The beauty of eCommerce brands is being able to reach a wide customer base all over the US, or even the world - the possibilities are endless. Unfortunately, that can also mean the states that can tax your income are endless too....well, not endless - there are only 50 states, but we think you get our point.
For a state to require you to pay state income tax or to register with their state authorities, your business would need to have a significant connection, or 'nexus', to that state.
There are two types of nexus - (1) Physical - where you have some kind of physical connection to the state, such as a warehouse or an office, or (2) Economic - a certain threshold of transactions occurred in the state.
The definition and threshold for creating nexus in a state may be different for state income tax purposes and state sales tax purposes and differs amongst the states.
For Pennsylvania, what generates state income tax nexus?
Pennsylvania can charge income tax to any corporation - whether organized in PA or outside of PA - that is doing business, carrying on activities, owning property, or having capital or property used in Pennsylvania.
For tax years beginning after January 1, 2020, the nexus determination is unrelated to whether or not your business has physical nexus in PA.
There are 2 categories of requirements that you should consider for income tax purposes:
- Requirements to register in Pennsylvania;
- Requirements to pay income tax in Pennsylvania.
When do I have to register to do business in Pennsylvania?
An out-of-state corporation cannot conduct business in Pennsylvania until it obtains a certificate of authority from the Pennsylvania Department of State.
Pennsylvania does not provide a specific definition of when the level of business results in a requirement to register within the state but, rather, determines it on a case-by-case basis.
PA does provide a list of activities that are not considered 'doing business' for the purpose of having to register in the state. Below are some examples of activities that may be relevant for eCommerce businesses:
- Handling legal disputes in the state
- Holding meetings of directors or shareholders or carrying on other activities concerning the internal affairs of a corporation
- Maintaining accounts in financial institutions
- Selling through independent contractors
- Seeking or receiving orders, whether by mail, through employees or agents, or otherwise and maintaining offices related to these orders on the condition that the orders require acceptance outside of Pennsylvania before becoming binding contracts
- Conducting an isolated transaction that is not in the course of similar transactions and is completed within 30 days
When do I have to pay tax in Pennsylvania?
Any corporation that has 'nexus' with Pennsylvania must generally file a corporate tax report in the state. There is a presumption, that any corporation without a physical connection to the state, will have nexus if it has $500,000 or more of direct or indirect gross receipts sourced to PA from:
- The sale, rental, lease, or licensing of tangible property;
- The sale of services;
- The sale or licensing of intangibles;
- Interest and other intangibles.
An important exception to income tax
Even if a corporation has Pennsylvania sourced sales over $500,000, they may still qualify for an exception under Pub. L. 86-272, the law that is a true saving grace for eCommerce businesses.
The law excludes a corporation from having nexus in their state if their activities are limited to certain protected activities. In Pennsylvania specifically, only the solicitation to sell tangible personal property is immune from corporate income tax, except for certain trivial activities and certain activities conducted by an independent contractor.
The following activities are examples of ones that will not create nexus in PA:
- Soliciting order for sales by any type of advertising
- Solicitation of orders by an instate employee if the employee is not using any office besides for a home office
- Passing orders, inquiries, and complaints to the head office
- Maintaining a sample or display for 2 weeks or less at any one location within the state
The following activities do not fall within the exception to the law and may be subject to tax:
- Investigating, handling, or otherwise assisting in resolving customer complaints,
- Approving or accepting orders
- Securing deposits on sales
- Owning, leasing using, or maintaining any kind of office other than an in-home office, warehouse, stock of goods other than samples
Pennsylvania provides a business activities questionnaire that can assist taxpayers in determining their nexus.
State income tax can be pretty complex. Unless the answer is a no-brainer for you, we highly recommend you speak to a tax advisor or CPA to ensure your business is compliant with state tax requirements.
We are a technology company providing automated end-to-end accounting service to eCommerce businesses. Our system connects to your apps, syncs all your data, and reconciles your books in real-time, replacing your bookkeeper. We offer reconciled books available 24/7, tax-saving insights, and a single place for all your financial data.
The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.