Philadelphia Business Income and Receipts Tax (BIRT) – Nexus Post Wayfair

• After South Dakota v. Wayfair (Wayfair), it was unclear whether a taxpayer who had nexus with a state would be considered to also have nexus with all localities in the state.
• In its amendment to the city’s Business Income and Receipts Tax (BIRT) regulations, Philadelphia cited Wayfair in adopting an economic nexus standard that applies to both gross receipts tax and income tax.
• The amended BIRT regulations are effective for tax years beginning on or after January 1, 2019.
• Businesses must closely analyze the new economic nexus provisions in Philadelphia and reevaluate whether they have created nexus and a Philadelphia BIRT tax filing obligation.

Amended BIRT Regulations

Earlier this year, in the wake of the Wayfair decision, Philadelphia (or the City) amended the BIRT regulations to amend the doing business standard to an economic nexus standard. Philadelphia will no longer have an active presence standard for purposes of determining whether a person is doing business in the City. Effective for tax years beginning January 1, 2019, Philadelphia’s amended Regulation 103 provides that a business with no physical presence in Philadelphia will be considered to have created nexus for BIRT purposes if it has:

1. generated a minimum of $100,000 in Philadelphia gross receipts during any twelve-month period ending in 2019 and thereafter; and
2. sufficient nexus with Philadelphia to establish nexus under the U.S. Constitution (i.e., constitutional nexus).

Components of BIRT

The BIRT has two components: a net income component and a gross receipts component. The amended regulations also provide that taxpayers with activity in Philadelphia that is strictly limited to solicitation of sales of tangible personal property will at least subject the taxpayer to the gross receipts portion of the BIRT. The taxpayer is protected from the net income portion of the BIRT due to P.L. 86-272. However, the federal protection does not extend to the gross receipts portion of the BIRT.

Sales Factor Sourcing

Note, the City has not updated its sales factor sourcing rules at this time, but it is planning to solicit feedback/input from the business community. Although the City has an exception for software companies allowing for market-based sourcing when assigning income to customers’ locations, all other service revenue/income is currently sourced to Philadelphia based on a cost of performance methodology. While it is quite possible a taxpayer may have economic nexus in Philadelphia under the new economic nexus standards, the taxpayer may not need to apportion sales into the City based on the current Philadelphia sourcing rules.

The Takeaway

Economic nexus is sufficient to constitute doing business in the City of Philadelphia. Businesses must closely analyze the new economic nexus provisions in Philadelphia and reevaluate whether they have created nexus and a Philadelphia BIRT tax filing obligation for tax years beginning January 1, 2019.