Philadelphia has released a proposed amendment to the business income and receipts tax (BIRT) nexus standard. The amendments reflect the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. that a businesses’ economic and virtual connections to a taxing jurisdiction are sufficient to create constitutional nexus.
Whether a taxpayer is subject to the full BIRT tax or only to the gross receipts portion depends on the level and nature of the taxpayer’s activity in Philadelphia. A taxpayer is subject to the gross receipts portion and the net income portion when it has sufficient contact with Philadelphia to be taxed without violating the U.S. Constitution. A taxpayer must pay the net income portion of the BIRT if it has sufficient contact with Philadelphia to be taxed without violating P.L. 86-272.
Active Presence Standard
Before 2019, Philadelphia will continue to apply the “active presence” standard to determine if a taxpayer was “doing business” in Philadelphia. Active presence means:
– purposeful, regular and continuous efforts in Philadelphia in the pursuit of profit or gain; and
– the performance in Philadelphia of activities essential to those pursuits.
Taxpayers selling tangible personal property will be subject to the active presence and solicitation plus standard. The test for nexus will be administered in two steps:
– active presence will subject a taxpayer to at least the gross receipts portion of the tax;
– activity rising to the level of “solicitation plus” will result in the imposition of both the gross receipts and net income portions of the BIRT.
Economic Presence Standard
Beginning in 2019, a business with no physical presence in Philadelphia will have nexus for the BIRT if it:
– generates at least $100,000 in Philadelphia gross receipts during any 12-month period ending in the current year; and
– has sufficient connection with Philadelphia to establish nexus under the U.S. Constitution.
Consistent with P.L. 86-272, taxpayers whose activity is limited to solicitation of orders for sale of tangible personal property will not be subject to the net income portion of the BIRT. The orders must be:
– approved or accepted outside Philadelphia; and
– filled by shipment or delivery from a point outside the city.
The regulation provides examples of activities creating nexus with Philadelphia.
The 30 day public inspection period began when the amended regulation was filed with the Department of Records on January 25, 2019.
The text of the updated regulation is available below.
Reg. Sec. 103, City of Philadelphia, filed January 25, 2019