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By Barry Williams, CPA, JD

During this past tax filing season, taxpayers in Pennsylvania may have received a letter or notification they had not seen before from companies they purchased items from online. Under a law that took effect for Pennsylvania taxpayers during 2018, marketplace facilitators, remote sellers, and referrers were required to either collect and remit Pennsylvania sales tax or comply with notice and reporting requirements. The notice and reporting requirements are to alert customers that they may owe use tax and to inform the Pennsylvania Department of Revenue (DOR) of all Pennsylvania sales, including customers’ names, addresses, and dollar amount of each purchase. It was the notice and reporting requirement that resulted in remote sellers sending taxpayers the notifications mentioned above.

In Pennsylvania, when sales tax is not charged by the seller on the purchase of a taxable item or service, the taxpayer (consumer) is responsible to report and pay a use tax. Examples of these types of purchases are those made from the marketplace facilitators, remote sellers, and referrers who are the subject of the new law, but the requirement to pay use tax is not new. In fact, in 2011 a line was added for use tax on the PA-40 Pennsylvania Personal Income Tax Return so taxpayers can more easily report and pay annual use tax.

The use tax rate is the same as the sales tax rate in Pennsylvania, 6%, with an additional 1% local tax for items purchased in, delivered to, or used in Allegheny County, and 2% local tax for items purchased in, delivered to, or used in Philadelphia. If someone receives a notification but is unsure of whether or not an item or service purchased online with no tax charged is subject to use tax, a list of examples can be found in the Retailer’s Information Guide (REV-717).

The DOR has exact notice requirements for remote sellers who choose the notice option. They are as follows:

• Post a notice on the sales forum site.
• Provide a written notice on all invoices, order forms, sales receipts, or similar documents, whether in paper or electronic form, to each purchaser at the time of each sale.
• Provide an annual report to the purchaser.

The DOR also provides specific language for the remote seller to display on its website. An example of a notice posted on a sales forum site can be found on Hammacher Schlemmer & Co. Inc.’s website, and a copy of the written notice as it would appear on an invoice can be found on the Music Go Round of Winmark Corp.’s website. These and similar notices will provide the consumer with the knowledge that they may be subject to use tax.

Pennsylvania has taken further action to increase the collection of sales tax following the U.S. Supreme Court’s 2018 landmark decision in South Dakota v. Wayfair Inc. The online retailer Wayfair was a party in a tax case that overturned the physical presence standard that had been adhered to since the Supreme Court’s Quill Corp. v. North Dakota decision.

“Brick-and-mortar” retailers have long argued that the physical presence test that required those with a physical store in Pennsylvania to collect sales tax while remote sellers who conducted business over the internet did not have to collect sales tax, placed the stores at a competitive disadvantage. The Quill decision was handed down in 1992, prior to the development and growth of e-commerce and online retailers. The increase in e-commerce also economically injured the states: the increase in “tax-free” online sales depressed state tax revenues.

Beginning July 1, 2019, remote sellers with no physical presence in Pennsylvania, but who have direct sales in Pennsylvania exceeding $100,000, will no longer have the notice and reporting requirement option discussed previously. Those sellers are now required to register with the state and to collect and remit Pennsylvania sales tax. In response to the Wayfair decision, Pennsylvania enacted an economic nexus (presence) test – not a physical nexus test – to determine when a marketplace facilitator or remote seller must register and collect sales tax. This will reduce the number of sales transactions that a Pennsylvania taxpayer would be responsible to pay “use tax” on as a result of the sales tax being directly added to the transaction. The Pennsylvania Sales and Use Tax Bulletin: Maintaining a Place of Business in the Commonwealth, issued on Jan. 8, 2019, and revised on Jan. 11, 2019, provides clarification of when a place of business is maintained in Pennsylvania.

Consumers or online retailers who are doing sales and use tax planning or have questions regarding transactions, make certain you understand all the rules related to the sales and use tax laws of Pennsylvania as well as any states in which you may do business or from which you make purchases. This tax discussion provides an overview of basic concepts and options that may or may not fit into your strategy. A CPA can provide further guidance, and the PICPA can assist you in locating a CPA to help you successfully achieve your goals.

Barry Williams, CPA, JD, is dean of the McGowan School of Business at King’s College in Wilkes-Barre, Pa. He serves as a member of PICPA’s CPA Image Enhancement and Relations with Schools and Colleges committees.

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