On December 1, 2011, the Department of Revenue issued Sales and Use Tax Bulletin 2011-01 to remind remote sellers of their sales tax collection obligations. For a link to the Bulletin, please visit www.reedsmith.com/patax. This Bulletin makes it clear that going forward, the Department’s policy will be to apply Pennsylvania’s sales and use tax statute1 to remote sellers “maintaining a place of business in the Commonwealth” to the full extent allowed by existing law.
What Do You Need to Know about the ‘New’ Guidance?
If you are a remote seller who is not collecting Pennsylvania sales tax, there are three things you need to know about Bulletin 2011-01:
- 1. If you are making sales into Pennsylvania through use of a web-based affiliate or agent located in Pennsylvania-or if you are using affiliates or agents to provide services (e.g. storage, repair or delivery services) to support your sales in Pennsylvania-the Department believes that you have nexus in Pennsylvania for sales and use tax purposes;
- 2. If you have nexus with Pennsylvania based on the foregoing, you have the opportunity to register to collect and remit sales tax to Pennsylvania by February 1, 2012, and avoid potential exposure for periods prior to February 1, 2012; and
- 3. Even under Pennsylvania’s expansive statutory definition of “maintaining a place of business in the Commonwealth,” some remote sellers may not have nexus with Pennsylvania. All remote sellers should carefully consider their particular facts and circumstances (and audit and assessment risks) before taking the steps to register.
The new guidance is likely to be a revenue win for the Commonwealth but also an opportunity for taxpayers whose activities may fall within those described in the statute (and reiterated in the Bulletin) to consider their options and, specifically, to bring themselves into compliance with the Department’s new position with respect to remote sellers.
The Department’s approach to applying this shift in application of Pennsylvania sales tax nexus statute prospectively clearly reflects Governor Corbett’s pledge, that his Administration would be more business friendly.
What Are the Options?
If you are a remote seller that has nexus with Pennsylvania (and you are not presently collecting sales tax on your sales into Pennsylvania) based on any of the activities described in Sales and Use Tax Bulletin 2011-01, you have two options:
1. Register with the Commonwealth to collect and remit Pennsylvania sales tax for online sales arising from the activities described in the Bulletin by February 1, 2012; or
2. Review your particular facts and circumstances under Pennsylvania law and decide not to register with the Commonwealth and be prepared to challenge the Department if you receive an assessment.
Remote sellers should carefully consider the examples contained in the Bulletin in light of their online activities in deciding whether to immediately register with the Commonwealth. Although the Bulletin and its accompanying press release are silent on whether remote sellers will face any potential liability for failure to collect and remit tax for prior periods, we understand that the Department will be willing to agree to allow most remote sellers with possible nexus exposure in light of the Bulletin to begin collecting and remitting sales and use tax on a prospective basis if they register and begin collecting and remitting tax by February 1, 2012.
It may be prudent to obtain written confirmation from the Department that registering to collect tax and collecting tax beginning on February 1, 2012, will absolve all potential tax collection responsibilities for all prior periods.
Who Should Consider Not Registering?
After a careful consideration of the facts and circumstances of their activities in the Commonwealth, some remote sellers may choose to forego registering (either immediately or before February 1, 2012) at the risk of receiving an assessment later on. One example of a situation in which a remote seller might choose not to register with Pennsylvania, notwithstanding the Bulletin, would be if the seller’s only connection with Pennsylvania is a contractual relationship with a Commonwealth entity whereby the seller pays a flat, monthly fee for banner advertisements placed on that entity’s website. Arguably, in this scenario the remote seller is contracting with the Commonwealth entity for a service more akin to traditional advertising than active sales solicitation. Another example of a situation in which a remote seller might choose not to register with Pennsylvania would be if the seller makes a de minimis (e.g., less than $10,000 annually) amount of Pennsylvania sales attributable to any click-though/affiliate marketing arrangement with a Pennsylvania entity.
Arriving at a decision to register-or not-will require remote sellers to thoughtfully consider their connections with Pennsylvania in light of the Department’s guidance. Notably, in addition to the Bulletin and the Department’s press releases, the Department has issued an updated nexus questionnaire, a copy of which may be found here: www.reedsmith.com/patax.
Remote sellers with Pennsylvania nexus, as interpreted by the Department, who fail to begin collecting tax could be assessed tax on sales into Pennsylvania for prior periods. The Department has indicated that it may look back at least three years for audit and assessment purposes.