Pennsylvania Supreme Court Upholds DOR’s Interpretation on Sourcing Services

On February 22, the Pennsylvania Supreme Court issued its long-awaited opinion in Synthes USA HQ Inc. v. Pennsylvania1.  The court upheld the Department of Revenue’s (DOR’s) “benefit received” interpretation of the cost of performance sales-factor-sourcing statute, which applied through 2013 for corporate net income tax (CNIT) purposes, as it relates to services. 

While the Pennsylvania legislature formally adopted market-based sourcing for sales of services beginning with tax year 2014, the cost of performance rule still applies for CNIT sourcing of receipts from intangibles for tax years through 2022. Further, for personal income tax (PIT) purposes, regulations with the same cost of performance language still apply to all sales of other than tangible personal property. Therefore, the decision could have important implications.  


Synthes involved the meaning of Pennsylvania’s CNIT cost of performance statute for sourcing service revenue, which applies for tax years beginning before January 1, 2014, and provides as follows: 

  • Sales, other than sales of tangible personal property, are in this State if:
    1. The income-producing activity is performed in this State; or
    2. The income-producing activity is performed both in and outside this State and a greater proportion of the income-producing activity is performed in this State than in any other state, based on costs of performance.

The court determined that the terms “income-producing activity” and “costs of performance” were ambiguous because they had not been defined by the legislature. It indicated that arguments can be made that the income-producing activity occurs either where the taxpayer produces the service (i.e., cost of performance) or where the customer receives the service (i.e., market-based sourcing ).

Ultimately, the court gave deference to the DOR’s benefit-received method. It said the Department had used the benefit-received method as a “consistent and deliberate policy and practice,” pointing out that the DOR interpreted the term “income-producing activity” as the receipt of the benefit of the taxpayer’s service, which it deemed to occur at the customer’s location.

For tax years beginning on or after January 1, 2014, the Pennsylvania legislature amended the law to provide that for CNIT apportionment purposes, sales of services are to be sourced based on where the services are delivered – that is, market-based sourcing. 3


Synthes addressed only the rules for sourcing the sale of services for CNIT purposes for tax periods beginning before January 1, 2014 (after which the new market sourcing statute applies). However, Pennsylvania’s CNIT sourcing rule for intangibles for tax years before 2023 is identical to the rule analyzed in Synthes. The DOR’s guidance on CNIT sourcing for income from intangibles focuses on where the customer uses the intangibles – that is, a market-oriented approach.  The Synthes decision supports the DOR’s position on CNIT sourcing of receipts from intangibles.

Further, for PIT purposes, Pennsylvania’s sourcing rule for sales other than of tangible personal property is identical to the cost of performance statute that was analyzed in Synthes.6  However, the DOR has historically applied a more traditional income-producing activity approach in the context of sourcing receipts of other than tangible personal property for PIT purposes. 

The legislature has not amended its PIT sourcing statutes. Thus, questions remain. For instance, will the DOR continue to use its interpretation for PIT purposes? Can taxpayers use market-based sourcing rules for those purposes?

BDO Insights

  • Importantly, it was the Office of the Attorney General (OAG) that challenged the DOR’s interpretation, arguing that the statute clearly uses cost of performance language. Before analyzing the sourcing rules, the court first had to address whether the OAG has authority to litigate on behalf of Pennsylvania and challenge the DOR. It concluded that Pennsylvania law allows the OAG to take a position on behalf of the state that is inconsistent with the position adopted by the Department.

Will the Synthes holding create future challenges if the OAG disagrees with a DOR position? On tax issues that might be ambiguous and that lack published guidance, should taxpayers prepare to engage in controversy, or should they negotiate with the DOR and OAG?

  • For tax years 2020 through 2023, a change in sourcing method for licensing intangibles could affect whether a company’s receipts in Pennsylvania are over the $500,000 economic nexus threshold for CNIT purposes (as established under Corporation Tax Bulletin 2019-04 and codified in Pennsylvania Act 53). 
  • A change in sourcing method could affect a company’s tax attributes in Pennsylvania (e.g., net operating losses, credits). 
  • For open years, taxpayers should review their prior positions and explore refund opportunities related to sourcing revenue.

1 Synthes USA HQ Inc. v. Pennsylvania, 11 MAP 2021 (Pa. 2023) (concurring opinion) (concurring and dissenting opinion).

2 72 Pa. Stat. Section 7401(3)2.(a)(17).

 3 Id. at (a)(16.1).

4  Supra note 2 (for tax years beginning before January 1, 2023). DOR, “Information Notice” Corp. Taxes 2014-01,” Section 6.1 et seq.

5  72 Pa. Stat. Section 7310; and 61 Pa. Code Section 109.5(c)(3)(iv).