under jurisdiction of Act 119?
Answer
The Department will review prior years’ net losses which effect the determination of the
current year’s tax.
15. Please comment on the Department’s current audit policies with respect to intercompany
transactions. In particular, under what circumstances would the Department review
intercompany royalty and/or interest expense deductions? What criteria would the
Department utilize to determine the appropriateness of such deductions? In what
circumstances, if any, would the Department assert that the related corporation receiving
of such intercompany payments is subject to tax? How would apportionment be
determined with respect to such intercompany income?
Answer
On audit, the Department reviews all royalty and interest expense deductions. A decision
is based upon the facts presented. If the person who has this question has a specific case,
they should consider making full disclosure of the facts, including the taxpayer’s identity,
and submitting these issues as letter ruling request to the Department.
16. Would the delivery of goods to customer locations in Pennsylvania – absent any
installation, set up or other services – by a corporation utilizing its own trucks and drivers
create nexus for Corporate Net Income Tax purposes where the corporation’s activities are
otherwise limited to solicitation in accordance with PL 86-272? If so, under what
instances would such delivery activities be considered de minimis?
Answer
No.
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17. Would the delivery of goods to customer locations in Pennsylvania – absent any other
physical presence in Pennsylvania – by a corporation utilizing its own trucks and drivers
create nexus for foreign franchise tax purposes? If so, under what instances would such
delivery activities be considered de minimis?
Answer
Yes. Delivery is part of solicitation. Solicitation creates capital stock franchise tax nexus.
18. Considering each of the following situations independently, would Corporation X be
entitled to utilize apportionment factors to determine its Corporate Net Income Tax and
Foreign Franchise Tax liabilities? In each case assume that Corporation X is subject to tax
only in the indicated states:
a. Corporation X transacts business in Pennsylvania and Texas, where it is subject to the
Texas Franchise (Margins) Tax.
b. Corporation X transacts business in Pennsylvania and Michigan, where it is subject to the
Gross Receipts Tax element of the Michigan Business Tax but is exempt from the
Business Income Tax element.
c. Corporation X transacts business in Pennsylvania and Ohio, where it is subject to the
Commercial Activities Tax.
d. Corporation X transacts business in Pennsylvania and Nevada, which does not impose an
income, privilege or shares tax. Under Pennsylvania nexus standards, Corporation X
would be subject to a net income tax in Nevada if that state chose to impose such a tax.
e. Corporation X transacts business in Pennsylvania and Nevada, which does not impose an
income, privilege or shares tax. Under Pennsylvania nexus standards, Corporation X
would be subject to a privilege or shares tax in Nevada if that state chose to impose such
a tax, but would not be subject to a net income tax under PL 86-272.
Answer
All of the above examples Corporation X may apportion.
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19. In several corporation tax audits the Department has determined the sales factor by
applying a customer-location-based market sourcing approach. In what circumstances
does the Department believe market sourcing is an appropriate policy? What is the
statutory or other authoritative basis for applying market sourcing in lieu of a cost of
performance approach?
Answer
Sales of tangible property are sourced to the destination state. Sales of intangibles are
sourced to the state where the income producing activity is performed. When we look at
the receipt of sales of other than tangible personal property, we first must determine the
income producing activity for each individual transaction. Costs of performance are only
considered when the income producing activity occurs in more than one state.
20. Please explain the Departments position regarding IRC Sec. 108, including specifically:
a. Is the exclusion of income recognized for federal tax purposes on a pre- or postapportioned basis?
b. Tax attribute reduction – are taxpayers required to reduce PA tax attributes (e.g., PA
NOL’s)
Answer
There is no statutory authority to adjust Federal taxable income for this item in
computing Pennsylvania taxable income. There is also no authority to adjust
Pennsylvania tax attributes for this item.
21. I have heard from clients that it is difficult to figure out how to make a corporate tax
payment for a balance due with a return using EFT. What I heard was that the EFT
payment choices were only for estimated payments or extensions but not return balances
due. One client gave me their log in information on Friday 4/15 for a payment due 4/18
and I could not figure it out either and was unable to make the electronic payment. Maybe
this was because it was late in the day of 4/15 and the return was due 4/18 and we were
too late for EFT. However, it would not even allow for the late payment. Please reiterate
the rules and instructions for paying corporate balance due payments using etides and
EFTPS.
