Pennsylvania to Close Online Sales Tax Loophole — a Little

Over the years, online retailers have been resistant to collecting sales tax from Pennsylvania customers for otherwise taxable purchases. Doing so gave these companies an unfair price advantage over their bricks-and-mortar competitors that are, rightfully, required to collect sales tax.

The Scranton Times Tribune reports that the playing field will be leveled somewhat, as revised Department of Revenue rules go into effect for sales tax collection next month.

What does this mean for the average consumer? If you buy items from Amazon or other online-only retailers that have warehouses or other related business locations within the commonwealth, you will be charged sales tax on applicable purchases. Until now, these online companies often did not charge sales tax, passing on the responsibility for paying use tax on the purchase to you, the consumer.

If you buy online from companies with stores in Pennsylvania, such as Walmart, Target, Barnes & Noble, or Lowe's, you have already been paying sales tax on these purchases.

The new rule won't encompass all online purchases. Online retailers with no physical presence in Pennsylvania will still be unlikely to collect sales tax — buy an item online from one of these retailers, and it will still be your responsibility to pay the use tax. Offers of "tax free shopping" are misleading; Pennsylvania taxpayers still owe use tax on such purchases — and should be reporting and paying the tax with their personal income tax return.

The revised online sales tax rule is a step in the right direction. Up until now, Amazon had not collected sales tax from purchases in Pennsylvania under the claim that its warehouses were owned and operated by a separate legal entity for tax purposes, even though the facilities were adorned with Amazon logos. The kicker for fair tax folks is that the commonwealth provided Amazon with economic development subsidies to build those facilities here, but the company chose to continue its strategy of claiming structural independence to avoid collecting the tax.

Other states (New York, Colorado and Texas, to name a few) blazed the way in closing this loophole. Some companies have warned that they would pull out of a state that takes such action, but that is unlikely in a large state like Pennsylvania, flush with customers.

Not surprisingly, there is a big plus for Amazon, too, for collecting the sales tax — increased access to customers by having warehouses spread out across the U.S. This is important if Amazon goes through with its plan to offer same-day delivery of many of its products, as reported (paywall) by The Financial Times

Ironically, bricks-and-mortar retailers, which fought long and hard to level the sales tax playing field with online retailers, could end up with an Amazon on every corner, so to speak.

For now, Pennsylvania is expecting to receive about $50 million in additional revenue in 2012-13 from the sales tax rule change. A far cry from the hundreds of millions of dollars in lost online sales tax revenue that bricks-and mortar retailers estimate. Still, it is a start.

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