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Pennsylvania Supreme Court Rules Coupon Amounts Are Not Subtracted from Sales Tax Base Unless Sales Receipt Adequately Describes Taxable Item and Coupon

by Stephen P. Kranz and Michael J. Hilkin | Feb 24, 2023 | Audits, Local Tax, Pennsylvania, Sales Tax, Tax Base, Transaction Taxes

Overturning a 6-1 en banc decision by the Pennsylvania Commonwealth Court, the Pennsylvania Supreme Court held that a coupon does not reduce the price upon which sales tax must be collected unless the coupon is adequately described and “linked” with the taxable item in accordance with Pennsylvania Department of Revenue (DOR) regulations. The case was brought by a retail customer seeking a sales tax refund on the difference between the retail price of the product and the discounted price as the result of a coupon. The decision instructs retailers on the application of coupon discounts when collecting sales tax. The decision may also provide comfort to retailers facing class action lawsuits in Pennsylvania for collecting sales tax on full invoice prices without taking discounts from coupons into account.

The case examined three transactions between a retailer and customer. In two of the transactions, the customer purchased a single taxable item and used a single coupon. In the other transaction, the customer purchased six taxable items and used five coupons of varying amounts. The receipt provided in each transaction identified each coupon as a “SCANNED COUP” and identified the discount provided with each coupon but did not further describe the coupon nor link the coupon as a discount to any specific item purchased. In all three transactions, the retailer collected sales tax on the full purchase price without taking the coupons into account. The customer sought a sales tax refund from the DOR, maintaining that sales tax should have been collected on the discounted price. The DOR denied the refund claim.

The Pennsylvania Supreme Court agreed with the DOR’s position that under Pennsylvania regulations, “sales tax is owed on the full purchase price” (disregarding any coupons) unless an invoice or receipt (1) separately states and identifies the amount of the taxable item and the coupon and (2) provides a description of both the taxable item and the coupon. Further, the Court agreed that a satisfactory description in the receipt must contain a “linking” element, meaning the coupon must be adequately described to show that it applied to a specific item. The Court explained that such a description on the receipt was necessary because, under Pennsylvania law, “there are discounts or coupons that do not establish a new [taxable] purchase price, such as a discount for shopping on a specific day, discounts from a minimum purchase amount, and sales tax absorption coupons.”

In recent years, state tax departments have been very aggressive in asserting that coupons and discounts do not reduce the sales tax base. This decision serves as a reminder to retailers that the description of coupons on invoices is critical in determining the amount of sales tax to collect. In Pennsylvania, the coupon must be separately identified and “linked” to the taxable product upon which the discount is applied.

This decision highlights the dilemma many retailers face when collecting tax on discounted products: if they collect on the full retail price, they face the potential for customer class action suits [...]

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Pennsylvania Cuts Corporate Tax Rate, Makes Other Changes to Corporate Tax Law

by Stephen P. Kranz and Michael J. Hilkin | Jul 14, 2022 | Federal Tax, Income Tax, Local Tax, Nationwide Importance, Nexus, Pennsylvania

Pennsylvania Governor Tom Wolf has signed into law omnibus tax legislation to implement the Commonwealth’s fiscal year 2022 – 2023 budget. Among other things, the enacted legislation: (1) cuts the corporate net income tax (CNIT) rate from 9.99% to 4.99% on a phased-in basis; (2) adopts market sourcing rules for intangible-related receipts; and (3) codifies the Pennsylvania Department of Revenue’s (DOR’s) CNIT economic nexus rules outlined in Corporation Tax Bulletin 2019‑04. Notably, the enacted legislation does not include Governor Wolf’s prior proposal to strengthen the Commonwealth’s related party interest and intangible expense addback statute.