Answer
Corporate balance tax payments and returns are not an option in e-Tides. This option is
available using the Fed State e- filing program, located on our Revenue web site.
However, an electronic payment for a specific tax period can be accomplished by selecting
the REV 857 estimated payment option in e-Tides and submitting a paper return.
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Corporate Tax Return with ACH Debit Payment e-Tides Timely Filing/ Payment
Schedule:
Transmission of e-Tides tax return and ACH debit payment must be completed before
1:00 PM Eastern Time at least one business day prior to the tax due date.
Timely payments are based on the date the Commonwealths bank account is credited.
Timely Returns are based on the date of acceptance of the electronic tax return.
Corporate Tax EFT Program ACH Debit Payment Timely Payment Schedule:
Transmission of EFT Telephone payments must be initiated and completed at least one
business day prior to the tax due date before 4:45 PM Eastern Standard Time.
You may report payments up to 365 days in advance of the tax due date. Fund
withdrawals are warehoused until the due date. However, this program only allows
transmissions of current and previous year payments.
ACH Credit and Credit Card Payments are available options for remitting EFT payments;
however, the Department must receive these types of payments on or before 4:00 PM
Eastern Standard Time on the tax due date in order for the payment to be considered
timely.
E-Tides and EFT do not allow payment transmissions for a previous tax period for the
purpose penalty, interest, or a balance due on an "old" tax year.
22. When did the PA DOR Corporate Tax Bureau start requesting additional information
using faxes? Why not by US mail? (The issue is faxes and e-mail are not reliable means
of communication if not followed up with a phone call if there is no response. It happens
all the time that e-mails do not come through or faxes get lost).
Answer
With the exception of processing the application for the Research and Development credit,
the Bureau of Corporation Taxes does not utilize faxes or e-mail as first contact with a
taxpayer or preparer. In cases where time is of the essence and a fax or e-mail must be
sent, the bureau will first call the individual listed on the report to let them know that a fax
or email requesting information will be forthcoming.
23. Why is the procedure of the PA DOR for follow up on an information request (In this case
the R&D Credit Application) if information is not received from the taxpayer as a result of
a fax request?
Answer
PA Department of Revenue found from past year application review and subsequent
taxpayer follow up, that the most efficient order of contact is e-mail, fax, and then a
letter. After this initial contact with no taxpayer reply, the Department will follow up with
a phone call/voice mail message, once every 10 days until the missing information is filed
or we reach the deadline.
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II. CORPORATION TAXES – SALES AND USE TAX
1. JKL Corp., a CA corporation, provides cloud computing services to MNO Corp., a multistate
corporation with offices located throughout the U.S., including PA. JKL Corp. and MNO
Corp. are unrelated. Under the terms of the agreement, MNO Corp. contracts to use JKL
Corp.’s (canned) software in exchange for a fee based upon number of users of the software.
One hundred of the five hundred employees of MNO Corp. who use the software work in
PA. However, other employees may travel into PA with their laptops upon which the
software may be accessed. JKL Corp.’s data center, including all equipment used to render
the cloud computing services, is located in CA. JKL Corp. owns all the equipment. JKL
Corp. has no presence in PA. No equipment used in the rendering of the cloud computing
services is located in PA.
a. Based upon the presented facts, please explain whether JKL Corp. would have nexus for
(1) CNI Tax, (2) CS/FF Tax and/or (3) Sales and Use Tax compliance purposes. (If
additional information is necessary to respond to this question, please explain what
additional facts are necessary in order to make a nexus determination.)
b. Assuming that JKL Corp. is subject to the CNI Tax and CS/FF Tax, i.e., the corporation
solicits sales in PA, please explain (1) whether the transaction would constitute the sale
of tangible personal property, the licensing of an intangible, or the rendering of a service,
and (2) the portion (or the methodology for determining the portion) of the usage fee that
would be includable in JKL Corp.’s sales factor numerator. (Please explain the reasoning
for the Department’s conclusions.)
c. Assuming that JKL Corp. is required to collect and remit Sales Tax, please explain under
what circumstances, and to what extent MNO Corp.’s purchase of cloud computing
services would be taxable in this example.
Answer
The issues raised in this question are not general in nature. The person asking this
question should consider making full disclosure of the facts, including the taxpayer’s
identity, and submitting these issues as letter ruling request to the Department.
2. PQR Corp., a PA corporation doing business in many states, provides cloud computing
services to STU Corp., a NJ corporation with offices located only in New Jersey. PQR Corp.
and STU Corp. are unrelated. Under the terms of the agreement, STU Corp. contracts to use
PQR Corp.’s (canned) software in exchange for a fee based upon number of users. All the
users are located in NJ. PQR Corp.’s data center, including all equipment used to render the
cloud computing services, is located in PA. PQR Corp. owns all the property necessary to
render these services.
a. Assuming that STU Corp. only makes sales of tangible personal property to PA
customers through the Internet into PA, please discuss whether STU Corp. would have
nexus for (1) CNI Tax, (2) CS/FF Tax and/or (3) Sales and Use Tax compliance purposes
under the facts presented in this example. (If additional information is necessary to
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respond to this question, please explain what additional facts are necessary in order to
make a nexus determination.)
b. Please explain what portion (or the methodology for determine what portion) of the
usage fee would be includable in the PQR Corp.’s sales factor numerator for CNI Tax
and/or CS/FF Tax purposes. (Please explain the reasoning for the Department’s
conclusion.)
c. Please explain under what circumstances and to what extent STU Corp. would owe PA
Sales and Use Tax on the transaction. (Please explain the reasoning for the Department’s
conclusion.)
Answer
The issues raised in this question are not general in nature. The person asking this
question should consider making full disclosure of the facts, including the taxpayer’s
identity, and submitting these issues as letter ruling request to the Department.
3. ABC Corp., a CA corporation, contracts with DEF Corp., a PA corporation with operations
in PA and NJ, to host DEF Corp.’s website and its custom developed application software on
ABC Corp.’s servers on a pay-by-usage basis. ABC Corp. and DEF Corp. are unrelated.
DEF Corp. maintains its website in PA and uses the application software in PA and OH.
DEF Corp.’s website is accessed by persons throughout the world. ABC Corp.’s data center,
including all equipment used to host DEF Corp.’s website and software is located in CA.
ABC Corp. has no presence in PA.
a. Based upon the presented facts, please explain whether ABC Corp. would have nexus for
(1) CNI Tax, (2) CS/FF Tax and/or (3) Sales and Use Tax compliance purposes. (If
additional information is necessary to respond to this question, please explain what
additional facts are necessary in order to make a nexus determination.)
b. Assuming that ABC Corp. is subject to the CNI Tax and CS/FF Tax, i.e., the corporation
solicits sales in PA, please explain (1) whether the transaction would constitute the lease
of tangible personal property or the rendering of a service, and (2) the portion (or the
methodology for determining the portion) of the usage fee that would be includable in
ABC Corp.’s sales factor numerator. (Please explain the reasoning for the Department’s
conclusions.)
c. Assuming that ABC Corp. is required to collect and remit Sales Tax, please explain under
what circumstances, and to what extent DEF Corp.’s purchase of website and software
hosting services would be taxable in this example.
Answer
The issues raised in this question are not general in nature. The person asking this
question should consider making full disclosure of the facts, including the taxpayer’s
identity, and submitting these issues as letter ruling request to the Department.
4. GHI Corp., a PA corporation doing business in many states, provides website and (custom or
customized) software hosting services to JKL Corp., a NJ corporation with offices located
only in New Jersey. JKL Corp. compensates GHI Corp. on a pay-by-usage basis. GHI Corp.
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and JKL Corp. are unrelated. GHI Corp.’s data center, including all equipment used to
provide website and software hosting services, is located in PA. GHI Corp. provides all the
property necessary to host JKL Corp.’s website. JKL Corp. developed and owns the
software hosted on GHI Corp.’s servers.
a. Assuming that JKL Corp. only sells tangible personal property in Pennsylvania through
the Internet, please discuss whether JKL Corp. would have nexus for (1) CNI Tax, (2)
CS/FF Tax and/or (3) Sales and Use Tax compliance purposes under the facts presented
in the example. (If additional information is necessary to respond to this question, please
explain what additional facts are necessary in order to make a nexus determination.)
b. Please explain what portion (or the methodology for determine what portion) of the fee
that GHI Corp. earns would be includable in the GHI Corp.’s sales factor numerator for
CNI Tax and/or CS/FF Tax purposes. (Please explain the reasoning for the Department’s
conclusion.)
c. Please explain under what circumstances and to what extent JKL Corp. would owe PA
Sales and Use Tax on the transaction. (Please explain the reasoning for the Department’s
conclusion.)
Answer
The issues raised in this question are not general in nature. The person asking this
question should consider making full disclosure of the facts, including the taxpayer’s
identity, and submitting these issues as letter ruling request to the Department.
5. TUV Corp., a CA corporation, contracts with WXY Corp., a PA-based corporation that
operates in many states, to use TUV’s proprietary application programming interfaces (API)
to develop software applications for WXY Corp.’s own use. Under the terms of the
agreement, WXY Corp. contracts to use TUV Corp.’s software in exchange for a fee based
upon usage. The software development activities take place in PA and NY. TUV Corp.’s
data center, including all equipment used to render the cloud computing services, is located
in CA. TUV Corp. owns all the equipment. TUV Corp. has no presence in PA. No
equipment used in the rendering of the cloud computing services is located in PA.
a. Based upon the presented facts, please explain whether TUV Corp. would have nexus for
(1) CNI Tax, (2) CS/FF Tax and/or (3) Sales and Use Tax compliance purposes. (If
additional information is necessary to respond to this question, please explain what
additional facts are necessary in order to make a nexus determination.)
b. Assuming that TUV Corp. is subject to the CNI Tax and CS/FF Tax, i.e., the corporation
solicits sales in PA, please explain (1) whether the transaction would constitute the sale
of tangible personal property, the licensing of an intangible, or the rendering of a service,
and (2) the portion (or the methodology for determining the portion) of the usage fee that
would be includable in TUV Corp.’s sales factor numerator. (Please explain the
reasoning for the Department’s conclusions.)
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c. Assuming that TUV Corp. is required to collect and remit Sales Tax, please explain under
what circumstances, and to what extent WXY Corp.’s purchase of cloud computing
services would be taxable in this example.
Answer
The issues raised in this question are not general in nature. The person asking this
question should consider making full disclosure of the facts, including the taxpayer’s
identity, and submitting these issues as letter ruling request to the Department.
6. Howard Corp., a NJ corporation with offices located only in NJ, contracts with Jeremy Corp.,
a PA corporation doing business in many states, to use Jeremy Corp.’s APIs to develop
application software. Howard Corp. will pay Jeremy Corp. a fee based upon usage. All the
users of the APIs are located in NJ. Jeremy Corp.’s data center, including all equipment used
to render the cloud computing services, is located in PA. Jeremy Corp. owns all the property
necessary to render these services.
a. Assuming that Howard Corp. only makes sales of tangible personal property to PA
customers through the Internet into PA, please discuss whether the corporation would
have nexus for (1) CNI Tax, (2) CS/FF Tax and/or (3) Sales and Use Tax compliance
purposes under the facts presented in this example. (If additional information is
necessary to respond to this question, please explain what additional facts are necessary
in order to make a nexus determination.)
b. Please explain what portion (or the methodology for determine what portion) of the
usage fee would be includable in the Jeremy Corp.’s sales factor numerator for CNI Tax
and/or CS/FF Tax purposes. (Please explain the reasoning for the Department’s
conclusion.)
c. Please explain under what circumstances and to what extent Howard Corp. would owe
PA Sales and Use Tax on the transaction. (Please explain the reasoning for the
Department’s conclusion.)
Answer
The issues raised in this question are not general in nature. The person asking this
question should consider making full disclosure of the facts, including the taxpayer’s
identity, and submitting these issues as letter ruling request to the Department.
III. SALES AND USE TAX
1. Please explain the criteria by which the Department distinguishes non-taxable consulting
services that are billed on an hourly basis from taxable help supply services that are billed on
an hourly basis.
a. Please address the specific distinguishing aspects of non-taxable computer programming
services that are billed on an hourly basis.
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Answer
If a service provider is contracted to provide an employee capable of performing a
task and there is no specified deliverable or finished product, the transaction is
considered to be a taxable help supply service. However, if the provider warrants
more than the mere fitness of the employee provided and guarantees that the
employee will deliver a specified finished product, the transaction is an exempt
consulting and/or computer programming service.
