— Tax-free online purchases will be curtailed in Pennsylvania starting next month, but activists pushing for a federal law say much more needs to be done to address the issue of tax-free Internet shopping, and the millions in sales tax that states are missing out on.
Pennsylvania alone would lose between $254 million and $410 million in uncollected revenues this year without legislative intervention, according to a 2011 study by Carnegie Mellon University professor Robert Strauss.
But starting Sept. 1, online retailers with a physical presence in the state will have to pay at least 6 percent sales tax for items purchased by Pennsylvanians. And for those shoppers in Allegheny County, the online sales tax would be 7 percent -- a 6 percent share going to the state, and an additional 1 percent for Allegheny County. In Philadelphia, they tack on an extra 2 percent, meaning the online sales tax -- just like the regular, bricks-and-mortar sales tax -- would be 8 percent.
Taxes would apply to all purchases made in the state, delivered to the state or used within the state. Items shipped to and from in-state distribution centers and warehouses, sales and services provided by people from out of state, and advertising relationships where compensation is based on sales and website clicks are also subject to being taxed under the new law.
A spokesman from the Pennsylvania Department of Revenue said the state estimates next month's change will bring in an additional $42.8 million for the 2012-13 fiscal year. The adjustment will allow the state to collect from major retailers such as Amazon, which has a distribution center outside of Allentown, Pa., and eBay, which has a warehouse in Chester, Pa.
Dan Hayward, spokesman for the national coalition Alliance for Main Street Fairness, called the legislation a "great first step" in closing the loophole, but said legislation pending in various federal government committees could finally solve the problem.
"Passage of the Marketplace Fairness Act will help standardize tax rates for the thousands of taxing jurisdictions in the United States. This will help small business owners easily collect and remit sales tax," he said.
The Marketplace Fairness Act, introduced in the U.S. Senate in November by Sen. Mike Enzi, R-Wyo., requires states to create a "Streamlined Sales and Use Tax Agreement," which assigns a state-level agency to collect and administer taxes and provides a single audit and single tax return for all state and local jurisdictions. It also requires retailers to use the sum of state and local tax rates to determine what's owed, and tasks states with providing adequate software and services for them to pay taxes.
Retailers with less than $500,000 in sales per year would be exempt from the federal act. Small retailers are also exempt from penalties for mistakes made during the tax collection process. The bill is awaiting action from the Senate's finance committee.
Another proposed federal law addresses the issue, but gives states more leeway in establishing how taxes will be collected -- the Marketplace Equity Act of 2011, introduced by Rep. Steve Womack, R-Ark., also requires states to designate a single entity to collect online sales taxes. That act exempts smaller businesses with sales of less than $1 million nationwide, or $100,000 statewide. The bill was referred to a Senate committee in October.
Jason Brewer of the Arlington, Va.,-based Retail Industry Leaders Association said both bills have bipartisan backing and stand a good chance of passing when Congress returns from summer recess. He said 26 states have already done the work necessary to meet requirements of the Marketplace Equity Act. Although many of the giants behind online commerce have automated programs that cover everything from federal sales tax to estimated shipping times, addressing fluctuating tax laws in thousands of jurisdictions hasn't been a simple feat.
"The sales tax issue needs to be resolved at the federal level and we're actively working with the states, retailers and Congress to get federal legislation passed. ...Today's technology allows online sellers to collect and remit sales taxes like brick and mortar retailers. There are numerous providers of collection and remittance services," wrote an Amazon spokesperson in an email.
Mr. Hayward agreed with Amazon that automated tax software programs have used for years when dealing with out of state transactions and said it should be a simple fix for online companies to implement the technology and comply with the law.
"A lot of brick-and-mortar stores and smaller businesses are doing what is asked, this is not new for them. So they're asking, if we can do it, how come Overstock.com and eBay can't do it?" he said.