On January 4, 2019, the Pennsylvania Department of Revenue issued Corporation Tax Bulletin 2019-01 taking the position that receipts from hedging transactions, including those of a securities dealer, should be excluded from the numerator and the denominator of a corporation’s Corporate Net Income Tax sales factor. The Bulletin is effective for taxable years beginning after December 31, 2018.
The Bulletin states that taxpayers must exclude from their sales factor gross receipts related to gain or loss from a transaction identified as a hedge under Internal Revenue Code section 475(c)(3) (pertaining to dealers in securities) or section 1221(b)(2)(A) (pertaining to capital assets). It also excludes from the sales factor: (i) receipts attributed to accrued interest income or expense, gain or loss on a debt instrument, a payable, a receivable or a forward contract payable in a foreign currency for foreign currency gain or loss that is computed under Internal Revenue Code section 988; and (ii) gross receipts related to Internal Revenue Code section 986(c)(1) foreign exchange gain or loss on distributions of previously taxed income.
The Pennsylvania sales factor is broadly defined to include “all gross receipts of the taxpayer,” with limited exceptions. The Department’s position is that receipts from hedging transactions, including those of a dealer in securities, should be excluded because hedging transactions: (i) do not reflect the market for a taxpayer’s goods and services; and (ii) are similar in nature to securities and are not held by a taxpayer primarily for sale to customers in the ordinary course of its trade or business (receipts from such securities are excluded from the sales factor by statute).
The Bulletin comes after the Board of Finance and Revenue ruled in 2018 that, pursuant to the plain language of the statute, a corporation was entitled to include gross receipts from hedging transactions in the denominator of its sales factor.
The Department’s position may be subject to challenge by taxpayers on the grounds that it does not comport with the plain language of the statute, which defines “sales” as “all gross receipts of the taxpayer,” with the exception of certain enumerated categories.