“How Pa. Cost-Of-Performance Decision May Affect Taxpayers”

Article by Jennifer Karpchuk on “How Pa. Cost-Of-Performance Decision May Affect Taxpayers”

In an article published on August 18, 2020 in Law360, Philadelphia-based Shareholder Jennifer Karpchuk discusses the interpretation of Pennsylvania’s cost-of-performance statute and addresses how this might impact taxpayer positions and filings.

Karpchuk explains that, “The case, Synthes HQ USA v. Commonwealth,[1] represents the culmination of over a decade of contentious debate between taxpayers and the department over the department's unreported construction of the cost-of-performance statute.”

States disfavored the cost-of-performance sourcing method because they argued it was inconsistent with the overall purpose of the sales factor, which is to reflect the contribution of the market to a company's revenue. When the economy shifted from manufacturing-based to service-based, states made the transition.

“First, taxpayers with sales of intangibles should consider the impact of the department's interpretation for any open tax years,” explains Karpchuk. “More specifically, out-of-state taxpayers with sales of intangibles should consider how the department's interpretation impacts positions the taxpayer has previously taken in Pennsylvania as well as whether that position should be altered for later tax years. Meanwhile, in-state taxpayers with sales of intangibles should consider whether the department's interpretation may open up an avenue to claim a refund for open tax years.” 

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