2. PA Ruling SUT 10-005 provides in part: “A web-based service that allows remote access to a
computer is not a taxable service if access to the software is solely through the Internet and
the server or data center is not is not located in Pennsylvania.”
The facts state that: “Other than an applet necessary to access the service, the service does
not entail the transfer of any Taxpayer [i.e., the remote access service provider] software to
the subscriber and does not allow subscribers to access the Taxpayer software code or
manipulate the software in any way. Rather, the service is provided through the Taxpayer’s
own data centers on its proprietary equipment and software, which is at all times owned by
and under the control of the Taxpayer.”
Please explain the authority by which this web-based service would be taxable assuming the
server or data center is located in Pennsylvania considering, according to the stated facts,
there is no transfer of ownership or rights to the operating software from the Taxpayer to the
subscriber (“which is at all times owned by and under the control of the Taxpayer”).
Answer
The Department’s policy is that the Taxpayer’s providing of access to canned software is
a nontaxable computer service. If the server is located in Pennsylvania, then the
Taxpayer is required to pay sales or use tax on the Taxpayer’s purchase of the canned
software placed on a server located in Pennsylvania. The access to the Taxpayer’s
software is a nontaxable service regardless of the location of the server. PA Ruling SUT
10-005 will be reworded and reissued.
This also means the a business purchasing canned software which on placed on server
located in Pennsylvania is required to pay sales or use tax on the entire purchase price of
such software even though some or most of the users are located outside of Pennsylvania.
3. An April 17, 1995 memorandum from the Revenue Chief Counsel indicated that common
and contract carriers are treated uniformly for purposes of the public utility exemption. Is
this policy still in effect?
Answer
If the carrier holds either a PUC or MC/MX number, yes.
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4. Does the public utility exemption depend on the type of customer for whom hauling services
of a common carrier are performed? Specifically, if a separate entity that is classified as a
“common carrier” by the Pennsylvania Public Utility Commission performs hauling services
only to one or more affiliated entities does that fact affect the tax exemption, and, if so, how
does that square with the uniformity clause of the PA Constitution?
Answer
If the carrier holds either a PUC or MC/MX number, no; they are treated the same and
both are entitled to the exemption.
IV. PERSONAL INCOME TAX
1. In light of recent BF&R decisions in which the Department of Revenue’s representative did
not dissent, please explain what criteria the Department of Revenue will now use to
determine whether hedge funds, private equity funds and/or similar types of investment
vehicles are engaging in a “business” for PIT purposes.
Answer
The Department does not anticipate making any policy changes related to the criteria for
business activity. The criteria are located in 61 Pa. Code § 103.12. The Department’s
position is that business entities such as hedge funds that do not market a product or service
to the general public but are merely a group of people who invest for their own benefit are
not conducting a business. See the following excerpts from the PIT Guide and Revenue
website Q&A, below:
B. What is Not a Business or Profession
The following activities do not constitute the operation of a business, profession
or farm and are, therefore, reportable in other classes of Pennsylvania incomeA sale, discontinuation, or abandonment of a business or segment thereof;
An isolated or nonrecurring transaction which is not a normal or routine business
activity;
The ownership or disposition of assets which are held for long-term investment
purposes;
Trading in or hedging securities for personal purposes; and
A non-operating interest in coal, oil, gas, or minerals in place unless they serve an
operational function in the operation of the owner's business.
Does a partner in an investment club partnership report the gain or loss on Part I or Part
III of PA-20S/PA-65 Information Return?
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If the partnership invests for anyone outside of the partnership, the income is
considered business income and should be reported in Part I.
If investments are strictly for partners of the partnership, income (loss) would be
reported in Part III.
2. Recent notice where the Taxpayer had PA WH on a W-2 in excess of 3.07%. the State sent
an invoice for the excess because they adjusted the WH down to 3.07%. They did this
without ever referencing the W-2? We had to reply to the notice and send a copy of the W-2.
Since they already had a copy from the employer, why couldn’t they just verify it internally?
Answer
Without any specific details on this particular case and knowing that both paper and
electronic filing methods allow the submission of Schedule W-2S and knowing that a number
of returns are submitted each year without any backup documentation, I’m going to provide a
general answer at this time. If however, the person who asked this question is present, I will
be happy to discuss the issue further after the meeting.
