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Pennsylvania’s Intangible Expense Add-back Continues to have Unanswered Questions and Now Renewed Focus

By Dakessian Law | February 10, 2022

On February 8th, Pennsylvania’s intangible expense add-back statute received renewed focus in Governor Wolf’s budget proposal.  The add-back statute went into effect in 2015 and denies deductions for intangible expenses or costs with an affiliated entity, including interest expense if it was related to an intangible expense or cost.  (See 72 P.S. 7401(3)1.(t))  The add-back statute puts forth a rebuttable presumption, with broad exceptions.  However, the Department of Revenue (Department) has released another interpretation of the statute in a notice to taxpayers.  (See Notice Corp. Taxes 2016-01.)  This notice broadens the applicability of the add-back statute and narrows the enumerated exceptions.  The Department has been asserting the add-back issue on taxpayer audits resulting in fairly aggressive assessments. 

Seven years later, the add-back statute continues to be riddled with unanswered questions.  We have seen numerous examples. To name a few: 

Whether deductions for certain management fees, cost of goods sold, service charges, or unrelated interest expenses will be denied.

What are the applicable standards to show a taxpayer qualifies for an exception to the add-back?

Whether showing that the principal purpose of the transaction was not to avoid Pennsylvania tax is sufficient.

The next hurdles will include sourcing of intangibles for apportionment (interpretation currently in litigation) and nexus considerations. In another bulletin, the Department asserted economic nexus for income tax purposes beginning in 2020, which could include the out-of-state recipient of the intangible receipts.  (See Corp. Tax Bulletin 2019-04.)  And most recently, Governor Wolf has identified all three of these topics (add-back, apportionment for intangibles, and economic nexus) as targets in his February 8th budget proposal for this year.  If you have any questions or would like to discuss how these issues may impact your company, please contact Jenna Mesigian from our team.