Pennsylvania reworks proposed use tax notification requirement for remote vendors
- May 12, 2017 | Gail Cole
The Pennsylvania House of Representatives has reworked legislation that would require out-of-state vendors that don’t collect Pennsylvania sales tax to notify consumers of their obligation to remit use tax.
What is use tax?
Retailers generally only collect and remit sales tax in states where they have a substantial connection, typically defined as a physical presence (although many states are challenging this physical presence precedent with affiliate, click-through, and economic nexus laws). However, taxable sales don’t suddenly become exempt just because a seller is located out of state. If sales tax isn’t collected by the retailer at the time of sale, consumers are supposed to remit use tax directly to the state.
Individual use tax compliance is typically quite low, either because people assume they can get away with not paying it, or because they don’t realize they owe it in the first place. This lack of compliance is a growing problem for states that rely on sales and use tax revenue to fund their budgets. Ecommerce has drastically multiplied sales by noncollecting vendors, thereby keeping vital sales tax revenue out of states’ reach and amplifying their need for use tax revenue. A study conducted by the University of Tennessee and the National Conference of State Legislatures estimated that in 2012, states collectively lost more than $23 billion in sales tax revenue due to untaxed electronic sales.
It is expensive and time-consuming for state departments of revenue to ensure individuals have paid the use tax they owe. To facilitate use tax compliance, some states have created use tax notification requirements, whereby noncollecting remote vendors must inform customers of their obligation to remit use tax when sales tax wasn’t collected at checkout.
Pennsylvania adds annual reporting requirement
Like the original bill, the amended version of HB 542 requires noncollecting remote sellers to notify each purchaser in Pennsylvania that sales or use tax is due on their nonexempt purchases and that the commonwealth requires the purchaser to pay any tax due on the purchaser’s tax return. Remote sellers who fail to provide this tax notice for each sales transaction are subject to a penalty of $5 for each such failure, “unless the remote seller shows reasonable cause for the failure.”
New to the amended version is that noncollecting remote retailers must also send a notice to each Pennsylvania purchaser who made at least $500 of purchases from the remote seller in the previous calendar year by January 31 of each year. The notice must contain the following information:
- “The total amount paid by the purchaser for purchases made from the remote seller in the previous calendar year”
- “A statement that the commonwealth requires a sales or use tax return to be filed and sales or use tax to be paid on nonexempt purchases made by the purchaser from the remote seller”
- Any other information required by the Department of Revenue
The measure describes in detail how the annual consumer notification must be sent to the purchaser. Failure to provide the annual notice is subject to a penalty of $10 per failure, unless reasonable cause for it can be shown.
Use tax notification requirements such as the one under consideration in Pennsylvania are growing in popularity. They are less likely than economic nexus policies to be challenged, particularly since the Supreme Court of the United States allowed Colorado’s use tax reporting and notification requirements to stand (they take effect July 1). Louisiana and Vermont have adopted similar policies, and use tax notification measures are making their way through the legislatures of Arkansas and Hawaii. Having been approved by the House, Pennsylvania’s amended HB 542 now moves to the Senate for consideration.
Tax automation software enables vendors of all sizes to comply with sales and use tax laws in all states. Out-of-state businesses that collect and remit tax don’t have to deal with use tax notification requirements. Learn more about sales tax automation.