Section 109.5. Apportionment and allocation of income from a business carried on partly within and partly without this Commonwealth

(a) If a nonresident individual, or a partnership of which a nonresident individual is a member, carries on a business, trade, profession, or occupation both within and without this Commonwealth, the items of income, gain, loss and deduction attributable to such business, trade, profession, or occupation shall be apportioned and allocated to this Commonwealth on a fair and equitable basis in accordance with approved methods of accounting.

(b) If the books of the business are kept so as to disclose to the satisfaction of the Department the proportion of the net amount of the items of income, gain, loss and deduction derived from or connected with Commonwealth sources, the return of the taxpayer shall disclose the total amount of such items, the net amount of such items allocated to the Commonwealth, and the basis upon which such allocation is made.

(c) If the books and records of the business do not disclose to the satisfaction of the Department the proportion of the net amount of the items of income, gain, loss and deduction attributable to the activities of the business carried on in this Commonwealth, the proportion shall, except as provided in § 109.6 (relating to rentals and gains from sale or exchange of real property), be determined by multiplying the net amount of the items of income, gain, loss and deduction of the business by the average of the following percentages:

(1) Property percentage. The property percentage shall be computed as follows:

(i) General. The percentage shall be computed by dividing the average of values, at the beginning and end of the taxable year, of real and tangible personal property connected with the business and located within this Commonwealth, by the average of the values, at the beginning and end of the taxable year, of all real and tangible personal property connected with the business and located both within and without this Commonwealth. For this purpose, real property shall include real property rented to the taxpayer and used in the business. Real property, the income or gain from which is allocated pursuant to § 109.6, shall be disregarded in computing the property percentage described in this subparagraph. Property owned by taxpayer shall be valued at original cost. The average value of property shall be determined by averaging the values at the beginning and ending of the tax period but the Department may require the averaging of monthly values during the tax period if reasonably required to reflect properly the average value of the property of the taxpayer.

(ii) Rented real property. The rented real property percentage shall be determined as follows:

(A) The fair market value of real property, both within and without this Commonwealth, which is rented to the taxpayer shall be determined by multiplying the gross rents payable during the taxable year by eight.

(B) Gross rents as used in this clause shall be the actual sum of money or other consideration payable directly or indirectly by the taxpayer or for its benefit for the use or possession of the property and includes the following:

(I) Any amount payable for the use or possession of real property, or any part thereof, whether designated as a fixed sum of money or as a percentage of sales, profits or otherwise.

(II) Any amount payable as additional rent or in lieu of rent such as interest, taxes, insurance, repairs or any other amount required to be paid by the terms of a lease or other arrangement.

(III) A proportionate part of the cost of any improvement to real property made by or on behalf of the taxpayer which reverts to the owner or lessor upon termination of a lease or other arrangement, based on the unexpired term of the lease commencing with the date the improvement is completed (or the life of the improvement if its life expectancy is less than the unexpired term of the lease). But if a building is erected on leased land by or on behalf of the taxpayer, the value of the land shall be determined by multiplying the gross rent by eight, and the value of the building shall be determined in the same manner as if owned by the taxpayer. The proportionate part of the cost of an improvement (other than a building on leased land) is generally equal to the amount of amortization allowed in computing Pennsylvania net income, whether the lease does or does not contain an option of renewal.

(C) Gross rents shall not include the following:

(I) Any portion of a payment or credit to the proprietor of the business or to a partner in the partnership conducting the business for the use of real property.

(II) Amounts payable as separate charges for water and electric service furnished by the lessor.

(III) Amounts payable for storage if no designated space under the control of the taxpayer as a tenant is rented for storage purposes.

(IV) That portion of any rental payment which, in the discretion of the Department, is applicable to property subleased by the taxpayer and not used by him or it in the carrying on of the business.

(2) Payroll percentage. The payroll percentage shall be determined as follows:

(i) The percentage computed by dividing the total wages, salaries and other personal service compensation paid or incurred during the taxable year to employes or casual employes in connection with the business carried on within this Commonwealth, by the total of all wages, salaries and other personal service compensation paid or incurred during the taxable year to employes or casual employes in connection with the business carried on both within and without this Commonwealth.

(ii) Compensation shall be paid in connection with business carried on in this Commonwealth if one of the following occurs:

(A) The service of the individual is performed entirely within this Commonwealth.

(B) The service of the individual is performed both within and without this Commonwealth, but the service performed without this Commonwealth is incidental to the service of the individual within this Commonwealth.

(C) Some of the service is performed in this Commonwealth and the base of operations or if there is no base of operations, the place from which the service is directed or controlled is in this Commonwealth, or the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed, but the residence of the individual is in this Commonwealth.

(3) Sales percentage. The sales percentage shall be determined as follows:

(i) The sales factor is a fraction, the numerator of which shall be the total sales of the taxpayer in this Commonwealth during the tax period, and the denominator of which shall be the total sales of the taxpayer everywhere during the tax period.

(ii) Sales of tangible personal property shall be in this Commonwealth if the property is delivered or shipped from outside this Commonwealth into this Commonwealth to a purchaser, other than the United States Government, regardless of the f.o.b. point or other conditions of the sale; or the property is shipped from this Commonwealth to any place and the purchaser is the United States Government, or the property is shipped from the Commonwealth to another state, and the taxpayer is not taxable in the state of the purchaser.

(iii) For purposes of apportioning business income, a person shall be taxable in another state if in that state he is subject to a net income tax, a franchise tax measured by net income, or a franchise tax for the privilege of doing business. Also, a person shall be taxable in another state if that state has jurisdiction to subject him to a net income tax regardless of whether, in fact, the state does not impose such tax.

(iv) Sales, other than sales of tangible personal property, shall be in this Commonwealth if one of the following occur:

(A) The income producing activity is performed in this Commonwealth.

(B) The income producing activity is performed both in and outside this Commonwealth and a greater proportion of the income producing activity is performed in this Commonwealth than in any other state, based on costs of performance.

The provisions of this § 109.5 amended December 10, 1999, effective December 11, 1999, 29 Pa.B. 6249. Immediately preceding text appears at serial pages (205372) to (205375).

Notation

Authority

The provisions of this § 109.5 amended under sections 354, 408 and 603 of the Tax Reform Code of 1971 (72 P. S. § § 7354, 7408 and 7603).

Cross References

This section cited in 61 Pa. Code § 109.6 (relating to rentals and gains from the sale or exchange of real property).