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Pennsylvania enacts remote-seller sales and use tax

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On June 28, 2019, Pennsylvania Gov. Tom Wolf approved House Bill 262, enacted as Act 13 of 2019. This revenue-raising element of Pennsylvania’s fiscal year 2019-20 budget enacted several notable tax changes.1 The legislation addresses sales and use tax remote seller and marketplace facilitator economic nexus standards, and reconciles conflicting rules regarding remote seller and marketplace facilitator sales tax collection requirements. Beginning July 1, 2019, remote sellers and marketplace facilitators that have no physical presence in Pennsylvania but have more than $100,000 in gross sales in a previous 12-month period are subject to a sales tax filing and collection obligation. In addition, Act 13 conforms the personal income tax (PIT) to Federal Opportunity Zone provisions enacted under federal tax reform, expands the Manufacturing Innovation and Reinvestment Program, and revises various tax credit and economic development zone programs.

Sales and use tax The most significant tax reforms provided in the budget legislation involve several changes to the sales and use tax law.

Remote seller and marketplace facilitator collection and reporting requirements Prior to the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc.2 Pennsylvania in October 2017 enacted Act 43,3 which required that remote sellers and marketplace facilitators with at least $10,000 in taxable Pennsylvania sales during the immediately preceding 12 calendar-month period file an election to either: (i) collect and remit sales tax to the state; or (ii) comply with detailed notice and reporting requirements.4 Remote sellers meeting the $10,000 sales threshold were required to file an election by March 1, 2018, (and annually each June 1 thereafter beginning June 1, 2019) to either begin collecting Pennsylvania sales and use tax by April 1, 2018, or comply with the notice and reporting requirements.5

In January 2019, the Pennsylvania Department of Revenue issued Sales and Use Tax Bulletin 2019-01,6 in which the Department determined that, based on the Wayfair decision, substantial economic nexus satisfies Pennsylvania’s definition of maintaining a place of business in the state.7 The Bulletin referenced both the Wayfair decision and Act 43. The Bulletin interpreted Wayfair to establish that physical presence is no longer required for the state to impose sales tax on either a seller or marketplace facilitator. The $100,000 gross sales threshold established in the Bulletin mirrored the threshold of $100,000 in sales adopted via legislation by South Dakota in March 2016 and ultimately upheld in the Wayfair decision.

Act 13 amended Pennsylvania’s definition of “maintaining a place of business” in the Commonwealth in accordance with the Department’s interpretation set forth in the Bulletin. Accordingly, the revised statute provides that vendors having at least $100,000 in gross sales of tangible personal property or services during the preceding 12-month calendar period are considered to maintain a place of business in Pennsylvania and thus required to register to collect and remit sales tax on sales to Pennsylvania customers.8 The definition of a “vendor” is expanded to include marketplace facilitators9 and marketplace sellers.10 Vendors having economic nexus with Pennsylvania during the 2018 calendar year are required to collect sales tax from July 1, 2019, through March 31, 2020.11 For calendar years after 2018, vendors with economic nexus are required to collect sales tax beginning April 1 of the following calendar year and ending March 31 of the next calendar year.12

With respect to marketplace facilitators, sales included in the $100,000 sales threshold calculation include sales of tangible personal property or services by a marketplace seller whose sales are facilitated through the marketplace facilitator’s forum.13 Marketplace facilitators are relieved of liability for collecting and remitting sales tax if the marketplace facilitator shows that the failure to collect the correct amount of tax was due to incorrect information given to the marketplace facilitator by the marketplace seller.14 A marketplace seller making sales solely through a marketplace facilitator that is required to collect sales tax on the seller’s behalf is not required to file a return and remit sales tax, provided the marketplace seller receives a certification from the marketplace facilitator that the marketplace facilitator will collect, report and remit the proper sales tax.15

While Act 13 codifies the economic nexus standard set in place by Bulletin 2019-01, the law also eliminates the $10,000 taxable sales threshold previously in place under Act 43. Specifically, Act 13 eliminates the ability of remote sellers and marketplace facilitators to utilize the options set forth in Act 43 by simply requiring those with $100,000 in annual gross sales to collect and remit sales tax. Businesses no longer have the option to file an election to comply with notice and reporting requirements instead of collecting and remitting sales tax.

