In June 2018, the Supreme Court ruled in South Dakota v. Wayfair, Inc. that states may tax purchases made by its residents from sellers/companies that do not have a physical presence in the state. This case reversed a previous decision from 1992 in Quill Corp v. North Dakota that prohibited states from collecting sales taxes for items bought on the internet from companies outside that state.
The PA Department of Revenue (DOR) announced that starting in 2020 out-of-state corporations with at least $500,000 worth of sales annually in Pennsylvania will be required to pay corporate net income taxes (CNIT). Pennsylvania’s DOR does not have an estimate of how much revenue this could bring into the state.
Even prior to the Wayfair decision, many states already demanded income tax filings from corporations doing business in the state. Many did not have a fixed threshold above which corporate income taxes must be paid. Sales tax in Pennsylvania already has a $100,000 threshold, but the state decided this was too low for corporate income taxes.
Additional revenue is badly needed in Pennsylvania, as we face a public investment deficit – too little revenue to invest adequately in our schools, infrastructure and human services. The decision to tax out-of-state companies doing business in PA is thus a good, and much needed policy change.
As the chart below shows, part of our state’s public investment deficit is due to corporations paying less taxes over time. In the 1970s, corporate taxes accounted for about 30% of our General Fund revenue, but today, because one corporate tax has been eliminated entirely and because of loopholes, corporate taxes now only account for 14% of our General Fund revenue.
In fact, had we not cut corporate taxes over the last 15 years, Pennsylvania would be bringing in roughly $4 billion more in corporate tax revenue a year than it does today.
The biggest loophole, and one that remains in place despite this new corporate tax change, is separate reporting–best known as the Delaware loophole. It allows multi-state and multi-national corporations to avoid paying any tax on the business they do in Pennsylvania by adjusting their own internal accounting to show no profits in the state. By showing profits in states with no corporate income tax – like Delaware – and no profits in states like ours which has a relatively high corporate income tax at 9.9%, companies avoid paying our corporate income tax. Currently about 74% of corporations—all of them based outside the state—pay nothing in Pennsylvania’s corporate net income taxes by taking advantage of this loophole.
This new rule may result in some new companies paying the CNIT in Pennsylvania who previously did not, as it makes it a bit harder for a company to take advantage of tax laws. But as long as the Delaware loophole exists in Pennsylvania, multi-state and multi-national corporations can continue to move money around and avoid paying Pennsylvania’s corporate net income taxes with some creative bookkeeping.
Pennsylvania’s next move should be to close the Delaware loophole by instituting combined reporting, which requires corporations to pay Pennsylvania’s corporate net income tax on the share of world-wide profits equivalent to the share of world-wide sales made in our state. In doing so, Pennsylvania would join at least 25 other states that ensure corporations pay their fair share in state taxes through the passage of combined reporting. The result? Hundreds of millions of dollars a year in additional revenues to the state.