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. Collection of sales tax on Internet sales has been a matter of ongoing debate both within individual states and at the federal level. Pennsylvania is one of several states that have adopted special rules (known as Amazon laws) applicable to larger online sellers.
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, physical presence means having:
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.
Examples of Physical Presence
Example 1: You are an online retailer located in Woonsocket, Rhode Island and make a sale through your website to a customer in Philadelphia, Pennsylvania—a state where your business has no physical presence: You are not required to collect sales tax from the Philadelphia customer (unless you fall under Pennsylvania’s Amazon DOR rules).
Example 2: You are an online retailer operating solely out of an office in Scranton, Pennsylvania and make a sale through your website to a customer in Hershey, Pennsylvania: You are required to collect sales tax from the Hershey customer.
Example 3: After several years of operating solely out of a warehouse in Lincoln, Nebraska, you open a one-room satellite office just outside of Pittsburgh, Pennsylvania—a state where previously you had no physical presence. A day later, you make a sale through your website to a customer in Philadelphia, Pennsylvania: You are required to collect sales tax from the Philadelphia customer.
While the physical presence rule may seem clear, this is not necessarily the case. In Quill, the Supreme Court discusses not only physical presence, but also several types of potential nexus (connections) between a business and a state. Many states, including Pennsylvania, have used the term nexus rather than physical presence in their sales tax laws, regulations, or other official documents, sometimes defining nexus in ways that could go beyond physical presence.
The Department of Revenue (DOR) issued a SALES AND USE TAX BULLETIN 2011-01 (subtitled Remote Seller Nexus)which lists seven specific circumstances it considers sufficient to create sales tax nexus. Included in this is the type of click-through arrangement seen in Amazon laws enacted in other states. Specifically, under the DOR rules, a remote seller must collect sales tax from Pennsylvania customers if that seller:
Unlike the typical Amazon laws in other states, there is no minimum gross sales receipts threshold before you are required to collect sales tax.
For additional general guidance on how physical presence is defined under Pennsylvania law, see Section 7201 of the Pennsylvania Statutes (P.S.), which defines maintaining a place of business in the state to include maintaining a place of business either directly or through a subsidiary, representative, or agent.
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 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.
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 as a use tax. The DOR has multiple webpages devoted to the use tax, including a general information page, a page for individuals, and a page for businesses. The Use Tax for Individuals webpage states the matter simply: “When you purchase taxable property or services over the Internet, from catalogs or by phone without paying Pennsylvania sales tax, and when the seller has the property or services delivered into Pennsylvania, you are required to pay use tax.” The DOR makes the same point on other webpages.
At the federal level, Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act 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.
For many small online businesses, it is the long-established physical presence rule that will determine whether they must collect sales tax in Pennsylvania. However, the 2011 DOR Bulletin outlines additional circumstances outside the scope of physical presence (including any click-through arrangements with Pennsylvania-based entities) where out-of-state sellers are responsible for collecting and paying sales tax. Sellers should carefully review the Bulletin for guidance on online sales to Pennsylvania residents.
Because Internet sales tax is a subject of ongoing debate, you should check with the Pennsylvania Department of Revenue to see if the rules have changed or new laws have been enacted.
Updated: April 14, 2016