If you are selling goods or products online and some of your customers are located in Pennsylvania, you need to be aware of the state’s Internet sales tax rules. As you read, keep in mind that collection of sales tax on Internet sales has been a matter of ongoing debate both at the state and federal level.
The federal government is currently considering legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The proposed federal law, called the Marketplace Fairness Act of 2013, would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
Below is an article on the current rules on Internet sales tax in Pennsylvania. The new federal law scheduled to be voted on in May 2013 would affect all state Internet sales tax laws so be sure to check for updates in this area. (We will continue to keep you updated as well.)
The General Rule: Physical Presence in the State
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a “physical presence.” The physical-presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail-order businesses to collect sales tax on out-of-state sales; the decision has been extended to include online retailers. Generally speaking, a physical presence means such things as:
- having a warehouse in the state
- having a store in the state
- having an office in the state, or
- having a sales representative in the state.
For basic guidance on how physical presence is defined specifically under Pennsylvania law, consult Section 7201 of the Pennsylvania Statutes (P.S.), which defines the phrase “Maintaining a place of business in this Commonwealth.” (The Pennsylvania Statutes are available online through a web portal maintained by Thomson Reuters; it is not possible to provide direct links to individual sections of the Statutes.) The definition includes maintaining a place of business either directly or through a subsidiary, representative, or agent, and extends to include any form of contact with the state that would “require a person to collect and remit tax under the Constitution of the United States.”
As you might expect, the corollary to the physical-presence rule is that, if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state.
“Nexus” and Pennsylvania’s “Amazon Bulletin”
While the physical-presence rule may seem clear, in the case of Pennsylvania, as well as a fair number of other states, it is necessary that clear cut. In Quill, the Supreme Court discusses not only physical presence, but also several types of potential “nexus” (connection) between a business and a state. The type of “nexus” the Supreme Court ultimately found relevant for mail-order businesses was based on the Commerce Clause of the Constitution, which—as described by the Supreme Court—means physical presence. However, many states, including Pennsylvania, have used the term “nexus” rather than “physical presence” in their sales tax laws, regulations, or other official documents, and, in the process, have sometimes defined nexus in ways that some people may think goes beyond physical presence.
More particularly, while Pennsylvania’s sales tax statute itself apparently does not use the term nexus, in late 2011, the DOR issued SALES AND USE TAX BULLETIN 2011-01 which is subtitled “Remote Seller Nexus.” The Bulletin is notable for several reasons. First, it makes a point of summarizing relevant U.S. Supreme Court case history regarding minimum requirements before a state can require a business to collect sales tax. Second, it emphasizes the broad statutory statement, quoted earlier in this article, regarding Pennsylvania requiring businesses to collect and remit sales tax if allowable under the Constitution.
Probably most important, however, is the Bulletin’s discussion of “remote sellers” and how they may, as far as the DOR is concerned, be “maintaining a place of business in” Pennsylvania. The DOR lists specific circumstances, numbered (1) through (7), which it considers to constitute sufficient sales tax nexus; at least some of these seven circumstances may not seem to some retailers like physical presence. One circumstance relates to so-called “click-through” arrangements with people in Pennsylvania, and is similar to the language of so-called “Amazon Laws” enacted in roughly a half-dozen other states. The intended effect of such laws is to require larger, ostensibly out-of-state Internet retailers to collect and pay sales tax. As you might guess, the name refers to Amazon.com, which is a large, Internet-based retailer that does not have a physical presence in many states, and therefore, under the default sales tax rule, need not collect sales tax from customers in those states. As customers in those states often do not pay the corresponding use tax, Amazon’s sales, and those of other large online retailers, such as Overstock.com, are frequently understood to constitute significant lost tax revenue for those states.
Under the typical Amazon Law, if an out-of-state Internet retailer has a click-through arrangement with one or more residents of the relevant state—and has a specified minimum amount of cumulative gross receipts from sales in the state for the preceding twelve-month period—then the retailer must collect sales tax. The DOR Bulletin click-through arrangement omits any mention of minimum receipts. Instead, it simply states that a remote seller must collect sales tax from Pennsylvania customers if that seller:
- “has a contractual relationship with an entity or individual physically located in Pennsylvania whose website has a link that encourages purchasers to place orders with the remote sellers,” and
- “The in-state entity or individual receives consideration for the contractual relationship with the remote seller.”
The DOR Bulletin does not have the force of law; however, it should serve to alert Internet retailers that Pennsylvania is trying hard to find ways to hold out-of-state sellers responsible for collecting and paying sales tax. If you have customers in Pennsylvania, it is highly recommend that you closely review the Bulletin.
Some items sold via the Internet to Pennsylvania customers may be exempt from sales tax under Pennsylvania law. For example, United States flags and Pennsylvania State flags are exempt from sales tax. For a concise, readable list of most exemptions, download and review the DOR’s Retailers’ Information booklet. For more official information, check out P.S. 7204 in its entirety, or Chapters 32 and 58 of Title 61 of the Pennsylvania administrative code.
The Customer’s Responsibility
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a “use tax.” The DOR has multiple webpages devoted to the use tax, as well as multiple downloadable use tax publications, including a simple one-page flyer, and brochures for individuals and businesses. The flyer titled “Do You Owe Use Tax?” states the matter simply: “Purchases made over the Internet, through toll-free numbers, from mail-order catalogs and from out-of-state locations -- when they are delivered to PA -- are examples of purchases subject to use tax when PA sales tax is not paid.” The same basic point is made in the DOR brochures and on the DOR webpages.
The issue of collecting sales tax from Internet retailers with no physical presence in a state has been contentious for a number of years in Pennsylvania, as well as in other states and at the federal level. Pennsylvania has tried to put more pressure on out-of-state Internet sellers than some other states, mainly by issuing a DOR Bulletin in late 2011 that emphasizes that ostensibly remote sellers may nonetheless be liable for sales tax. However, Pennsylvania has not passed any new, special law regarding Internet retailers.
While the DOR Bulletin is important, it seems that, for most small online businesses, it is the long-established “physical presence” rule laid down in Quill that still provides primary guidance on collecting tax on sales to customers in Pennsylvania. However, because of the ongoing debate surrounding the issue, you should check in periodically with the Pennsylvania Department of Revenue to see if the rules have changed or new laws have been enacted. For more general information on taxes on Internet sales, see Nolo's article Sales Tax on the Internet. And, for information on the rules about collecting sales tax for Internet sales in any other state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws.