After the U.S. Supreme Court decided on South Dakota v. Wayfair, 585 US in 2018, the city of Philadelphia amended the Business Income and Receipts Tax (“BIRT”) regulation to impose economic nexus.
The BIRT is a privilege tax; it consists of net income and gross receipts. Every individual, partnership, association, corporation, and limited liability company engaged in a business, profession or other activity for profit within the City of Philadelphia is subject to the BIRT. The tax rate was 1.415% per $1,000 on gross receipts, and 6.30% on taxable net income in 2018.
According to the newly amended regulation, the City of Philadelphia adopts an economic presence standard, effective for the tax years beginning January 1, 2019 and after. A business with no physical presence in Philadelphia will be subject to the BIRT if:
- Has generated at least $100,000 in Philadelphia gross receipts during any 12-month period ending in the current tax year; and
- Has sufficient connection with Philadelphia to establish nexus under the U.S. Constitution.
The amended regulation also adopts an “active presence” test for tax years before 2019. “Active presence” means purposeful, regular and continuous efforts in Philadelphia in the pursuit or profit or gain and the performance in Philadelphia of activities essential to those pursuits. [Section 103 of the BIRT regulations]
As for Public Law 86-272, the amended regulation clarifies that it will continue to protect the taxpayer if the taxpayer’s activities are limited to the solicitation and sale of tangible personal property, but not extend to the gross receipts portion of the BIRT.
The taxpayers who sell products or services to customers in Philadelphia will need to consider the potential nexus with the City and tax liability of the BIRT. Should you have any questions, please reach out our Stephano Slack tax team. We are always happy to help with any question or concern regarding Philadelphia nexus.
Yan (Isabella) Ma, CPA