Philadelphia Updates the Nexus Standard for Business Income and Receipts Tax

Philadelphia has joined the ranks of many other state and local jurisdictions in adopting a more streamlined approach to nexus for the purposes of imposing the Business Income and Receipts Tax (“BIRT”).

As of January 1, 2019, taxpayers are now required to evaluate their exposure to the BIRT using an economic or bright line nexus approach. Taxpayers that have at least $100,000 of sales sourced to Philadelphia will now be required to file the BIRT return. The new filing requirement is not dependent on a taxpayer establishing a physical presence in the City, as was previously required.

Prior to January 1, 2019, Philadelphia used an “active presence” test to determine whether a taxpayer had nexus with the City for purposes of imposing a BIRT filing requirement. As a result of the recent adoption of an economic nexus standard, the active presence test is no longer determinative of nexus.

Taxpayers that have generated at least $100,000 of Philadelphia-sourced receipts during the current calendar year, and have sufficient connection with the City to establish nexus under the U.S. Constitution, will have a BIRT filing requirement.

Here are two important items that businesses should consider before concluding that nexus exists under the new standard:

1. Understand how you are currently sourcing sales/receipts to the City to determine if there is a position to be taken to source those receipts outside of the City using the market sourcing rules under the current BIRT regulations. Service-related businesses should pay particular attention to this.
2. Businesses engaged in the sale of tangible personal property are still protected under P.L. Law 86-272, which requires a greater physical connection with the City before the income tax component of the BIRT can be imposed. Businesses engaged in the sale of tangible personal property whose only physical connection with customers located within the City is the solicitation of orders will not be subject to the income tax portion of the BIRT.

Philadelphia’s adoption of an economic nexus approach supports taxpayer concerns that the Wayfair decision, a sales tax opinion rendered by the U.S. Supreme Court, will have broader implications and extend not only to other state non-income taxes but to localities as well. Businesses should understand how this new standard affects them before concluding that they are now subject to the BIRT. As noted above, items such as the sourcing of receipts, public laws, and proper identification of sales as services versus tangible personal property can help a business avoid or minimize the impact of the new standard.