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Multistate Tax Alert: Pennsylvania’s clarification of sales tax nexus standards spells more trouble for remote sellers

As we have discussed in prior Alerts, the remote seller industry is under attack by many states in an effort to force these businesses to collect sales tax in spite of their federal constitutional protections. Remote sellers include businesses that sell goods and services over the Internet or through catalogs.

The Pennsylvania Department of Revenue (DOR) was the latest state to join this battle when it recently released Sales and Use Tax Bulletin 2011-01 (The Bulletin) which adopts an aggressive “click-through” nexus standard and clarifies when a remote seller of property would be required by DOR to collect Pennsylvania sales tax. 

A taxpayer must be maintaining a place of business within Pennsylvania to be required by DOR to collect sales tax. The Bulletin provides that a remote seller will be considered to be maintaining a place of business in Pennsylvania and, therefore, be required by DOR to collect Pennsylvania sales tax, if one of the following scenarios applies:

  • The remote seller 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 seller, and the in-state entity or individual receives consideration for the contractual relationship with the remote seller.
  • The remote seller regularly solicits orders from customers within Pennsylvania via the website of an entity or individual physically located in Pennsylvania, such as via click-through technology.
  • The remote seller’s affiliates, agents and/or independent contractors provide service(s) within Pennsylvania (including, but not limited to storage, delivery, marketing, or soliciting sales) that benefit, support and/or complement the remote seller’s business activity.
  • The remote seller utilizes affiliates, agents and/or independent contractors located in Pennsylvania who will provide repair, delivery or other seller service relating to tangible personal property sold by the remote seller to customers within the state.
  • The remote seller accepts orders that are directly shipped to customers within Pennsylvania from a facility within Pennsylvania which is operated by a remote seller’s affiliate, agent or independent contractor.
  • The remote seller stores its property or the property of a representative at a distribution or fulfillment center located within Pennsylvania, regardless if the center also stores property of other third parties.
  • The remote seller’s employee(s) regularly travel to Pennsylvania for any purpose related to the remote seller’s business activity.

The above list should only be considered examples of when the DOR may require a remote seller to collect sales tax.

Nationwide trend: Many states, including Arkansas, California, Colorado, Connecticut, District of Columbia, Illinois, New York, North Carolina, Oklahoma, Rhode Island, South Dakota, and Vermont, have legislatively adopted similar “click-through” nexus positions. So far this year, Florida, Indiana and five other states have proposed legislation for new nexus standards for remote sellers. Uniquely, the DOR Bulletin is not the result of any legislative change in Pennsylvania; rather, the DOR is administratively adopting this position under the current statute. We expect that other states will now begin to follow a similar approach.

One Time Opportunity: DOR is inviting remote sellers to voluntarily come forward and register to collect Pennsylvania sales taxes on a go-forward basis. In exchange for coming forward, DOR will not assess the remote sellers for sales tax on sales made in prior years. DOR has extended the original deadline for remote sellers to accept this One Time Opportunity to September 1, 2012.

Risk to remote sellers: A major risk of DOR’s approach is that remote sellers could be held liable for tax not collected on Pennsylvania sales made in all prior years. (Remember, the statute of limitations generally will not apply to most remote sellers because no tax return has been filed.) Although DOR is currently taking the position that a remote seller that does not take advantage of the One Time Opportunity is only subject to a look back period of three years, this could certainly change in the future. Also, such remote sellers would also be assessed penalties and interest for those prior years.

What remote sellers should do: All remote sellers should be tracking these national trends and assessing their risk for a state asserting retroactive tax collection. Of course, with Pennsylvania’s new position and the One Time Opportunity it is offering, each remote seller should carefully examine its facts and gain a clear understanding of its potential liability for Pennsylvania sales tax, as well as its constitutional protections. Often, steps can be taken to mitigate a remote seller’s risk of being held liable for collecting sales tax on remote sales.

Our Multistate Tax team has experience advising and assisting remote sellers with weighing their risks and identifying opportunities to reduce that risk. If you would like to discuss this subject, please contact:

John R. Trippier
(non-attorney professional)
614.458.0042
jtrippier@mcdonaldhopkins.com

Adam L. Garn
614.458.0032
agarn@mcdonaldhopkins.com

Multistate Tax Practice

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. This can be a daunting task. We provide a broad range of state and local tax services including tax planning, tax controversy, real estate tax abatement and exemption, and tax policy advocacy. With professionals who have worked both inside and outside government agencies, the multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.

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IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments), was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding any penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction matter addressed herein.

© 2012 McDonald Hopkins LLC All Rights Reserved. This Alert is designed to provide current information for our clients, friends and their advisors regarding important legal developments. The foregoing discussion is general information rather than specific legal advice. Because it is necessary to apply legal principles to specific facts, always consult your legal advisor before using this discussion as a basis for a specific action.