by Michael McGraw, Assoc. Print Editor
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| © valleynewslive.com |
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.”
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| © amazon.com |
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.
