Philadelphia Night Street

In response to the South Dakota v. Wayfair Supreme Court decision, the city of Philadelphia has updated its economic nexus standards, which may affect your tax obligations.

Tax strategies

Philadelphia’s Business Tax Now Reaches Remote Sellers

  • 3/4/2019

The city of Philadelphia has amended its business income and receipts tax (BIRT) regulations to impose an economic nexus standard effective for tax years beginning on or after January 1, 2019.

The revision means any individual, partnership, association, limited liability corporation (LLC), or corporation may have to file an annual income tax return or partial return with the city of Philadelphia if it has generated at least $100,000 of activity annually — even if the business does not have a physical presence in the city.

The amended law is part of a trend of expected state and municipal updates now that South Dakota v Wayfair has been settled. Earlier this year, San Francisco revised its business tax law.

BIRT overview and pre-2019 rules

Philadelphia’s BIRT is imposed annually on those who engage in any business, profession, or other activity for profit within the city. That includes commercial or residential real estate rentals, as well as estates, trusts, or nonprofits engaged in any for-profit business or activity within Philadelphia.

The BIRT consists of two separate taxes; a business income tax and a gross receipts tax. For the 2018 tax year, the income tax portion is imposed at 6.30 percent of net income apportioned to the city. The gross receipts tax portion is imposed at 1.415 mills (0.1415 percent) of gross receipts sourced to the city.

Prior to 2019, nexus for the net income portion of the BIRT was based on a “solicitation plus” standard, meaning a business had to be performing activities exceeding the protection of Public Law 86-272 in order to be subject to that portion of the tax. Conversely, the gross receipts portion has historically used the “active presence” standard, which is defined as “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.”

Examples of activities that meet the pre-2019 “active presence” nexus standard for the gross receipts tax include having employees own, rent, lease, use, or maintain an unreimbursed home office in the city, and conducting 10 or more days of any business activity in the city within a 12-month period.

2019 BIRT update eliminates physical presence

Under the amended rules, beginning for tax year January 1, 2019, a business with no physical presence in Philadelphia is considered to have economic nexus and subject to the BIRT if it:

  1. Has generated at least $100,000 in gross receipts in Philadelphia during any 12-month period ending in the current year; and
  2. Has sufficient nexus with Philadelphia to establish nexus under the U.S. Constitution.

If a taxpayer’s activities are limited to the solicitation and sale of tangible personal property, the taxpayer would be protected from the net income portion of the BIRT. However sales other than tangible goods would not be protected.

For example, a software company with no physical presence in the city sells $100,000 worth of product to customers in Philadelphia in 2019. That company would have economic nexus and owe both the net income and gross receipts portions of the BIRT.

Note that even if a company’s activities do not exceed the sales solicitation of tangible personal property, it would still be required to file the gross receipts portion of the BIRT return.

How we can help

Local taxes can be overlooked when considering which taxes may apply to a business with customers in multiple states. CLA’s state and local tax professionals are here to help.

We offer a sales tax nexus assessment (“Wayfair checkup”) so you can understand your exposure under these changing laws, and can combine that with sales tax outsourcing services, so you can focus on what matters.