Pennsylvania revises sales and use tax economic nexus standard


Matthew Melinson
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Jerry Glynn
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Patrick Skeehan
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Daniel Giorgio
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Jamie C. Yesnowitz
Washington, D.C.
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Chuck Jones
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Lori Stolly
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The Pennsylvania Department of Revenue recently issued Sales and Use Tax Bulletin 2019-01, in which the Department determined that, based on the U.S. Supreme Court’s decision in South Dakota v. Wayfair,1 substantial economic nexus satisfies Pennsylvania’s definition of maintaining a place of business in the state.2 In the Bulletin, the Department asserts that persons having more than $100,000 of gross sales in a previous 12-month period will have economic nexus in Pennsylvania for sales and use tax purposes and will be required to collect and remit Pennsylvania sales tax. The guidance applies to transactions occurring on or after July 1, 2019.

Background The Bulletin references both the Wayfair decision issued in June 2018 and Pennsylvania Act 43. Wayfair established that physical presence is no longer required for a state to impose sales tax on a seller or marketplace facilitator. The $100,000 gross sales threshold established in the Bulletin mirrors the threshold of $100,000 in sales adopted via legislation by South Dakota in March 2016 and ultimately upheld in the Wayfair case.

In October 2017, prior to the Wayfair decision, Pennsylvania enacted legislation requiring that certain remote sellers,3 marketplace facilitators4 and referrers5 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.6 Remote sellers and referrers 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.7

Department’s bulletin creates post-Wayfair standards In Bulletin 2019-01, the Department interprets Pennsylvania’s definition of “maintaining a place of business” in the Commonwealth to include persons having economic nexus in Pennsylvania. The Bulletin references existing Pennsylvania law, which defines maintaining a place of business to include “[h]aving any contact with this Commonwealth which would allow the Commonwealth to require a person to collect and remit tax under the Constitution of the United States.”8 The Department previously followed the physical presence standard for sales and use taxes under Quill Corp. v. North Dakota to establish whether a seller had sufficient contact with the state.9 Noting the overturning of Quill in Wayfair, the Department observed that economic nexus, as created by meeting a certain sales threshold, is sufficient to meet the definition of “maintaining a place of business” in the state, without the requirement of physical presence.

Vendor safeguards and sales threshold Effective July 1, 2019, persons with $100,000 or more of gross sales in the Commonwealth during the previous 12-month period will be considered to have economic nexus in Pennsylvania. For purposes of measuring what constitutes gross sales, the Bulletin provides that:

  • A marketplace facilitator with no physical presence in Pennsylvania should use both facilitated and direct sales to determine whether it has exceeded the economic nexus threshold; and
  • A marketplace seller with no physical presence in Pennsylvania should use only its direct sales and those sales made through a marketplace facilitator that does not collect sales tax on its behalf to determine whether it has exceeded the economic nexus threshold.

The Bulletin also notes that the Department will certify service providers that will: (i) offer software and perform services that will assist in determining the taxability of a product or service, relieving the person of liability upon audit; and (ii) aid in the registration, collection, reporting, and remittance of sales tax.

Bulletin 2019-01 initially referred to the $100,000 threshold as applying to “taxable” sales. To rectify this apparent drafting error, the Department released a revised version of the Bulletin on Jan. 11, 2019, clarifying that the sales threshold applies to gross sales, not taxable sales, within the Commonwealth. This change increases the likelihood that a remote seller or marketplace seller or facilitator will be subject to Pennsylvania’s collection and remittance requirements.

Coordination with Pennsylvania Act 43 The Bulletin further states that the economic nexus rules are not meant to replace or provide an alternative to the provisions of Act 43. In other words, the $10,000 sales threshold for either collecting and remitting sales tax or electing notice and reporting requirements will still apply to all persons and sellers who have neither physical presence nor economic nexus in the Commonwealth. However, the Department notes that Act 43 will no longer apply to marketplace facilitators or remote sellers that exceed the $100,000 gross sales economic nexus threshold. Such businesses will now be required to register for sales tax in Pennsylvania and collect and remit sales tax for transactions occurring on or after July 1, 2019. In addition, marketplace facilitators with economic nexus will be required to collect sales tax on all sales into the Commonwealth, even if the seller on whose behalf the facilitator is collecting does not have nexus individually.
The Department notes at the end of the Bulletin that “[a]dditional procedural and technical guidance…will be available on the Department’s website.” The Department subsequently released a Q&A on its website, in which it clarified that the sales threshold would be measured by calendar year for purposes of determining whether a remote seller has economic nexus in Pennsylvania.10 As an example, for the initial collection period of July 1, 2019 through March 31, 2020, sales made in calendar year 2018 will be used to determine nexus; sales made in calendar year 2019 will be used for the subsequent collection period of April 1, 2020 through March 31, 2021. These measurement periods differ from the “previous twelve months” referred to in Bulletin 2019-01.

Commentary In light of the Court’s favorable opinion of the anti-discriminatory provisions of the South Dakota statute, and the subsequent response of states to enact similar economic nexus provisions, the constitutionality of Pennsylvania’s existing sales tax collection and reporting requirements enacted under Act 43 came into question.11 Pennsylvania’s $10,000 sales threshold, far below the $100,000 adopted by South Dakota and over 30 conforming states, could be subject to possible constitutional challenge. With Bulletin 2019-01, the Department decided to conform to the $100,000 sales threshold enacted by South Dakota as a regulatory matter, but did not adopt the separate transaction threshold enacted by South Dakota and other states. Further, the Bulletin’s provisions are not retroactive, as they apply to transactions occurring on or after July 1, 2019.

