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Pennsylvania: Scared Online Retailers Incorrectly Charge Sales Tax

  • Jan 31, 2014 | Gail Cole

 Confusion and fear in Pennsylvania.

If there are perks to being an online retailer, there are also drawbacks.

Consider sales tax. An online retailer selling throughout the country may have to contend with thousands (approximately 10,000) of sales tax rates. That’s challenging in and of itself. Now add the fact that those rates periodically change, as do laws and boundaries. While changes often happen at the start of a new quarter, they sometimes occur at other times. For example, the rate of tax on an item sold to someone in Ulster County, New York, on January 31, 2014, will be different from the rate of tax on an item sold to that person on February 1, 2014.

True story. Now multiply that situation by 10,000, and repeat. It’s no wonder mistakes are made.

Recently, an online seller assessed sales tax on a woman’s shirt sold to a Pennsylvania customer. Pennsylvania exempts most clothes, so tax should not have been collected on the sale of the shirt. When told of the error, the representative reportedly insisted the tax had been correctly applied (Pittsburg Post-Gazette).

The error is understandable. Pennsylvania does tax some clothing, such as formalwear and bathing suits. And many states, including neighboring Ohio, tax most clothing.

Yet there may be something else behind this particular sales tax snafu: fear.

Fear factor

According to the recent Pittsburg Post-Gazette article:

“…since the [Pennsylvania] state revenue department launched its e-commerce initiative in 2012—which included the warning that it would be cracking down on scofflaws—some 100 retailers, including Amazon.com, have started adding sales tax to customers’ online shopping bags….”

In December 2011, the Pennsylvania Department of Revenue published nexus in the Commonwealth, according to the bulletin, and are therefore required “to collect sales tax on sales within Pennsylvania.”

Remote sellers with nexus include the following (according to the bulletin):

  • “A remote seller who 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. The in-state entity or individual receives consideration for the contractual relationship with the remote seller.”
  • “A remote seller utilizing affiliates, agents and/or independent contractors located in Pennsylvania who will provide repair, delivery or other service relating to tangible personal property sold by the remote seller to Pennsylvania customers.”
  • “A remote seller who regularly solicits orders from Pennsylvania customers via the website of an entity or individual physically located in Pennsylvania, such as via click-through technology.”

The Department will, it insists, “enforce these provisions accordingly.”

An August 2012 Department of Revenue press release cautions, “If companies with nexus blatantly disregard the tax bulletin and their obligations to begin collecting sales tax, the department has the statutory authority to look back at least three years for audit and assessment purposes.” That’s pretty good motivation for compliance.

It works!

Online retailers were required to comply with Pennsylvania’s nexus laws by September 1, 2012, and Amazon did indeed start collecting sales tax in Pennsylvania on that date. Sales tax generated by Amazon and other remote retailers have added roughly $70 million to Pennsylvania’s coffers since then, according to a representative from the Department of Revenue.

Incorrectly collected sales tax

With the threat of audit looming, online businesses may choose to err on the side of sales tax collection. That could be what happened with the shirt incident described above, although the company involved declined to comment for the story.

So long as the incorrectly collected sales tax is remitted to the state, there is little harm done. Consumers are entitled to a refund. If the business that collected the extra sales tax won’t provide the refund, the state department of revenue typically will.

Who owes what?

The fact that not all remote retailers are required to collect sales tax in all states makes the situation even more complex.

Just what establishes nexus (the connection between a state and seller that triggers sales tax liability) has been a point of fierce debate for years. Even before the arrival of the Internet, mail-order vendors and states met in court over sales tax.

Many retailers and state lawmakers are looking to the federal government for a solution. Had it become law, the Marketplace Fairness Act of 2013 (MFA) would have enabled states with simplified sales tax laws to require certain remote vendors to collect sales tax. MFA was approved by the U.S. Senate last spring, and it may be resurrected and enacted in 2014. Until it is, if it is, states must handle the problem of remote sales tax as best they can.

And remote retailers need to be on their toes.

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.