CNIT RATE CUT

Pennsylvania’s CNIT rate is currently 9.99%—one of the highest corporate tax rates in the nation. The enacted legislation phases in a decrease of Pennsylvania’s CNIT rate as follows:

January 1, 1995, through December 31, 2022; 9.99%
January 1, 2023, through December 31, 2023; 8.99%
January 1, 2024, through December 31, 2024; 8.49%
January 1, 2025, through December 31, 2025; 7.99%
January 1, 2026, through December 31, 2026; 7.49%
January 1, 2027, through December 31, 2027; 6.99%
January 1, 2028, through December 31, 2028; 6.49%
January 1, 2029, through December 31, 2029; 5.99%
January 1, 2030, through December 31, 2030; 5.49%
January 1, 2031, and each year thereafter; 4.99%

MODIFICATION OF INTANGIBLES SOURCING RULE

The enacted legislation shifts Pennsylvania’s sourcing regime for receipts from intangibles from a cost-of-performance regime to a market-based regime. The legislation generally sources gross receipts from the sale, lease, or license of intangible property to the location the property is used. Further, the legislation generally sources receipts from a broker’s sales of securities to the location of its customer and receipts from credit card interest, fees, and penalties to the billing address of the cardholder.

The legislation also contains detailed sourcing rules for interest, fees, and penalties earned by a lender, generally sourcing those receipts:

From loans secured by real property to the location of such real property;
From loans related to the sale of tangible personal property to the location the property is delivered or shipped; and
To the location of the borrower (if not otherwise addressed by the legislation).

These sourcing rule changes apply to tax years beginning after December 31, 2022. According to the Senate Appropriations Committee’s Fiscal Note to the legislation, the purpose of the sourcing rule change is to “[a]lign[] the apportionment rules governing sales of intangible property with the sales of tangible personal property, real property and services to be consistent with market sourcing (i.e., where the purchaser paying for the sale or using the property is located).” As discussed in a prior blog post, the Pennsylvania legislature changed the sourcing regime for services from cost-of-performance to a market-based regime.

Nevertheless, the Pennsylvania DOR has insisted that current law requires the use of a market-based approach to source receipts from certain intangibles, despite the cost-of-performance statutory regime currently in effect. For tax years before 2014, the Pennsylvania DOR also employed a market-based approach [...]

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Resistance is not Always Futile: New Decision in Ongoing Delaware Unclaimed Property Audit Litigation

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | Aug 14, 2017 | Audits, Constitutional Issues, Delaware, New Jersey, Pennsylvania, Unclaimed Property

On August 9, 2017, the US Court of Appeals for the Third Circuit (Third Circuit), overruling the US District Court for the District of Delaware (District Court), allowed a claim by a holder seeking to prevent an unclaimed property audit by Delaware on due process grounds to proceed. See Plains All American Pipeline L.P. v. Cook et al., No. 16-3631 (3d Cir. Aug. 9, 2017). The procedural due process claim challenges Delaware’s use of auditors that have a stake in the assessment. Consistent with the District Court decision, the Third Circuit held that challenges to Delaware’s estimation methodology were ruled not ripe. The case has been remanded to the District Court for further proceedings.

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Beverage Tax Wars Continue as Parties Head Back to Court for a Preliminary Injunction Hearing on the Cook County, Illinois Tax

by Mary Kay McCalla Martire | Jul 12, 2017 | Constitutional Issues, Illinois, Local Tax, Pennsylvania, Sales Tax

A legal challenge to Cook County Illinois Sweetened Beverage Tax (Tax) heads back to circuit court today for a hearing on the plaintiffs’ motion for preliminary injunction. On June 30, Circuit Judge Daniel Kubasiak issued a temporary restraining order (TRO), halting Cook County, Illinois’ imposition of the Tax, which was to take effect on July 1. Judge Kubasiak found that the “Plaintiffs have persuaded the Court that a fair question exists as to the constitutionality” of the Tax.

Earlier this week, the plaintiff group, which includes the Illinois Retail Merchants Association and a group of retail food markets, successfully opposed the county’s emergency appeal of the TRO. In a ruling issued on Monday, July 10, the Illinois appellate court declined to set aside the TRO. While the fight is far from over, the Illinois rulings are a positive development for retailers, who have not succeeded to date in their efforts to defeat the Philadelphia sweetened beverage tax. See Opinion, Williams v. City of Phila., Nos. 2077 C.D. 2016, 2078 C.D. 2016 (Pa. Commw. Ct. June 14, 2017).

