Pennsylvania may tax marketplace sales

The Pennsylvania Legislature has once again amended a bill intended to help the state obtain more tax revenue from remote sales. This time around, it removed a provision requiring non-collecting remote sellers to comply with use tax notification and reporting requirements, and added a provision to tax sales by marketplace providers that facilitate sales for third-party sellers.

Under House Bill 542, a business is considered to “facilitate a sale” for a third party if it or an affiliated person:

• Collects the payment made by a customer to or for a marketplace seller (regardless of whether the marketplace provider receives compensation or other consideration in exchange for its services); and
• Provides the forum in which, or by means of which, the sale takes place.

The “forum” may be a physical marketplace, a catalog, or an online marketplace. Internet marketplace providers include eBay, Etsy, and ecommerce giant Amazon, which is both a seller and a marketplace provider (approximately half of all Amazon sales are marketplace sales).

A “marketplace seller” is defined as a person who:

• Has an agreement with a marketplace provider under which the marketplace provider will facilitate sales for the person; and
• Makes taxable retail sales.

The measure would require marketplace providers to collect tax on behalf of marketplace sellers, “whether or not the person is required to register to collect tax.” However, if the marketplace seller collects and remits tax, the marketplace provider is freed from its obligation to do so.

Pennsylvania HB 542 narrowly passed the Senate in early August and will return to the House for consideration when it reconvenes mid-September.

An earlier version of HB 542 sought to impose use tax reporting and notification requirements on non-collecting remote sellers. While that provision was removed, the bill now asks the Independent Fiscal Office and the Pennsylvania Department of Revenue to study and assess “the legal implications and fiscal impact of mandating notice requirements for remote sellers.” However, such a study will only be necessary “if federal legislation relating to remote sellers has not been enacted by December 31, 2018.”

Under the Commerce Clause of the United States Constitution and a 1992 Supreme Court decision (Quill Corp. v. North Dakota, 504 U.S. 298), states are prohibited from taxing out-of-state sellers that lack a substantial connection (nexus) to the state, defined as a physical presence.

Federal legislators have introduced two bills that would grant states the authority to tax sales by out-of-state sellers: The Marketplace Fairness Act of 2017 and the Remote Transactions Parity Act of 2017. While they’ve been gathering dust in the capitol, a third bill that would greatly restrict the states’ ability to “tax or regulate a person’s activity in interstate commerce” was introduced. This summer, the No Regulation Without Representation received a congressional hearing.

With waning hope that Congress will help them to capture more remote sales and use tax revenue, states are working to come up with a solution themselves.

Early attempts focused on affiliate and click-through nexus legislation, which maintained that remote sellers forged a substantial connection to a state through in-state affiliates or website referrals. These were followed by economic nexus laws, which say a substantial connection is forged when an out-of-state seller does a certain amount of business in a state.

In seeking to impose a tax obligation on marketplace providers, Pennsylvania is in step with the newest trend. Minnesota, Rhode Island, and Washington have already enacted laws requiring marketplace providers or facilitators to collect and remit tax on behalf of their third-party sellers. Other states, including New York, North Carolina, and Texas, are considering doing the same. And South Carolina recently handed Amazon a bill for more than $12 million in outstanding taxes on its marketplace sales.

As Pennsylvania and other states look to tax marketplace sellers or providers, 24 other states are offering them an olive branch in the form of a tax amnesty program.

Between Aug. 17 and Oct. 17, 2017, participating states will forgive or reduce outstanding sales and use taxes and/or income/franchise taxes for qualifying marketplace sellers that agree to register and collect tax in participating state(s) by Dec. 1, 2017. Pennsylvania is not participating in this program.

See the Avalara sales tax amnesty resource center for additional details.