United States: Pennsylvania Department Of Revenue Asserts Authority To Impose Sales Tax Collection And Remittance Responsibility On Remote Sellers

On December 1, 2011, the Pennsylvania Department of Revenue issued Sales and Use Tax Bulletin 2011$01, in which the Department asserts that under current Pennsylvania law, a remote seller without physical presence in Pennsylvania, including those making sales over the Internet, may have nexus with Pennsylvania for sales and use tax purposes. The determination of nexus will depend on the activities and in$state presence of subsidiaries, representatives or agents with whom the remote seller has relationships.

Overview of Bulletin

The Bulletin discusses the statute and applicable case law while providing examples of business activities of remote sellers which the Department believes create sales tax nexus with Pennsylvania.

In an effort to familiarize remote sellers with Pennsylvania's sales tax law, the Department first "reminds" all vendors, including remote sellers, that they have a sales tax collection responsibility on sales made to Pennsylvania customers if they maintain a place of business in Pennsylvania. The Department then reiterates the definition of "maintaining a place of business in this Commonwealth" which includes, to no surprise, such activity as having an office or warehouse, soliciting sales, and providing repair or assembly services in Pennsylvania. But presumably to narrow the discussion to remote sellers, the Department emphasizes the following paragraphs of the definition and certain language contained therein:

The Department then discusses Scripto, Inc. v. Carson² in which the United States Supreme Court held that a vendor who sent independent contractor sales representatives into Florida to solicit sales on its behalf had sufficient physical presence to permit the imposition of Florida use tax (the Department also cites Quill Corp. v. North Dakota³ in support of the result in Scripto). The Department takes the position that based on Scripto and Quill and the definition of "maintaining a place of business in this Commonwealth," "a remote seller can have nexus with Pennsylvania because of its relationship with third parties who act as agents or representatives of the remote seller who have a physical presence within the Commonwealth."

Based on the foregoing, the Department provides the following examples of remote seller activities that constitute maintaining a place of business in Pennsylvania for sales tax purposes and, thus, a sales tax collection and remittance responsibility:

• Storing property of the remote seller or its representative at a distribution or fulfillment center located in Pennsylvania;
• Utilizing affiliates, agents or independent contractors to perform repair, delivery or other services relative to the property sold by the remote seller, or services that benefit, support or complement the remote seller's business (e.g., soliciting sales); and
• The remote seller's employees regularly traveling to Pennsylvania.

These examples should not be a surprise – generally such activities have been recognized as sufficient to establish nexus. However, and of particular interest to remote sellers, the Department also provides the following examples of activities that create sales tax nexus with Pennsylvania:

• A remote seller has a contractual relationship with a Pennsylvania$based entity or individual whose Web site has a link encouraging purchasers to place orders with the remote sellers, and consideration from the remote seller is paid to the Pennsylvania$based entity or individual.
• A remote seller accepts orders directly shipped to Pennsylvania customers from a Pennsylvania facility operated by a remote seller's affiliate, agent or independent contractor.
• A remote seller regularly solicits orders from Pennsylvania customers via the Web site of a Pennsylvania$based entity or individual (for example, by using click$ through technology).

Commentary

This Bulletin is another prong of the Department's recent multi$faceted strategy to collect the $410 million in sales and use tax revenue Pennsylvania is estimated to lose from Internet transactions in 2012.⁴ The Department has also added a use tax line to the 2011 Pennsylvania individual income tax form (Form PA$40) to better facilitate the reporting of Pennsylvania use tax by individual taxpayers. These efforts are intended to "level the playing field" for in$state brick and mortar companies that are subject to Pennsylvania sales and use taxes and employ Pennsylvania residents, but are at a competitive disadvantage relative to remote sellers that do not charge Pennsylvania sales tax.

As the Department believes it has the authority to impose a sales tax collection and remittance responsibility on remote sellers under the present language of the statute, and the Department's specific reference to this Bulletin as a "reminder" to remote sellers having nexus of what has presumably always been their obligation to collect Pennsylvania sales tax, it raises the question of what the Department might do to pursue what it considers to be prior period sales and use tax liabilities. Remote sellers should evaluate their potential exposure in light of the Department's position and their own facts and circumstances.

