Pa. Sourcing Ruling Injects Uncertainty into Future Tax Fights

Tax attorney John Wertz spoke with Law360 about a Pennsylvania Supreme Court decision to uphold the state Department of Revenue's interpretation of a service sourcing statute. The article details how the ruling has opened the door for courts to give greater weight to the agency's reading of tax laws in other cases. Mr. Wertz explained that litigation over the proper way to apply sourcing laws has been percolating for decades, with courts around the country upholding both market-based sourcing and costs-of-performance approaches.

Pennsylvania's sourcing law has its roots in the Uniform Division of Income for Tax Purposes Act, a model sourcing law that sought to create a uniform method among states for apportioning income from multistate businesses. Mr. Wertz said that most states initially used the law to apply a cost-of-performance approach but started shifting their apportionment methods to a market-based approach when they no longer preferred origin sourcing. Some states changed their laws explicitly to provide for market-based sourcing, while some tax agencies attempted to chip away at cost-of-performance by applying the law in a market-based manner, he said.

"It was never ambiguous. Departments of revenue made it ambiguous. But the solution is to go to the legislature and go to a market-based approach."

Following the decision in Pennsylvania, Mr. Wertz said he wonders if other agencies in states with laws with similar phrasing might see the ruling as a green light to use market-based sourcing. He added that it can be difficult for out-of-state taxpayers to understand how a law may be applied if there is no binding guidance on it.

"People shouldn't have to divine what the administrative practice is that's never written anywhere," he said.

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