Malt and brewed beverage manufacturers Previously in Sales and Use Tax Bulletin 2018-02, the Department announced that certain malt or brewed beverages sold for consumption on or off the premises by manufacturers of malt or brewed beverages would be subject to sales tax beginning in July 2019, including beer sales at tasting rooms and retail storefronts at small breweries.16 Under this guidance, the sales tax would be imposed on the full retail price of each sale. Under Act 13, only 25% of the retail price charged to the ultimate consumer for consumption will be subject to sales tax.17 Although the 25% tax base will not be imposed on sales or take effect until Oct. 1, 2019, it supersedes the rule previously set forth under Bulletin 2018-02. In response to these new rules, the Department released a revised bulletin regarding the specific application of the new rules to the sale of malt or brewed beverages in Pennsylvania.18

Vendor sales tax absorption advertising Prior to the enactment of Act 13, vendors were prohibited from advertising their election to absorb all or part of state sales tax on behalf of the purchaser to the public.19 Effective July 1, 2019, the legislation allows vendors to advertise that they are absorbing the cost of the sales tax as part of the retail sales price, as long as they expressly state on the receipt, invoice or sales slip that sales tax is still applicable, but is being paid by the vendor and included in the retail sales price.20 The sales documentation may not indicate or imply that the transaction is exempt or excluded from sales tax.

Personal income tax In December 2017, the Federal Tax Cuts and Jobs Act (TCJA) enacted major federal tax reform in a variety of tax areas, including individual income tax. One component of the TCJA is the Federal Opportunity Zones (OZ) Program, under which gains, income and losses associated with investments in an OZ may be excluded from federal taxation. Act 13 conforms the PIT to the OZ Program by excluding such income from “net gains or income,” “net losses,” and “dividend” income calculations for PIT purposes, effective for tax years beginning after Dec. 31, 2019.21 Act 13’s conformity with the federal rules seeks to incentivize investment in low-income urban and rural communities.

Act 13 also conforms the PIT to federal law by allowing an executor or administrator of a decedent’s estate to file a joint tax return for an estate and revocable trust for the taxable years when trust income is reported as part of estate income under Sec. 645 of the Internal Revenue Code.22 If a joint return is filed, the tax liabilities of the estate and trust will be joint and several.23 This provision applies to tax years beginning after Dec. 31, 2019.

Corporate net income tax Currently, Pennsylvania’s Manufacturing Innovation and Reinvestment Deduction Program requires a private capital investment of over $100 million in order for a business subject to the corporate net income tax (CNIT) to receive a deduction from taxable income.24 If this threshold is met, a maximum allowable investment deduction is set at 25% of the private capital investment amount over a five-year period. Act 13 revises the program requirements through creation of a two-tier scale, resulting in a greater number of opportunities for investment in such businesses.25 The program’s new structure maintains the current $100 million minimum with a 25% maximum deduction, but also allows an additional private capital investment tier of $60 million to $100 million, under which a maximum deduction from taxable income of 37.5% is allowed over a 10-year period.26

Economic Development Zones Additional Keystone Opportunity Expansion Zone designations Act 13 establishes an application process for designated Keystone Opportunity Expansion Zones (KOEZs) located in Cambria, Clearfield, and Lancaster Counties, as determined by specific population requirements.27 The KOEZ application deadline is Oct. 1, 2021, and the Department of Community and Economic Development (DCED) must respond to such application within a three-month period, or otherwise by Dec. 31, 2021.28 If DCED declines an application, it must present its reasoning for such denial at a public hearing, as well as the potential benefits that would have resulted from its approval.29