As noted above, the Department's position that it has the authority to impose a sales tax collection and remittance responsibility on remote sellers under present Pennsylvania law is based on Scripto and Quill and certain provisions of the definition of "maintaining a place of business in this Commonwealth" which apply to subsidiaries, representatives, and agents of a remote seller. Importantly, the Department does not mention in the Bulletin the special facts and circumstances in play in Scripto. The independent contractor sales representatives in Scripto were contractually described as independent contractors of the taxpayer (which carries with it certain legal consequences), actively engaged in sales solicitation in Florida as representatives of the taxpayer, had the authority to enter into a contract of sale with the taxpayer's customers, and carried the taxpayer's catalogs, samples, and advertising material with them. The activities of the independent contractor sales representatives in Scripto appear to exceed that of an entity or individual physically located in Pennsylvania whose Web site merely has a link that encourages purchasers to place orders with the remote sellers, or of a Web site of an entity or individual physically located in Pennsylvania which merely allows a remote seller's customers to "click$through" to its Web site. It is questionable as to whether such Pennsylvania$based entity or individual would qualify as an agent or representative of the remote seller in all cases, as required by the Pennsylvania statute.

Realizing, perhaps, the potential non$business$friendly and contentious results if the Department were to assert remote seller nexus for prior periods and pursue the collection of unpaid taxes, the Department simultaneously issued a news release (along with the Bulletin) in which it implies it will not pursue remote sellers having nexus that register with the Department for sales tax purposes no later than February 1, 2012.⁵ Conversely, the news release explicitly states the Department will pursue enforcement against companies with nexus that "fail to begin" collecting Pennsylvania sales tax as required by law, including to look back at least three years under the Pennsylvania statute of limitations. Thus, the Department appears to be offering an "olive branch" to remote sellers who have "maintained a place of business in this Commonwealth" as interpreted in the Bulletin but were unaware. For a remote seller, the question then becomes whether to accept this "olive branch," register for sales tax purposes by February 1, 2012 and prospectively subject itself to a Pennsylvania sales tax collection responsibility.⁶ The answer to this question should be based upon a separate analysis of each remote seller's facts and circumstances, including consideration of potential exposure to Pennsylvania sales tax on prior period transactions, the remote seller's activities in Pennsylvania and its relationships with affiliates and Web site operations located in Pennsylvania, among other factors.

It should be noted that prior to the issuance of the Bulletin, on October 3, 2011, following the trend in several other states,⁷ Pennsylvania legislators introduced House Bill 14 (H.B. 14) to amend the definition of "maintaining a place of business in the Commonwealth" to include: (i) in$state affiliate nexus provisions; and (ii) a provision which imposes a sales tax collection and remittance responsibility on a remote seller who enters into an agreement with a Pennsylvania resident who refers potential customers via a Web site link in exchange for consideration and the sales from the referrals exceed $10,000 during the year. The existence of this proposed legislation suggests that at least some Pennsylvania legislators may disagree with the Department's assertion that it presently has authority to impose a sales tax collection and remittance responsibility on remote sellers, at least with respect to the click$through nexus issue (and may even undermine attempts by the Department to apply the Bulletin and remote seller nexus to transactions that pre$date the effective date of H.B. 14 if enacted), because it would not be necessary to enact such legislation if the Department already has the authority.

Footnotes

1 72 PA. CONS. STAT. § 7201(b) (emphasis supplied as provided in the Bulletin).

2 362 U.S. 207 (1960).

3 504 U.S. 298 (1992).

4 Robert P. Strauss, Failure to Tax E_Commerce Hurts PA, Centre Daily Times, July 22, 2011, available at http://www.centredaily.com/2011/05/24/2731407/failure$to$tax$e$commerce$hurts.html.

5 News Release, Revenue Department Clarifies Existing Sales Tax Nexus Law for Remote Sellers, Pennsylvania Department of Revenue, Dec. 1, 2011.

6 Depending on its facts and circumstances, a remote seller may want to consider entering into a formal voluntary disclosure agreement with the Department to limit the potential look$back to three years.

7 Arkansas, Connecticut, Illinois, New York, North Carolina and Rhode Island have enacted statutes with similar language. In Amazon.com LLC v. New York Department of Taxation and Finance, New York Supreme Court, Appellate Division, No. 07823, Nov. 4, 2010, the Appellate Division of the New York Supreme Court held that New York's remote seller nexus provision was facially constitutional under the Commerce and Due Process Clauses but did not conclude as to whether it was constitutional as applied to the taxpayer's New York business activities due to insufficient discovery on the issue. The Appellate Division reinstated the complaint filed with the lower court for further proceedings with regard to the claims that, as applied, the statute violates the Commerce and Due Process Clauses. Litigation on these issues in New York is still proceeding.

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