As part of our normal examination process, the Department’s tax examination staff reviews
the entire return to locate the physical W-2 if the submission was via paper. If the
submission was via electronic means, we would review the entire record transmission to
locate the W-2 information and in both cases, conduct any necessary research through the
Department’s internal systems in an attempt to verify the withholding information before
adjusting the return or requesting information from the taxpayer.
However, please keep in mind that since employers are not required to submit the individual
W-2s, via electronic media or paper before January 31st; and that during this same period of
time, the department also receives hundreds of thousands of other returns and payments for
posting and processing. There is a large convergence of information in a short period of
time. This results in cases where not all of the individual W-2s or summary information is
available for cross-reference when the initial examination of a PA-40 return occurs.
When these situations occur, we are left with three options: One is to correspond with the
taxpayer to request information. (We prefer this method so that the taxpayer is aware that
information is needed and that their return is on hold.) The second is to place the return into
an internal hold and go back at a later date to re-review the item. (This is the less preferred
method during our busy time, since it means holding the return for X number of days and
then going back for a second look.) The third is to make an adjustment to the return and let
the taxpayer correspond with the department if they disagree. (This is the least preferred
method and is normally only used when previous attempts to get any necessary information
from the taxpayer have failed.)
3. PA E-filing only permits up to 2 misc. line items on a PA UE schedule. Also, only eleven
misc line items were allowed on a schedule “C”. If you exceed these totals, they bounce you
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from E-filing. Why can’t this be increased to a more reasonable level? The Federal has no
problem with many more lines accepted.
Answer
The current e-file platform requires forms to mirror our e-File specifications which require
the forms to mirror our paper format of the forms. The department would not be able to see
those extra lines of input without the limitation. In addition, the paper Schedule UE and
Schedule C forms have held at two pages for the last several years and at this time there are
no plans to add more lines to either paper schedule resulting in them being three page forms.
Although the limitations exist, there are options that will still permit you to e-file the return.
One way around the limitation in the current e-file platform is to include an entry shown as
“See Attached Schedule” with a dollar amount of input. The actual schedule is then included
via separate input to the e-filed return and included as a statement schedule. If a software
vendor does not support the statement schedule, you have three other options: include an
additional Schedule UE with the additional schedules only showing additional lines of input
(up to four can be included); fax in the additional statement schedule; or file via paper.
However, in the new Modernized e-File (MeF) platform, an unlimited number of lines will
be available. The department will be able to see the additional lines of entry in our output.
Question 6’s answer will have more information about the MeF platform and how it will
enhance your ability to e-file more returns.
4. Are there any plans to revise the policies regarding the taxability of benefits from
Nonqualified Deferred Compensation Plans (the most recent published information is PIT
Bulletin 2005-03 and PIT Guide Chapter 7 at XVII)?
Although PIT Bulletin 2005-03 will probably not be republished, PIT Guide Chapter 7 is
currently being vetted for updating. Policy related issues with respect to documentation
to support the basis of any pre-2004 deferrals are not out of line with any IRS related
guidelines for keeping track of the basis of an asset.
5. Taxpayer has a Schedule “F” Farm. Taxpayer recently received a check from a drilling
company for the right to drill for Marcellus Shale on his Farm Land. Can we report this
income on Schedule F (or does it have to be reported as royalty income on Schedule E)?
The income should be reported as royalty income on PA Schedule E. Farming income is
related to surface activity. The payment received is related to an activity that takes place
below the surface and mineral rights of the property. It is not related to the farm
operations and therefore should be reported separately. Please see the Taxable
Royalties and Taxable Rental Income sections of the Natural Resources chapter of
the PA PIT Guide (Chapter 23) for additional information.
6. Accounting firms still find that some aspects of efiling PA tax returns are more burdensome
than filing paper returns, especially in today’s “paperless” environment. Examples include
the requirement to separately mail or fax to the PA DOR 1) federal Form 1116 (foreign
2011 PICPA/PA DOR Questions
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taxes) and 2) other state tax returns (other state taxes) when the taxpayer claims a credit for
the taxes on an efiled Form PA-40. If these forms are not mailed, the PA DOR generally
sends out correspondence to the taxpayer requesting them, which has negative repercussions
on the accountant’s relationship with the taxpayer client. Does the PA DOR have plans to
allow for PDF attachments (of Form 1116 and the other state tax returns) or some other
enhancement to current efiling procedures so efiling can be more efficient for practitioners?