Strategic Development Area sales and use tax exemption clarification Currently, qualified businesses located in a designated Strategic Development Area (SDA) are provided a sales and use tax exemption on the purchase of certain goods and services.30 In order to qualify for such exemption, the goods and services must be for the “exclusive use, consumption and utilization” within the SDA. Act 13 revises the definition of “exclusive use, consumption and utilization” to include the use, consumption or utilization at a location other than the facility of computers, laptops, tablet computers, computer hardware, related software, storage media, portable scanners and printers, mobile radio devise, cell phones and accessories, telecommunication services, global positioning systems and accessories and parts for motor vehicles, by an employee assigned to the facility within the SDA.31

Other notable provisions Other notable provisions contained in Act 13 include the following:

  • The 4.5% inheritance tax levied on the transfer of property from parents to children of 21 years of age or younger is eliminated.32 This change applies to transfers by a natural parent, adoptive parent, or step-parent dying after Dec. 31, 2019
  • The June 30, 2019, sunset date of the additional 2% tax on table games enacted in Act 84 is extended to Aug. 1, 202133
  • Amendments to various Pennsylvania tax credit programs, including the Film Production Tax Credit, Concert and Rehearsal Tax Credit and Resource Enhancement and Production Tax Credit

Commentary The enactment of Act 13 is expected to have a nominal revenue impact on Pennsylvania’s general fund, with an actual revenue decrease of $29 million expected for the 2020 fiscal year.34 This is not surprising given that the Commonwealth ended its 2019 fiscal year with general fund collections at $883 million above estimate, resulting in a budget surplus.35 With more ambitious spending goals expected by both the governor and the state legislature in the near future, budget negotiations are expected to be more contentious leading up to next fiscal year, with the governor proposing various tax increases, including a severance tax on natural gas drilling.36

While the enactment of Act 13 does not bring the significant tax changes to Pennsylvania seen in recent budget bills, the codification of the Department’s existing marketplace sales rules provides much-needed clarity for out-of-state businesses with no physical presence in the Commonwealth. After the release of Bulletin 2019-01 in January, remote sellers and marketplace facilitators were required to track their sales to Pennsylvania customers over a 12-month period according to two separate sales thresholds: $10,000 in taxable sales and $100,000 in gross sales. Act 13 eliminates the lower $10,000 sales threshold rules enacted under Act 43, allowing remote sellers to navigate a simple rule with a single sales threshold mirroring that of South Dakota and other states enacting economic nexus standards in response to Wayfair.

It was unclear whether the Department had the authority to impose an economic nexus sales threshold that was not supported by statutory authority, and in fact contradicted the enforcement of the existing $10,000 sales threshold under Act 43. The enactment of Act 13 removes this uncertainty and provides statutory authority for the new economic nexus standard. By repealing the marketplace sales provisions of Act 43, the new law also eliminates any constitutional questions created by the lower $10,000 sales threshold and signifies the growing mootness of notice and reporting requirements. Oklahoma is the only remaining state with a pre-Wayfair $10,000 sales threshold and a notice and reporting option currently still in place. However, this option will be eliminated for remote sellers effective Nov. 1, 2019, at which time such businesses will be required to collect tax upon exceeding $100,000 in annual Oklahoma sales.37 This leaves Kansas as the only state to depart below the $100,000 sales threshold approved in Wayfair, having announced a controversial standard requiring remote sellers with no physical presence in Kansas to collect tax on any sales delivered into the state.38


