United States

Philadelphia proposes economic income tax nexus rules post Wayfair


In light of the June 21, 2018, South Dakota v. Wayfair decision, on Nov. 20, 2018, the city of Philadelphia posted a draft amendment to the city’s Business Income and Receipts Tax (BIRT) Regulations based on an economic nexus standard.

The amendments are intended to simplify the existing “active presence” rules, provide a bright line economic nexus standard similar to the South Dakota economic sales tax nexus standard in Wayfair, and apply it to the net income and gross receipts taxes of the BIRT. The changes would only affect out-of-state businesses that do not already have a physical presence in the city. The amendments, if approved, are scheduled to be effective Jan. 1, 2019.

In accordance with the draft amendment, for tax years beginning July 1, 1998 and prior to Jan. 1, 2019, “active presence” requires a business to have purposeful, regular, continuous and physical activities in Philadelphia to be considered as “doing business” in the city. For tax years beginning on or after Jan. 1, 2019, a business meeting the “economic presence” thresholds of at least $100,000 in Philadelphia gross receipts during any 12-month period ending in the current tax year generated as a result of a group of activities performed by a business for the purpose of conducting continued operations in the city would be sufficient for the city to levy the BIRT. Business revenue generated from selling tangible personal property, specified digital products, or services delivered electronically or physically to a customer in Philadelphia are subject to the proposed economic standard.

The economic nexus activities would be based on the facts and circumstances of each taxpayer. However, the following limited activities on their own may not create nexus:

  • Meeting with suppliers in Philadelphia;
  • Meeting with Philadelphia government representatives in their official capacity;
  • Attending occasional meetings in Philadelphia;
  • Holding recruiting or hiring events in Philadelphia; or
  • Attending and/or participating in trade shows in Philadelphia

Businesses that sell tangible personal property and strictly limit their activities within Philadelphia to solicitation of orders for sales continues to be explicitly protected under Public Law 86-272 (86-272), and are protected from the net income portion of the BIRT. However, 86-272 protected businesses may still be subject to the gross receipts portion of the BIRT.

Out-of-state taxpayers providing services remotely to Philadelphia customers may also encounter difficulties when sourcing gross receipts since most service industries are subject to cost-of-performance sourcing rules for both the net income and gross receipts components of the tax.

Challenges, revisions, and/or a delay in the effective date to the proposed amendments are sure to meet challenges, including constitutional challenges, and with less than a month to go before the proposed effective date, the proposal is unlikely to affect businesses in the coming year. Interesting to note, Philadelphia may be a bellwether providing insight to how local governments are viewing the Wayfair decision and the plausible implications the decision may have beyond sales and use tax.


Philadelphia appears to be the first jurisdiction to use the Wayfair decision, which decided whether an economic nexus standard would be applicable to a sales tax, for income tax purposes. It likely will not be the last.  Additionally, it is important to note the impact of this change is muted by the potential applicability of PL 86-272, and the fact that Philadelphia sources receipts from services to the location of the performance of the service for apportionment purposes. 


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