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Pennsylvania General Assembly Passes Revenue Package with Significant Digital Tax Expansion

by McDermott Will & Emery, Eric D. Carstens and Stephen P. Kranz | Jul 14, 2016 | Audits, Pennsylvania, Sales Tax, Tax Base, Transaction Taxes

Yesterday, a legislative conference committee was appointed to approve an already agreed-upon $1.3 billion revenue package, which was immediately approved by both the House (116-75) and Senate (28-22) and sent to Governor Wolf for approval. The governor subsequently issued a press release confirming that he “will sign this revenue package.” A copy of the conference committee report (in full) that passed is available here.

The final revenue package includes (among a host of other revenue raising changes) a new tax on digital content and services, as described in more detail below. Specifically, the expansion captures most (if not all) digital goods within the sales and use tax imposition by defining them as tangible personal property. A number of digital services are also captured in the broadly defined language. (more…)

Unclaimed Property Litigation Update – Spring 2016

by Diann Smith, Eric D. Carstens and Stephen P. Kranz | May 16, 2016 | California, Delaware, Nationwide Importance, Pennsylvania, Unclaimed Property

Litigation over unclaimed property rules and obligations continues to accelerate. The first quarter of 2016 brought developments in several cases, including a much-watched contest over merchandise credits and a new battle between the states over which state gets the money.

California Merchandise Credits Not Subject to Remittance as Unclaimed Property; Implicit Application of Derivative Rights Doctrine Prevails

On March 4, 2016, a California superior court held in Bed Bath & Beyond, Inc. v John Chiang that unredeemed merchandise return certificates (certificates) issued by Bed Bath & Beyond (BB&B) to tis California customers are exempt “gift certificates” under the California Unclaimed Property Law—and not “intangible personal property” under the California catch-all provision. Like many retail stores, BB&B provides the certificates as credits to customers who return items without a receipt. While the certificates may be redeemed for merchandise at BB&B or one of its affiliates, they cannot be redeemed for cash. BB&B took the position that it mistakenly reported and remitted the unclaimed certificates from 2004 to 2012 and filed a refund claim with the California State Controller’s Office (Controller) in 2013 for the full amount remitted during that time period (amounting to over $1.8 million). The Controller denied the claim, and BB&B proceeded to sue John Chiang, both individually and in his official capacity as former California state controller. The relief sought by BB&B was the full refund request, plus interest. (more…)

U.S. Supreme Court’s Wynne Decision Calls New York’s Statutory Resident Scheme into Question

by McDermott Will & Emery and Arthur R. Rosen | May 21, 2015 | Connecticut, Constitutional Issues, Delaware, Income Tax, Maine, Maryland, Massachusetts, Nationwide Importance, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont

On May 18, the U.S. Supreme Court issued its decision in Comptroller of the Treasury of Maryland v. Wynne. In short, the Court, in a five-to-four decision written by Justice Alito, handed the taxpayer a victory by holding that the county income tax portion of Maryland’s personal income tax scheme violated the dormant U.S. Constitution’s Commerce Clause.

Specifically, the Court concluded that the county income tax imposed under Maryland law failed the internal consistency test under the dormant Commerce Clause, because it is imposed on both residents and non-residents with Maryland residents not getting a credit against that Maryland local tax for income taxes paid to other jurisdictions (residents are given a credit against the Maryland state income tax for taxes paid to other jurisdictions).

The Supreme Court emphatically held (as emphatically as the Court can be in a five-to-four decision) that the dormant Commerce Clause’s internal consistency test applies to individual income taxes. The Court’s holding does create a perilous situation for any state or local income taxes that either do not provide a credit for taxes paid to other jurisdictions or limit the scope of such a credit in some way.

The internal consistency test—one of the methods used by the Supreme Court to examine whether a state tax imposition discriminates against interstate commerce in violation of the dormant Commerce Clause—starts by assuming that every state has the same tax structure as the state with the tax at issue. If that hypothetical scenario places interstate commerce at a disadvantage compared to intrastate commerce by imposing a risk of multiple taxation, then the tax fails the internal consistency test and is unconstitutional.