 
1 Act 13 (H.B. 262), Laws 2019.
2 138 S. Ct. 2010 (2018). For a discussion of this case, see GT SALT Alert: Wayfair Ruling Overturns Quill Physical Presence Requirement.
3 Act 43 (H.B. 542), Laws 2017.
4 Former 72 PA. STAT. § 7213.1(a), suspended effective July 1, 2019. For a discussion of these provisions, see GT SALT Alert: Pennsylvania Enacts Legislation Imposing Collection and Reporting Requirements on Marketplace Sales, Modifying Net Loss Deduction Limitation.
5 Former 72 PA. STAT. § 7213.1(a), suspended effective July 1, 2019.
6 Sales and Use Tax Bulletin 2019-01, Maintaining a Place of Business in the Commonwealth, Pa. Department of Revenue, Jan. 8, 2019, revised Jan. 11, 2019.
7 For a further discussion of Bulletin 2019-01, see GT SALT Alert: Pennsylvania Department of Revenue Guidance Implements Revised Sales and Use Tax Economic Nexus Standard for Remote Sellers, Marketplace Facilitators.
8 Act 13, Sec. 1, adding 72 PA. STAT. § 7201(b)(3.5)(i).
9 A “marketplace facilitator” is a person that facilitates the retail sale of tangible personal property by listing or advertising the sale of tangible personal property in any forum, collecting payments from the purchasers and transmitting the payments to the seller. Act 13, Sec. 1, adding 72 PA. STAT. §§ 7201(p), (iii).
10 A “marketplace seller” is defined as a person having an agreement with a marketplace facilitator to facilitate sales for the person. Act 13, Sec. 1, adding 72 PA. STAT. §§ 7201(jjj).
11 Sec. 6, adding 72 PA. STAT. § 7237(b)(1.2)(I).
12 Sec. 6, adding 72 PA. STAT. § 7237(b)(1.2)(II).
13 Sec. 1, adding 72 PA. STAT. § 7201(b)(3.5)(ii).
14 Sec. 5, adding 72 PA. STAT. § 7230(c)-(d).
15 Sec. 4, amending 72 PA. STAT. § 7215; Sec. 5, amending 72 Pa. Stat. § 7237(b).
16 Sales and Use Tax Bulletin 2018-02, Pa. Department of Revenue, Oct. 1, 2018 (superseded effective July 1, 2019).
17 Sec. 1, adding 72 PA. STAT. § 7201(g)(9). The law further provides that Philadelphia and Allegheny County may continue to levy local alcoholic beverage taxes on the retail sale of malt or brewed beverages by a manufacturer. Sec. 2, adding 72 PA. STAT. § 7202(h)(3).
18 Sales and Use Tax Bulletin 2019-02, Taxation of the Sale of Malt or Brewed Beverages in Pennsylvania by Manufacturers, Pa. Department of Revenue, July 16, 2019.
19 See 72 PA. STAT. § 7268(b)(1).
20 Sec. 2, amending 72 PA. STAT. § 7202(b); Sec. 7, amending 72 PA. STAT. § 7268(b)(1).
21 Sec. 10, amending 72 PA. STAT. § 7303(a)(3)(viii), adding 72 PA. STAT. § 7303(a)(5).
22 Sec. 10.2, amending 72 PA. STAT. § 7331(g).
23 72 PA. STAT. § 7331(g).
24 72 PA. STAT. § 7407.7(a).
25 Sec. 10.4, amending 72 PA. STAT. § 7407.7(a).
26 Sec. 10.4, amending 72 PA. STAT. § 7404.7(d).
27 72 PA. STAT. § 8921-D(a).
28 72 PA. STAT. § 8921-D(d).
29 72 PA. STAT. § 8921-D(e).
30 See 72 PA. STAT. §§ 9931-C; 9945-C.
31 72 PA. STAT. §§ 9931-C(c); 9945-C(b.1).
32 Sec. 21, adding 72 PA. STAT. § 9116(a)(1.4).
33 Sec. 22, amending 72 PA. STAT. § 9503(a).
34 Fiscal Note to H.B. 262, Pa. Senate Appropriations Committee, June 26, 2019.
35 Revenue Department Releases Fiscal Year 2018-2019 Collections, Pa. Department of Revenue, July 1, 2019.
36 Lauren Loricchio, Governor Renews Calls for Gas Severance Tax, STATE TAX TODAY, July 22, 2019.
37 Oklahoma’s $10,000 sales threshold and the option to comply with notice and reporting requirements remains in effect for marketplace facilitators. S.B. 513, Laws 2019.
38 Guidance released by the Kansas Department of Revenue does not set forth a “safe harbor” threshold for small businesses based on sales or numbers of transactions. Notice 19-04, Sales Tax Requirements for Retailers Doing Business in Kansas, Kansas Department of Revenue, Aug. 1, 2019.



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