2011-02-24 / Local & State

Pa. Cracking Down On Businesses Over ‘Use Tax’

By Jan Murphy

HARRISBURG, Pa. (AP) – Buying furniture and office supplies online from an out-of-state company might be cheaper than buying in Pennsylvania. But those items are not exempt from the state’s use tax, which applies to purchases made online, through mail-order catalogs and from out-of-state retailers.

The state Department of Revenue is trying to collect that money.

The agency is targeting businesses that have paid no use tax to the commonwealth in recent years, suspecting they likely bought taxable items from outof state companies.

This is part of the agency’s efforts to find every scrap of tax revenue as the state scrambles to address a budget deficit of more than $4 billion.

Even with this push, though, the state is not going after Amazon or other big online national retailers that do business in the state but do not collect sales tax from their Pennsylvania customers. Revenue Department lawyers say such a mandate likely wouldn’t withstand a court challenge because of a previous court ruling.

But the agency is trying to get Pennsylvania businesses to pay the use tax on purchases from out-of-state companies.

Pennsylvania is missing out on as much as $345 million annually in use-tax revenue on products or services purchased online from out-of-state companies, the department says.

The use tax is similar to the state’s 6 percent sales tax and is applicable to the same items. It applies to purchases made from companies outside the state.

If a Pennsylvania resident buys computers or cleaning supplies from out-of-state companies, he is supposed to report that use tax to the Revenue Department andpaya6percent tax.

Granted, asking people to self-report a tax – a tax that only they know they incurred – is a tall order.

Still, the Revenue Department said the law requires them to report and pay it.

Since July 1, the department has mailed out more than 100,000 notices to Pennsylvania businesses to remind them about their responsibility to report and pay the use tax.

A Harrisburg businessman who received one of the notices bristled at its wording, as well as the expense the state incurred in sending it to him.

It states, “Department of Revenue records indicate your company has not reported or remitted use tax in the past three years.’’ The eight-page letter included a tax form to report the tax, along with literature about what the use tax is and examples of products and services subject to it.

The business owner, who asked to remain anonymous for fear that the department might become more vigilant about auditing his tax records, insists he truthfully reported that he incurred no use-tax liability in the past three years. He resented filing yet another form verifying it.

He said he understands that not reporting or paying the use tax when it is owed is stealing from the commonwealth. “But to send out a blanket form saying you haven’t paid your taxes in three years to everybody with a sales tax license seems like a waste,’’ he said.

Revenue spokeswoman Elizabeth Brassell said the department has tried to target small businesses that most likely incurred use-tax liabilities.

The state collected $373 million from use taxes in 2009-10, with most of that coming from 41,000 businesses, she said.

Some individuals pay it, but Revenue Department officials suspect it’s a fraction of those who should be paying it. “We’re talking hundreds, perhaps a thousand, individuals reporting use liabilities,’’ Brassell said.

Unlike other states, however, Pennsylvania is not going after big national retailers such as Amazon. Several states have sued Amazon in an attempt to claim sales tax revenue.

However, the Revenue Department said an unfavorable Commonwealth Court ruling in 1989 sets a precedent that makes Pennsylvania a less-viable candidate to take the lead in a court battle over online sales.

In that ruling, the court found that though the retail chain Bloomingdales operated stores in Pennsylvania, Bloomingdales By Mail was a separate entity, despite the fact that its catalog sales could be returned to Bloomingdales stores and the mail-order section had the same owners as the department store chain.

As a result, the court ruled that Bloomingdales By Mail did not have a physical presence in Pennsylvania and therefore could not be compelled to collect sales tax on sales made to Pennsylvania residents, as is the case with Pennsylvania-based companies.

“The challenge is that businesses with very talented lawyers and tax planners can set themselves up in a sophisticated way that essentially avoids establishing a (presence) in a state,’’ Brassell said.

A 1992 Supreme Court ruling determined that until Congress acts, states may require businesses that have a presence in their state to collect and remit only sales tax. The court said such a mandate would create an undue burden given the varying sales tax rates that states charge and the differences across states about which items are subject to that tax.

But states are beginning to team up to find ways to get past this roadblock.

In 2002, a multi-state pact, the Streamlined Sales and Use Tax Agreement, was born. It requires states that sign on to it to comply with a uniform set of rules concerning what items and services are subject to the sales tax in their states.

This effort has been endorsed by 24 states and is aimed at pushing Congress to pass a law requiring large Internet and mail-order retailers to collect sales tax and remit that money to states.

Christopher Rants, a former Iowa House speaker, recently spoke to state House members about Pennsylvania joining this effort. He said it brings tax revenue and helps level the playing field for brick-and-mortar businesses that compete with online and mail-order retailers.

More than 1,400 companies voluntarily collect sales tax from their customers and remit it to their customer’s home states if they live in a state that has signed the agreement.

While the idea piqued the interest of some Pennsylvania House members, Rep. Scott Perry, R-Dillsburg, wasn’t sold on it. He said if the state were to join this effort, it could put Pennsylvania companies at a price disadvantage with competitors in states that are not participants.

Pennsylvania companies that don’t tax online purchases might help themselves, plus bring more money into the state, by foregoing collecting the sales tax, Perry said.

Diane Krulac, owner of Brittle Bark in Mechanicsburg, said it would put her at a disadvantage if the sales tax were added to out-of-state customers’ bills.

“We are a worldwide economy now, and we compete on a daily basis over the Internet with all kinds of business. So any time you can gain a competitive advantage by not having them have to pay sales tax is important to business,’’ she said.

The hassle of filling out sales tax-related paper work in other states is why she stopped going to craft shows in other states to sell her homemade brittle candy and took her business to the Internet, she said.

“If they want us to do it, they should be legislating it at the federal level and take away the burden of me having to know what 50 states require for me to do business in them,’’ Krulac said.

A spokeswoman for Gov. Tom Corbett said the issue has not risen to the governor’s attention.

But short of the state getting involved in that multi-state effort or until Congress enacts a law requiring large companies to collect sales taxes, the Revenue Department can ask individuals and businesses only to self-report the tax they owe from buying through out-of-state companies.

“We’re looking for new strategies to collect use-tax collections, but this online arena continues to prove a challenge,’’ Brassell said. “We’re relying on self-reporting. So if you don’t report it, we don’t know its owed.’

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