However, certain provisions of Bulletin 2019-01 are problematic in terms of their prospective enforcement. First, it is not clear whether the Department has the authority to impose a $100,000 economic nexus sales threshold when it comes into conflict with the existing $10,000 threshold under Act 43. Any change to existing law would require further action by the Pennsylvania state legislature. To date, over 40 states have imposed economic nexus standards in response to Wayfair by enacting statutes or promulgating regulations. Only a handful of states, including Michigan and South Carolina, have not done so through a state’s legislative process. Further, the Bulletin references the terms “economic nexus,” “substantial economic nexus,” and “virtual presence,” which are used to describe the new nexus standard. However, these terms are not currently defined under Pennsylvania law, and cannot be used to enforce any statute or rule until they are introduced into law.

While the Department intended the application of the new $100,000 sales threshold to complement the Act 43 standard, the Bulletin significantly limits the application of Act 43. First, the statement that the Act 43 election is “no longer available” to businesses exceeding $100,000 in gross sales attempts to supersede the enforcement of Pennsylvania law. Act 43 did not include a ceiling on the option to either collect and remit sales tax or comply with notice and reporting requirements. Imposing a ceiling on the option to comply with notice and reporting requirements contradicts the enforcement of Act 43.

In addition, the Bulletin’s July 1, 2019, effective date raises further questions as to the interaction with Act 43. According to the Bulletin, the Act 43 election is no longer available to remote sellers with over $100,000 in Pennsylvania sales. Act 43 provides both an affirmative and a deemed election to comply with notice and reporting requirements if no election is made. With Act 43 apparently no longer available to sellers exceeding the $100,000 threshold, such sellers may suddenly have a sales tax collection and remittance obligation under the Department’s policy outlined in Bulletin 2019-01.

The Bulletin and Act 43 also differ with respect to the types of sales used to measure their respective thresholds. The Bulletin uses gross sales while Act 43 uses “sales at retail of tangible personal property subject to tax.”12 Thus, a remote seller with sales of exclusively nontaxable items (e.g., clothing) and/or sales for resale greater than $100,000 would now be subject to the requirements of the Bulletin, while under Act 43 they would have had to do nothing.

Further, the Department has already released conflicting guidance regarding how sales thresholds are measured for purposes of determining nexus: Bulletin 2019-01 suggests that sales are measured during any previous 12 calendar month period, while the Department’s FAQ indicates that sales will be measured using a calendar year period. Such inconsistencies will require further clarification before remote sellers can correctly determine whether they have economic nexus with Pennsylvania and when they need to register to collect and remit sales tax.

Taxpayers should consider the impact of Bulletin 2019-01 on their business for purposes of ASC 450, which stipulates that a liability be declared for taxpayers who may have a loss contingency.13 ASC 450 contains the two-pronged requirement that the liability be both “probable” and “estimable.”14 Remote sellers or marketplace facilitators that chose to comply with notice and reporting requirements under Act 43 but have Pennsylvania gross sales exceeding $100,000 may have a contingent liability pursuant to the Bulletin. However, in light of the inherent conflict between Bulletin 2019-01 and Act 43 and without further clarifying guidance, any potential sales tax collection obligations should be closely examined before declaring a liability under ASC 450.

The question looms as to why the Department decided to release guidance pertaining to remote seller nexus in the form of an administrative bulletin as opposed to waiting for or actively encouraging the Pennsylvania legislature to act. With respect to remote sellers, the Bulletin’s $100,000 sales threshold and effective date conforms to the South Dakota statute that was upheld by the U.S. Supreme Court.15 In any event, additional guidance is likely necessary and expected to determine the extent of the Bulletin’s application to impacted remote sellers and marketplace providers.

1 South Dakota v. Wayfair, Inc., U.S. Supreme Court No. 17-494, June 21, 2018. For a discussion of this case, see GT SALT Alert: Wayfair Ruling Overturns Quill Physical Presence Requirement.
2 Sales and Use Tax Bulletin 2019-01, Pennsylvania Department of Revenue, Jan. 8, 2019, revised Jan. 11, 2019.
3 A “remote seller” is a person having no physical presence in Pennsylvania, but sells tangible personal property at retail to purchasers within the Commonwealth. 72 PA. STAT. § 7213(h).
4 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, collects payments from the purchasers and transmits the payments to the seller. 72 PA. STAT. § 7213(c).
5 A “referrer” is a person that, pursuant to an agreement with a marketplace seller or remote seller, receives consideration from the seller to list or advertise products for retail sale and transfers the purchaser to the seller to complete the sale. 72 PA. STAT. § 7213(g).
6 Act 43 (H.B. 542), Laws 2017, 72 PA. STAT. § 7213.1(a). 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 (February 8, 2018).
7 72 PA. STAT. § 7213.1(a).
8 72 PA. STAT. § 7201(b)(3.3).
9 504 U.S. 298 (1992).
10 See Pennsylvania Sales Tax and Economic Nexus – South Dakota v. Wayfair, Pennsylvania Department of Revenue.
11 See, e.g., Joseph Bishop-Henchman, Hannah Walker & Denise Garbe, Post-Wayfair Options for States, The Tax Foundation, Aug. 29, 2018.
12 72 PA. STAT. § 7213.1(a).
13 FASB defines a loss contingency as an existing condition, situation, or set of circumstances involving uncertainty as to possible losses or expenses that will be resolved when one or more future events occurs or fails to occur. FAS 5, Accounting for Contingencies.
14 ASC 450, Contingencies: Gain Contingencies (issued July 20, 2010).
15 It should be noted that the Wayfair case did not address the application of the sales threshold to marketplace facilitators, though many states have expanded their post-Wayfair nexus statutes to require marketplace facilitators or providers to collect and remit sales taxes on transactions within the marketplace if certain economic nexus thresholds are met.

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