Pennsylvania seeks $345M cut of Internet retail sales
By Kim Leonard
Published: Monday, Oct. 31, 2011
Starting in the spring, Pennsylvania wants taxpayers to report their Internet purchases and pay a 6 percent tax if they didn't pay sales tax online.
The state wants to stake claim to part of an estimated $345 million it says it will miss out on this year because most Internet and catalog retailers with no presence in Pennsylvania don't collect sales tax.
The 6 percent "use tax," the same rate as the state sales tax, isn't a new levy.
Few Pennsylvania taxpayers know that they are required to pay use tax if their online, catalog or out-of-state purchases on taxable items weren't taxed at the point of sale. The tax applies to merchandise bought or shipped into Pennsylvania without sales tax being charged, merchandise then "used" in the state. The use tax isn't meant to target someone who paid sales tax in another state.
Until now, people were asked to report use tax on the PA-1 form, which individual taxpayers seldom use. But the PA-40 income tax form for the 2011 tax year will contain a use-tax line for filers to enter a figure, even zero.
"It's not something that a taxpayer can skip over," said Elizabeth Brassell, spokeswoman for the state Department of Revenue. With more than 6 million personal income tax forms filed annually in Pennsylvania, she conceded that enforcing collections will be tough.
Most clothing purchased online is exempt from Pennsylvania sales tax, Brassell said. But many types — such as formal apparel, fur, safety clothing and sports apparel — are subject to the use tax, as are computers and many other items.
Some taxpayers don't like the idea of being asked to report web purchases.
"I don't think that's right. The Internet is everywhere — it's the thing today," said Bill Mikos of McKeesport, who buys Harley-Davidson merchandise online. In a bad economy, Pennsylvania shouldn't go after people for more sales tax, he said.
"If tax wasn't charged where you bought something from, you shouldn't have to pay it," said William Chapman of Clairton.
The state plans to educate people about declaring Internet purchases. Taxpayers can use receipts from their web shopping to calculate tax payments, or estimate what they owe based on income. Pennsylvania collected $386 million in use tax in its 2010-11 fiscal year, nearly all from businesses, Brassell said.
Several states ask taxpayers to pony up use tax. New York added a use tax line to its income tax form in 2003; Ohio did so about five years ago.
"We believe it has increased voluntary reporting of use tax by consumers," said Ed Walsh, spokesman for New York's revenue department. That state logged about $7 million in voluntary collections before the change, and $35 million last year.
Based on results in other states, Pennsylvania could collect an additional $5 million to $6 million each year, Brassell said.
Gov. Tom Corbett's office is evaluating laws and court rulings that relate to collecting sales tax from online retailers, Brassell said.
Traditional store-based retailers and online or catalog sellers have battled over sales tax collection for years. The U.S. Supreme Court decided in 1992 that an office supply retailer, Quill Corp., didn't have to collect sales tax on shipments to North Dakota customers because the company had no physical presence in that state.
That ruling set the standard nationwide. Retailers such as Best Buy and J.C. Penney, with stores and other operations in Pennsylvania, collect sales tax, but online and catalog sellers such as Amazon.com don't.
A House bill introduced last week would empower states to collect sales tax from online retailers outside their borders. The Senate is considering a similar bill.
As Internet sales continue to gain strength, "there has been this crescendo, or groundswell" of frustration from brick-and-mortar stores, said Dan Hayward, spokesman for the Pennsylvania Alliance for Main Street Fairness, a lobbying group. "They see a slow but steady eating into their revenues that create jobs on Main Street and allow them to keep their businesses open."
Collecting sales tax should be a states' rights issue, Hayward said.
Some states have pushed the issue. California tried to force Amazon.com and other retailers to collect sales tax, but later agreed to work toward a uniform federal law. If that effort fails, web retailers will start collecting California's 7.5 percent sales tax in September 2012.
Ohio, West Virginia and New Jersey are among 24 states in the 12-year-old Steamlined Sales Tax project that sets efficiency and technology standards to try to make tax collections from remote sellers easier.
The Direct Marketing Association supports Pennsylvania's effort to teach residents about use tax, said Ron Barnes, vice president for state affairs. The New York City-based trade organization wants simplified tax rules that can be applied nationwide, and he said neither the House nor Senate bills go far enough to ensure it.
Robert Strauss, a Carnegie Mellon University economics and public policy professor who testified before the state Senate Finance Committee about the Internet tax issue in May, said Pennsylvania's push for voluntary use tax reporting "will pick up some money."
But state officials still won't know how much consumers are buying. Internet shopping has been growing by about 5.5 percent a year, said Strauss, who estimated Pennsylvania could collect $240 million to $388 million more in sales and use tax in 2012 if all retailers charged the tax.
Paul Rudoy, managing partner at accounting firm Horovitz Rudoy & Roteman, said he'd be "surprised if there is significant participation" in the state's reporting request.
"But it doesn't hurt. It's appropriate for the commonwealth to try to get revenue in any area they can," he said.
Brassell said the state tried to boost use-tax collections from businesses by sending about 20,000 notices a month in recent years to entities whose tax returns and other data signal they might owe the tax.
Jim Ramsey of Latrobe received such a such a notice in August, even though he's retired and doesn't own a business.
"I haven't bought anything on the Internet," said Ramsey, 85. Even so, he thought about sending in a check for 60 cents but ended up returning the form, declaring zero use tax. "Who wants to pay it• Are they going to file suits against people?" he asked.
Tax action in other states
Ohio: Added use-tax line to standard income tax form about five years ago. A recent University of Cincinnati study said the state could collect $200 million a year through sales taxes on online purchases.
California: State officials plan to work with Amazon.com and other Internet retailers for a federal resolution on collecting sales tax. If that isn't accomplished, retailers have agreed to start collecting tax in September 2012.
Connecticut: Passed a law requiring online that retailers collect sales tax.
Tennessee: Amazon.com will be required to start collecting sales tax on Jan. 1, 2014, under an agreement with the state. Amazon recently opened two Tennessee distribution centers.
New York: Added use-tax line to its income tax form in 2003; collections increased
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