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Pennsylvania

Pennsylvania lawmakers see online sales tax as net loss

| Monday, Aug. 29, 2011

READING, Pa. -- The bandwagon drumming up support for a tax on Internet sales is passing by Pennsylvania this time around.

That's good news for state residents -- sort of. People in this state who buy taxable items via the Internet, a catalog or phone from out-of-state businesses won't find 6 percent added to the bottom line of their bills.

It's called a use tax, a counterpart to the sales tax.

Consumers living in at least seven other states will have to pay use tax because their states have adopted variations of a law requiring businesses with a connection to their states -- known as a nexus -- to collect use taxes from residents who shop from home.

More states are jumping on board, seeing the tax as an opportunity to fill their budget gaps.

Pennsylvania could raise $246 million to $398 million, show a modest increase in jobs and collect more wage taxes with such a levy, according to a study by Dr. Robert P. Strauss, a professor of economics and public policy at Carnegie Mellon University.

Even so, state Rep. Jim Cox, a Berks County Republican who sits on the House Finance Committee, said this state is not likely to join the others anytime soon.

Testimony at a May hearing on the issue led committee members to walk away from the idea, he said.

"I got the impression that we're not going to gain a lot with the tax, but we are going to lose," Cox said.

State residents could find they have fewer choices when making online purchases, Cox said, referring to the reaction of businesses such as Amazon.com -- the largest online retailer in the world.

Amazon.com severed connections with affiliates in several states to avoid collecting taxes.

The retailer and other online retailers are challenging the new tax laws in court.

Businesses would move to tax-free states, putting states that have a use tax at a disadvantage in economic development, Cox said.

And the enormous cost of enforcing and auditing the taxes could be enough to wipe out most of the revenue gain, he said.

"Once that testimony was put out there, that became the nature of the discussion among the entire committee," Cox said. "Is this going to be worth it in the end, or is it a shift?

"I think it's just a shift, and another nightmare for those selling on the Internet."

A federal law would make more sense because that would benefit all states, he said.

State Sen. Judy Schwank, a Berks County Democrat, agreed the federal government is better equipped to deal with the issue. Meanwhile, the state should wait to see what happens on the federal level and in other states, she said.

"California is one state that's taking the path of levying the tax, and it's in court," she said. "In Pennsylvania, we can watch and wait and see what happens to determine the next step for us."

There could be better ways to raise revenue while the state waits, Schwank said.

One option could be closing the tax loophole for companies that incorporate in Delaware rather than Pennsylvania, she said.

Another could be limiting the 1 percent discount businesses receive for collecting and remitting state sales tax, Schwank said.

Instead of giving businesses the discount on all sales, they would no longer be able to claim it after their sales reach a threshold for the year, she said.

"If we would close those loopholes, we would generate additional revenue without any additional taxes on any Pennsylvania consumer," Schwank said.

While legislators wait and see, state residents by law are supposed to be paying use tax directly to the state, if the seller didn't collect it at the time of the sale.

Instructions on personal income tax returns provide information on that. However, to pay the tax the buyer must file a separate use tax return.

Few people know that. If they do, they also know the state isn't likely to try to come after them for not paying it.

Dan Hassell, the state's deputy secretary for tax policy, implied as much in his testimony before the House Finance Committee.

He admitted the state concentrates on businesses required to pay use tax because they make most of the payments.

"While we can't offer exact numbers on how many individual taxpayers self-reported last year, it's safe to say it was a very small number," he testified.

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