2023 Marcum Year-End Tax Guide

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Ultimately, the New York precedent established that it does not matter whether a taxpayer is present or domiciled in New York City for purposes of sourcing capital gains because the business activities resulting in investment income that are conducted in the city from the entity in which the taxpayer is invested provides sufficient nexus between a taxpayer’s capital gains and New York City. Pennsylvania Sourcing The Pennsylvania Supreme Court recently issued its long-awaited decision in Synthes USA HQ, Inc. v. Commonwealth , wherein the divided Pennsylvania Supreme Court held that service providers were required to apportion receipts based on the location where the customer received the benefit of the service (“Benefit-Received Method”) under Pennsylvania’s “costs of performance” (“COP”) statute in effect before 2014. Substantively, the Synthes USA HQ Inc. v. Commonwealth case involved the proper application of Pennsylvania’s corporate net income tax apportionment sourcing rules to sales of services for years prior to 2014, during which time Pennsylvania had a Cost-of Performance sourcing statute for apportioning sales from services. In the holding, the court reasoned that

since the Pennsylvania Department of Revenue’s (“PDOR”) interpretation of the Cost-of-Performance sourcing statute had for many years before 2014 been enforced using the benefit-received method, the legislature had acquiesced in the PDOR’s interpretation when it amended the law in 2013 to a Market-Based sourcing statute to clarify the application of the benefit received method. Ultimately, the court concluded that the PDOR’s interpretation was consistent with the statute’s legislative intent and ruled in the taxpayer’s favor, resulting in the taxpayer being entitled to a refund. In light of the Synthes USA HQ Inc. v. Commonwealth case, taxpayers filing a Pennsylvania return should pay particular attention to the statutory language used in the state’s legislation and the PDOR’s historical treatment for sourcing income. Texas Sourcing Texas recently promulgated a new rule in direct response to the Texas Supreme Court’s ruling in the Sirius XM Radio, Inc. v. Hegar case, which was decided on March 25, 2022. Effective March 10, 2023, Texas sourcing rule 3.591(e)(26) removes references to its previous guidance indicating Taxpayers must look to the location of the “receipts-producing, end-product act” when determining

the location of where a service is performed for purposes of sourcing receipts. The amendment to the law is said to interpret the Texas Supreme Court’s use of the phrase “useful work for the customer” to mean “work that the customer hired the taxable entity to perform” and does not include “activities that enable the taxable entity to do business in general or are not directly used in the provision of a service to the customer.” Additionally, the new law uses the term “property” rather than “equipment” to account for circumstances where property may be used to perform services and the property may not be considered equipment. Specifically, the amended rule adds the following language: “A service is performed at the location or locations where the taxable entity’s personnel or property are doing the work that the customer hired the taxable entity to perform. Activities that are not directly used to provide a service are not relevant when determining the location where a taxable entity performs a service.” Taxpayers whose fact patterns resemble those mentioned in Sirius XM Radio, Inc. v. Hegar should take note of this update in the future, as their sourcing of receipts will need to be updated.

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