Although the Wynne decision does not address the validity of other taxes beyond the Maryland county personal income tax, the decision does create significant doubt as to the validity of certain other state and local taxes such as the New York State personal income tax in the way it defines “resident.” New York State imposes its income tax on residents on all of their income and on non-residents on their income earned in the state; this is similar to the Maryland county income tax at issue in Wynne.

“Resident” is defined as either a domiciliary of New York or a person who is not a domiciliary of New York but has a permanent place of abode in New York and spends more than 183 days in New York during the tax year. N.Y. Tax Law § 605. (New York City has a comparable definition of resident.) N.Y.C. Administrative Code § 11-1705. Thus a person may be taxed as a statutory resident solely because they maintain living quarters in the state and spend more than 183 days in the state, even if those days have absolutely nothing to do with the living quarters; this category of non-domiciliary resident is commonly referred to a “statutory resident.” As such, under New York’s tax scheme, a person can be a resident of two states—where domiciled and where a statutory resident—and thus [...]

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Pennsylvania Unwraps Final Market-Sourcing Guidance

by Catherine A. Battin | Dec 19, 2014 | Allocation/Apportionment, Income Tax, Pennsylvania

The Pennsylvania Department of Revenue (the Department) recently finalized its Information Notice on sourcing of services for purposes of determining the appropriate net income and capital franchise tax apportionment factors. The guidance also addresses the Department’s views on the sourcing of intangibles under the income producing activity test. Since Pennsylvania is not a member of the Multistate Tax Compact, it is no surprise that the Department did not wait for the Multistate Tax Commission to complete its model market sourcing regulation before it issued its guidance.

Under the Pennsylvania statute (72 Pa. Stat. Ann. § 7401(3)(2)(a)(16.1)(C)), for tax years beginning after December 31, 2013, receipts from services are to be sourced according to the location where the service is delivered. If the service is delivered both to a location in and outside Pennsylvania, the sale is sourced to Pennsylvania based upon the percentage of the total value of services delivered to a location in Pennsylvania. In the case of customers who are individuals (other than sole proprietors), if the state or states of delivery cannot be determined for the customer, the service is deemed to be delivered at the customer’s billing address. In the case of customers who are not individuals or who are sole proprietors, if the state or states of delivery cannot be determined for the customer, the service is deemed to be delivered at the location from which the service was ordered in the customer’s regular course of operations. If the location from which the service was ordered in the customer’s regular course of operations cannot be determined, the service is deemed to be delivered at the customer’s billing address.

The statute generated more questions than it answered. Key terms such as “delivered” and “location” were not defined. The Department’s Information Notice provides answers to many of taxpayers’ questions. However, unlike the draft Information Notice released in June 2014, the final Information Notice shies away from providing a succinct definition of “delivery” and resorts to defining the term through various examples. (For our coverage of the Department’s draft Information Notice, click here.) However, the Information Notice does define “location” stating that “location” generally means the location of the customer and, thus, delivery to a location not representative of where the customer for the service is located does not represent completed delivery of the service.

The Information Notice is chock full of examples to guide taxpayers. The Department’s views relating to various scenarios when services are performed remotely on tangible personal property owned by customers are of interest. If a customer ships a damaged cell phone to a repair facility that repairs and returns it, the Department deems the service to be delivered at the address of the customer. Contrast that with a situation when a customer drops a car off for repair at a garage and later returns to pick it up. One may conclude that the service should also be deemed to be delivered at the address of [...]

