Pennsylvania Supreme Court upholds DOR’s interpretation of sales sourcing rules

In a decision dated Feb. 22, 2023, the Pennsylvania Supreme Court (Court) agreed with the  taxpayer and Department of Revenue’s (DOR) interpretation of the state’s pre-2014 statute pertaining to sourcing sales of services for apportionment purposes. While the decision generally has no bearing on current Pennsylvania corporate income tax apportionment rules applicable to open years, it offers considerable insight into the Court’s analysis of apportionment statutes.


Synthes USA HQ (which we will refer to as “Synthes” or “Taxpayer”) is a Pennsylvania-based corporation that provided management and research and development services to its affiliates both within and outside of Pennsylvania. On its originally filed 2011 Pennsylvania corporate income tax return, Synthes sourced service revenue using the state’s statutorily prescribed majority of costs of performance (COP) methodology on the basis of where the services were being performed.  As a result, all of its sales were sourced to Pennsylvania, where Synthes was headquartered and maintained its principal place of business and operations.

In 2014, Synthes filed a refund claim for $2 million for the 2011 tax year based on the DOR’s interpretation of the sales sourcing provisions in effect at that time. Before Jan. 1, 2014, 72 P.S. Section 7401(3)2.(a)(17) required C corporation taxpayers to source sales of services to Pennsylvania if the greater proportion of the income-producing activity took place in the state, based on the cost of performance. For tax years beginning on or after Jan. 1, 2014, 72 P.S. Section 7401(3)2.(a)(16)(C)(I) requires C corporations to source revenues from service on the basis of where such services are delivered.

The DOR’s interpretation of this pre-2014 provision, which applied to non-domiciled corporations, was that the income-producing activity was completed where a customer received the service’s benefit – an approach that was consistent with state precedent that the sales factor is focused on the “contribution of Pennsylvania customers and purchasers to the entity’s sales,” according to the DOR without regard to where the performance activities occurred.

Initially the DOR rejected Synthes’ 2014 refund claim. Synthes eventually appealed this decision to the Pennsylvania Commonwealth Court, which allowed the claim. Interestingly, the Pennsylvania Attorney General argued on behalf of the state that the DOR’s interpretation of the pre-2014 statute was incorrect and that Synthes was not entitled to a refund claim. The DOR intervened in the case and the court upheld the DOR’s interpretation of the apportionment provision in a July 2020 decision. The Attorney General then appealed the case to the Pennsylvania Supreme Court.

The Court held in the decision that, given that the critical terms of the apportionment provision were not defined in the statute, “colorable arguments can be made that the ‘income-producing activity’ occurs either where the taxpayer produces the service or where the customer receives the service.” The Court reasoned that the provision should be read in context of other apportionment provisions, looking specifically to the sourcing of the sale of tangible personal property, which was and is sourced to the location where the property is received by the customer.

The Court further stated that a change to the sourcing statute effective on Jan. 1, 2014, was not an attempt to change how the sales of services are to be sourced, but rather acts to clarify how these sales should be sourced based on prior DOR interpretations that have been applied.

What Does CohnReznick Think

Although the Court’s decision only impacts pre-law change tax years beginning before Jan. 1, 2014, this precedent could still be applied to any Pennsylvania filing corporations that have extended their statute of limitations for any such years remaining open including such corporations that had filed protective refund claims awaiting the outcome of this decision.


John Iannotti, Partner, State and Local Tax


Jason Gajramsingh, Senior Manager, State and Local Tax


James Gaul, Manager, State and Local Tax


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    John Iannotti

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