Any Pennsylvania residents who have made online purchases since the beginning of September may have noticed the ostensibly sudden emergence of a “sales tax.” While many people have considered online purchases “tax-free,” as of September 1, 2012 the Pennsylvania Department of Revenue (“Department of Revenue”) mandated that the days of “tax-free” online purchases were finished.
In reality, there never truly was such a concept as a “tax-free” online purchase in Pennsylvania, because residents are required to pay a “use tax” for any purchase in which the seller does not implement a sales tax. The use tax acts as a consumer variation of a sales tax, applying the identical rate as Pennsylvania’s sales tax (i.e., 6 percent, with an additional 1 percent in Allegheny County and 2 percent in Philadelphia).
Prior to 2011, Pennsylvania taxpayers were supposed to self-report use tax utilizing the PA-1 Form; however, beginning in 2011, the use tax was integrated into the PA-40 and PA-41 forms (as line 25) in an effort to increase taxpayer compliance. If taxpayers did not keep receipts providing for a specific dollar amount spent on Internet purchases, the Department of Revenue established an estimated amount modeled after New York’s use tax calculations. If a taxpayer identifies that he or she owes no use tax, the Department of Revenue has said it will pursue back payments with interest, along with penalties, if information subsequently comes forth that indicates the taxpayer did in fact owe use taxes.
Sales on the Internet are accountable for the same taxation as traditional so-called “brick and mortar” stores, but there has been a relaxed implementation of the sales tax requirement in Pennsylvania combined with a general reluctance by companies to pay this tax. As states would prefer that companies be required to simply charge sales tax to their customers and not depend on individual self-reporting for a use tax, on Dec. 1, 2011, the Department of Revenue distributed a bulletin to retailers, specifying that it would begin enforcement of sales tax collections, beginning on Feb. 1, 2012 (later pushed back to the Sept. 1, 2012 date), from online retailers who have a physical presence in Pennsylvania. With the issuance of this bulletin, the Department of Revenue explicitly declared that any retailer with a physical presence in the state that did not pay state sales taxes after Sept. 1, 2012 would be subject to penalties, including payment of at least three years of back taxes with interest.
The test of whether a state can tax a retailer was established by the 1992 United States Supreme Court case of Quill Corp. v. North Dakota, which held that a state can only require companies to pay a state tax if the entity has a physical presence in the state. The concept of a physical presence can be tenuous depending on the circumstances. A non-comprehensive list of what encompasses physical presence includes distribution and fulfillment centers, warehouses, sales representatives and stores. A contention among the largest Internet retailers, like Amazon, is that they are at a disadvantage to smaller online retailers, because Amazon has distribution centers throughout the country in order to increase efficiency in order processing and shipping. For example, Amazon has multiple distribution centers throughout Pennsylvania, and eBay has an affiliate in Wilkes-Barre, subjecting both of these large Internet companies to pay the applicable sales tax in Pennsylvania because of maintaining a physical presence in the state.
As it often takes time for the law to catch up to modern trends and technology, it seemed inevitable that the period of not paying sales tax on Internet purchases was nearing extinction. According to the perspective of Professor Bruce Ledewitz, who teaches constitutional law at the Duquesne University School of Law, this transformation was inevitable. Ledewitz said, “The indicators have been moving a long time that the Internet is not in another state, but is in every state. When Amazon sells me a product, it is not like me sending a letter to Amazon and Amazon shipping the product from another state. The ‘where’ of the Internet is not a particular physical space. It never made sense to treat sales of the Internet as outside of Pennsylvania.”
As the popularity of Internet purchasing continues to grow, so too has the volume of potential sales tax revenue. The Department of Revenue projects increases of $42.8 million and $67.1 million in revenue generated from the sales tax for the 2012-2013 and 2013-2014 fiscal years, respectively. With such a significant financial component, it is no surprise states have become more aggressive in attempts to collect this revenue.
While now paying state sales tax in Pennsylvania, Amazon also pays sales tax in California, Kansas, Kentucky, New York, North Dakota, Texas and Washington, and it is no surprise that companies like Amazon support a federal law to provide for an across-the-board sales tax to all Internet companies, regardless of any physical presence requirement. Currently, three proposed bills are before Congress: the Marketplace Fairness Act, Marketplace Equity Act of 2011 and the Main Street Fairness Act. Each bill contains different nuances with regard to implementation of a uniform tax, like varying floors for revenue generated before a company is required to collect sales tax, but they all have the same goal: require analogous collection of sales tax irrespective of a company’s in-state physical presence.
While it can be safe to presume no one is eager to pay more money when making purchases, the tax collection aims to promote fairness to those “brick and mortar” stores that have continued to pay sales taxes to the state while Internet companies have not, creating the “weird incentive of saying, ‘Don’t create stores within the state,’” Ledewitz said.
As the proposed federal bills navigate their way through the legislative process, it is clear that the days of “tax-free” Internet purchases are becoming obsolete, bringing with it the strong likelihood of federal legislation to provide a uniform application of state sales tax, regardless of a company’s physical presence in a state.