On July 13, 2023, the Pennsylvania Board of Finance and Revenue (“BF&R”) denied a pharmaceuticals developer’s corporate net income tax refund claim based on adjustments to its apportionment formula and taxable income. The taxpayer filed, and the Pennsylvania Department of Revenue denied, a refund claim for the 2019 tax year on three grounds: (1) the reduction of the sales factor numerator to the amount of receipts from product consumed in Pennsylvania (i.e., excluding sales to distributors in Pennsylvania that were subsequently shipped outside of the state); (2) the exclusion from taxable income and its sales factor numerator of its royalties, management fees, and research and development cost share relating to activities outside of the United States; and (3) the use of a three-factor formula – rather than single sales factor – because it was a manufacturer relying extensively on capital and labor.
The BF&R denied all three of the bases for the taxpayer’s refund claim. First, the BF&R found that products delivered to distributors in Pennsylvania were correctly included in the sales factor numerator because the taxpayer had sold its goods to Pennsylvania distributor customers and delivered the goods in Pennsylvania. The BF&R refused to look through to the distributors’ customers’ sales to calculate the taxpayer’s sales factor. Second, the BF&R denied the taxpayer’s “request for multiform income treatment” because of the “lack of sufficient evidence proving entitlement to such treatment.” Third, the BF&R denied the taxpayer’s request for special apportionment because it had “not shown that the standard apportionment methods did not fairly represent the extent of its business activity within Pennsylvania.”