Pennsylvania Says Out-of-State Online Retailers Must Collect Sales Tax by Wendi L. Kotzen and Christopher A. Jones

The Pennsylvania Department of Revenue (DOR) dropped a holiday-shopping bombshell on the e-commerce world last week with the announcement that many remote online retailers are expected to collect sales tax on Internet sales to Pennsylvania residents.

The DOR, in a press release issued just three days after Cyber Monday, said companies whose business activities “establish nexus in Pennsylvania” must become licensed to collect sales tax “as soon as possible,” but no later than by February 1, 2012.

Many other states have passed so-called “Amazon laws,” requiring out-of-state retailers that make sales online to collect sales taxes based on the location of the customer. But, despite considering such a law, Pennsylvania’s lawmakers have not yet enacted it.

The DOR apparently has concluded that Pennsylvania does not need an Amazon law because it believes that Pennsylvania’s existing tax laws already require many remote sellers to collect Pennsylvania sales taxes. In Sales and Use Tax Bulletin 2011-01 published December 1, the DOR “reminded” remote sellers that have nexus with the Commonwealth that they must collect sales tax on “Internet, catalog and telephone sales” to Pennsylvania resident individuals and businesses. Although the Bulletin applies to all businesses that remotely sell to Pennsylvania resident individuals and businesses, the DOR’s announcement is specifically aimed at online retailers.

The DOR’s move thrusts Pennsylvania into the center of an intense debate over the constitutional limits of requiring out-of-state sellers to collect sales tax. Under the U.S. Supreme Court’s interpretation of the U.S. Constitution, a state may require a vendor to collect sales tax only if the vendor has a sufficient connection (known as nexus) with the taxing state—typically by having a physical presence in the taxing state. Amazon laws are designed to cast a wider net, typically by creating nexus for an out-of-state retailer through affiliated entities or based on contractual relationships with entities that have physical presence in the taxing state. States also claim that click-though technology used to solicit customers creates nexus.

To understand the import of the DOR’s Bulletin, a few tax law fundamentals are in order. Under Pennsylvania law, any retailer that maintains a place of business in Pennsylvania is required to collect Pennsylvania sales tax for sales made in Pennsylvania. A retailer is deemed to maintain a place of business in Pennsylvania if it owns property in Pennsylvania, has employees in Pennsylvania, or otherwise engages in business activity in Pennsylvania. This includes retailers whose Pennsylvania activities are conducted through a “subsidiary, representative or an agent.” Pennsylvania law also provides that a vendor is required to collect sales tax if the vendor has the minimum contacts with Pennsylvania that the U.S. Constitution permits to enable a state to require the vendor to collect sales tax.

The potential scope of the DOR’s conclusions is highlighted by the Bulletin’s seven examples of when remote sellers have nexus with Pennsylvania. A remote seller is required to collect Pennsylvania sales tax if it:

• Stores property at the location of a representative at a distribution or fulfillment center located in Pennsylvania;
• Has a contractual relationship with a person that is (i) physically located in Pennsylvania who has a website that encourages purchasers to place orders with the remote seller, and (ii) receives some sort of consideration for doing so;
• Uses affiliates, agents or independent contractors (AAIs) in Pennsylvania who provide repair, delivery, or other services related to tangible personal property sold by the remote seller to Pennsylvania customers;
• Has AAIs who provide storage, delivery, marketing or sales services in Pennsylvania to promote its business;
• Has employees who regularly travel to Pennsylvania for any purpose related to the its business;
• Accepts orders that are directly shipped to Pennsylvania customers from a Pennsylvania facility operated by the remote seller’s AAI; or
• Regularly solicits orders from Pennsylvania customers through the website of a person physically located in Pennsylvania, such as via click-through technology.

The position announced in the Bulletin is more aggressive than the DOR’s previous positions on what constitutes nexus for sales tax collection purposes, and potentially conflicts with the Pennsylvania Commonwealth Court’s 1989 holding in Bloomingdale’s by Mail v. Commonwealth that the U.S. Constitution prohibits the DOR from requiring an out-of-state mail order vendor who solicited orders through catalogs to collect sales tax. The Bloomingdale’s court held that a corporate relationship between the mail-order vendor and an affiliate that operated department stores in the Commonwealth was insufficient to require the mail order vendor to collect sales tax.

Despite Bloomingdale’s, the DOR now seems to be asserting that such a relationship does create sufficient nexus with Pennsylvania to require sales tax collection by the remote seller.

Although the Bulletin hints that the DOR may offer some leniency for remote sellers that agree to collect sales tax on a prospective basis before February 1, 2012, Pennsylvania law does not prevent the DOR from conducting a sales tax audit of remote sellers for years prior to their acknowledgment, through registration, of Pennsylvania sales tax jurisdiction. As a result, any remote seller with customers in Pennsylvania should act quickly, but cautiously, in evaluating its collection responsibilities in Pennsylvania.

Finally, please note that the DOR by no means intends to discharge Pennsylvania purchasers from their obligation to pay use tax. If a remote seller does not collect sales tax—for whatever reason—the Bulletin also reminds Pennsylvania resident purchasers of their duty to pay the use tax and that beginning in 2012, self-reporting of use tax will be included in Pennsylvania personal income tax returns.

If you have questions about the Bulletin or other Pennsylvania sales tax issues, please contact Wendi L. Kotzen at 215.864.8305 or kotzenw@ballardspahr.com, or Christopher A. Jones at 215.864.8424 or jonesc@ballardspahr.com.

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