If so, when will such changes be in place?
Answer
The Department is currently in the process of converting over to the IRS’s new MeF,
Modernized e-File, platform. The MeF platform will permit preparers to attach pdf files of
items such as other state returns and federal Form 1116 for verifying resident credit as well
any other documents that are currently required to be faxed to the department. The
Department began accepting MeF based returns for tax-year 2010 in January of 2011.
However, only one software vendor supported MeF returns. The Department expects more
software vendors to participate using the MeF platform this coming tax season. However,
software vendors are not required to participate until tax-year 2012 during the 2013 filing
season. The department suggests preparers check with their own software vendor to
determine when they will convert to the MeF platform.
V. BANK SHARE TAX
1. In the 2010 Q&A session, a question was posed regarding the calculation of shares value for
Bank Shares Tax purposes when a savings bank that had been filing MTIT reports was
converted to a national bank and merged into an existing national bank that had been filing
Shares Tax reports during the second quarter of 2010. The Department responded that the
shares value of the surviving merged bank would include the historic capital value of both
the surviving national bank and the merged/converted savings bank for the prior 5 years as
the savings bank would not be considered a new entity at the time of its conversion and
merger into a national bank. Follow up questions:
a. Would the savings bank be required to file a MTIT report for 2010?
b. If so, would the period covered by MTIT be the full year or only from the beginning of
the year up to the time of its conversion/merger into a national bank?
c. Assuming the savings bank merely converted into a national bank but did not merge into
another bank, would its 2011 Shares Tax be prorated to reflect the number of days from
the 2010 conversion to the end of 2010?
Answer
a. Yes
b. The savings bank must file a MTIT report for the period up to the date of the conversion.
c. There is no authority to prorate the Bank Shares Tax.
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VI.
REALTY TRANSFER TAX
1. In light of the criticism that the Department misinterpreted the Pennsylvania Supreme
Court’s 1996 decision in Allebach regarding the assignment of real estate contracts, are there
any plans to propose an amendment to 61 Pa. Code § 91.170 (specifically to Example 1) and
RTT Bulletin 2008-01 (specifically Result #4b)?
Answer
The Department does not believe that it misinterpreted the Allebach decision and does not
believe that it misapplied the principles from the decision in its RTT regulations. Therefore,
the Department does not have any plans to revise its position or regulation, even in light of
the criticism. The Department, however, is in the process of drafting a new RTT regulatory
package. PICPA was privy to the package as part of the Department’s public outreach.
Therefore, PICPA is aware of all current RTT regulatory proposals.
VII. ADMNISTRATION
1. Please make sure that the outside collection agencies employed by the Commonwealth have
the detail information on balances they are trying to collect printed and detailed with their
collection correspondence rather than just the taxpayer name and identification number and a
single amount due.
Answer
The Department of Revenue works closely with the Office of Attorney General in support
and administration of that Office’s collection agency contracts.
Specifically, the contracts between the Office of Attorney and the private collection agencies
direct that a dunning letter be sent to each taxpayer within 48 hours of the Department of
Revenue’s referral of the account. This general letter is intended to encourage the taxpayer to
contact the agency. The notice along with a telephone call from the agency within a week of
referral puts the debtor and his/her practitioner on notice that the Commonwealth has referred
the tax debt to a private agency for action. With this approach, a collection agency contact
can immediately address and more efficiently resolve a delinquent tax account. Of course,
additional contacts from that agency can occur if there is no response from the taxpayer.
Upon receiving a call back, the agency has access to view the Department of Revenue’s
Combined Liability System. This system was built to convey a detailed description of the tax
debt. Additionally, the agency is prepared to issue a written statement of account that details
the tax type and the amount of tax, interest, penalties, legal fees and the agency’s collection
fees.
Because the collection agencies are contracted to focus on collection of known tax liabilities,
the detailed information they will have at their disposal will be directed to “how much” a
taxpayer owes. The collection agencies will have an awareness of special conditions
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regarding the source of the liability such as estimated assessments for corporation
taxes. However, the collection agencies will not have background information for why the
taxpayer was assessed.