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Sep 10, 2018

Wayfair May Have Opened Up Online Sales to Pennsylvania Taxes

Adam KoelschBy Adam Koelsch, Esq.


In South Dakota v. Wayfair Inc., the U.S. Supreme Court overruled the so-called “physical presence requirement” for the collection of state sales tax. That requirement was once deemed necessary as a measure of “substantial nexus” between a state and a seller. Now, sellers “who engage in a significant quantity of business” in a state and “maintain an extensive virtual presence” may be subject to a sales tax collection obligation, irrespective of whether they have physical presence within a state.

Harrisburg capitol buildingSome states will be required to remove limiting language from their tax statutes before they are able to reach remote sellers. Pennsylvania, however, arguably has a sales tax statute that already reaches them.

Pennsylvania’s statute imposes a tax upon each in-state retail sale of tangible personal property and defined services by those “maintaining a place of business in [the] Commonwealth.”1 “Maintaining a place of business in [the] Commonwealth” includes “[h]aving any contact within [the] Commonwealth which would allow the Commonwealth to require a person to collect and remit tax under the Constitution of the United States.”2 Presumably, Pennsylvania will assert that, because physical presence is no longer required by the Constitution, most online sales into Pennsylvania will have sufficient contacts to require collection under the statute.

There are potential problems with applying the Pennsylvania statute to remote sellers. In Wayfair, the court held that a South Dakota law did not violate the Constitution because it included “several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce.” Specifically, the court referenced the following:

  • The South Dakota law only applies to sellers engaging in more than $100,000 of sales or 200 or more transactions into the state annually (a so-called “safe harbor”).
  • It is not retroactive.
  • South Dakota is a member of the Streamlined Sales and Use Tax Agreement (SSUTA).

The court did not identify features that would render other laws unconstitutional. Consequently, the question of whether application of the Pennsylvania statute to remote sellers is constitutional can only be evaluated in terms of how it compares with the South Dakota law, and a comparison does shows significant differences.

First, there is no safe harbor within the Pennsylvania statute. Such exceptions are necessary to protect small sellers from the burden of familiarizing themselves with thousands of local tax schemes. As a model for such an exception, Pennsylvania might look to another of its statutes, Act 43 of 2017, which obligates a remote seller to either collect sales tax or satisfy notice and reporting requirements if the seller engages in $10,000 or more of in-state sales.3 That threshold, however, is far less than the 200 transactions/$100,000 threshold sustained in Wayfair. If Pennsylvania fails to enact a separate safe harbor, or enacts a lower threshold than the South Dakota law, attempts to collect sales tax from remote sellers below that threshold may be challenged.

Second, there is no provision prohibiting retroactive application of the Pennsylvania statute. Although the court favorably noted that the South Dakota law was not retroactive, it also stated that the physical presence requirement had always been an incorrect interpretation of the law. The Pennsylvania statute existed pre-Wayfair, and it could be argued that it would have been applicable to remote sellers but for the perceived physical presence limitation. Therefore, Pennsylvania might assert that it is entitled to impose sales tax collection obligations for past years. Rhode Island apparently has taken that position with respect to its own statute. Pennsylvania was one of 41 states that submitted an amicus brief supporting South Dakota in Wayfair, dismissing concerns about the possibility of retroactive tax liability. But, so was Rhode Island. If Pennsylvania were to impose liabilities retroactively, that imposition will likely be challenged.

Third, Pennsylvania is not a member of the SSUTA. Therefore, the question is what similarities with the SSUTA, if any, are necessary to impose a collection obligation? The SSUTA is a tax coordination regime that requires, among other things, that its members have simplified tax rates and uniform tax bases. However, Pennsylvania imposes additional, different rates on sales in Allegheny and Philadelphia counties. There are also potentially significant differences between the Pennsylvania and SSUTA tax bases. These variations make it harder for out-of-state businesses to understand their Pennsylvania sales tax obligations. Additionally, unlike SSUTA states, Pennsylvania does not provide state-certified tax software that immunizes the user against certain errors. The Wayfair case favorably noted that the SSUTA provided such protection. Whether, and to what extent, these differences render a remote seller collection obligation an unconstitutional burden on interstate commerce is an open question.

Some legislation, administrative guidance, or litigation will likely be necessary to fully understand the application of the Pennsylvania statute on internet sales.

Another effect of Wayfair is that earlier state laws attempting to reach remote sellers may be redundant. Again, Pennsylvania’s Act 43 requires a remote seller engaging in $10,000 of in-state sales to elect to either collect and remit tax or comply with a notice and reporting scheme. But that requirement is applicable only to sellers not maintaining a place of business within the state. And, as mentioned, many remote sellers may be deemed to maintain a place of business in Pennsylvania post-Wayfair. That said, if Pennsylvania enacts a separate safe harbor above the $10,000 threshold in Act 43, the choice to either collect or report might remain for some sellers who fall between the two. Also, Act 43 might continue to provide some protection to small sellers, in that it requires marketplace facilitators – assuming they can be deemed to maintain a place of business in Pennsylvania post-Wayfair – to collect tax on behalf of any seller for whom they facilitate a Pennsylvania sale.4

This has been just a brief overview of Pennsylvania sales tax implications. Know that Wayfair may also have implications for state income taxes – probably not Pennsylvania corporate net income tax, but possibly trust income taxes. Be sure to keep an eye open for all Wayfair-related repercussions on various Pennsylvania taxes.

1 72 P.S. Sections 7201(p) and 7202(a).
2 72 P.S. Section 7201(b)(3.3).
3 72 P.S. Section 7213.1(a).
4 See 72 P.S. Sections 7201(b)(3), (3.3), and 7213.1(c); Sales and Use Tax Bull. 2018-01, Jan. 26, 2018.


Adam Koelsch, Esq., is a state and local tax attorney in Chamberlain Hrdlicka’s Philadelphia office. He can be reached at adam.koelsch@chamberlainlaw.com.


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