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Favorable Ruling: HMOs Not Taxable Under New York City General Corporation Tax

by McDermott Will & Emery | Jul 28, 2014 | Income Tax, Insurance Tax, Pennsylvania

A New York City Tax Appeals Tribunal Administrative Law Judge (ALJ) recently ruled in favor of Aetna, Inc. (Aetna) on the question of whether a health maintenance organization (HMO) was “doing an insurance business” in New York State, thereby exempting it from the New York City General Corporation Tax (GCT). In Matter of Aetna, Inc., the ALJ determined that the HMO at issue was “doing an insurance business” in New York because insurance risk was present in contracts covering the members of the HMO, the members of the HMO spread the risk of loss due to unforeseen medical expenses to the HMO and the HMO was subject to significant regulation under New York State Insurance Law and Public Health Law. Aetna Health, Inc. (Health), a subsidiary of Aetna, qualified as an HMO under Article 44 of the New York State Public Health Law. Though the New York City Department of Finance (Department) argued that HMOs were subject to the GCT because they do not conduct insurance business, the ALJ engaged in a thorough examination of federal and New York State authorities on HMOs and concluded that Health was doing an insurance business in New York. Of particular note, the ALJ, relying on the United States Supreme Court decision in Rush Prudential HMO v. Moran, noted that HMOs could be (and were) “both insurer[s] and corporation[s] which arrange[] for the provision of medical services.” The Department has 30 days from the determination date to file an appeal.

McDermott is pleased to have represented Aetna, Inc. in this favorable ruling. If you have any questions regarding this determination and its past, present, and future impact on your company, please contact a member of the McDermott State and Local Tax group. For more please see McDermott’s On the Subject regarding this case.

Was It Wirth It? The Pennsylvania Supreme Court Sets a Low Bar for Minimum Contacts

by Diann Smith and Stephen P. Kranz | Jul 28, 2014 | Constitutional Issues, Income Tax, Nexus, Pennsylvania

In Wirth v. Commonwealth, the Supreme Court of Pennsylvania held that Pennsylvania personal income tax applied to non-resident limited partners whose only connection with the state was the ownership of a small interest in a partnership that owned Pennsylvania property. This ruling has weakened the effectiveness of the Due Process Clause as a defense against Pennsylvania taxation.

In 1984 and 1985, the non-resident appellants purchased interests in a Connecticut limited partnership organized solely for the purchase and management of a skyscraper located in Pittsburgh. The appellants each owned between one-quarter of a unit to one unit of the partnership. One unit equated to a 0.151281 percent interest. The opinion does not indicate whether any of the numerous non-appellant partners owned significantly larger shares. Further, all of the appellants were only passive investors and did not take “an active role in managing the [p]roperty.” After 20 years of losses, the lender foreclosed on the property. The appellants lost their entire investments, but the partnership reported a gain on its tax filings consisting of the unpaid balance of the nonrecourse note’s principal and the accrued interest, totaling $2,628,491,551. As a result, the Pennsylvania Department of Revenue assessed personal income tax against the appellants, plus interest and penalties.

The appellants argued that the Commerce and Due Process Clauses prohibited the imposition of the Pennsylvania personal income tax on them. The court did not determine whether the Commerce Clause bars the imposition of the personal income tax on these non-residents because the appellants waived this defense by not sufficiently distinguishing between the Commerce Clause and Due Process Clause arguments.

The court did reach a decision on whether the Due Process Clause would bar relief and held that the limited interest in the partnership amounted to minimum contacts with Pennsylvania. The court agreed with the Department, which argued that the appellants’ interests, while limited, were “hardly passive” because of the large amount of money invested by each appellant, the extensive lifespan of the partnership and the partnership’s ownership of the Pennsylvania skyscraper. (Interestingly, this statement from the court’s opinion echoes the Department’s brief; however, the Department instead describes the appellants’ actions as passive “on a technical level” and describes the appellants’ involvement with the partnership as “hardly trivial.” The Department’s statement works to clear up confusion as to how an interest that is, by definition, passive could not be passive, but does raise the question as to why the court would opt to affirmatively state that the appellants’ involvement was “hardly passive.”) The court was also particularly concerned by the fact that had the appellants not had minimum contacts with Pennsylvania, any income earned by the appellants would escape Pennsylvania tax.

Practice Note: This case does not mean that other non-resident limited partners should accept Pennsylvania taxation. Because the appellants did not adequately argue the Commerce Clause issues, this line of argument remains viable. Further, the court’s concern with the possibility that income related to Pennsylvania property could escape Pennsylvania tax should be a question [...]

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