PA Online Sales Tax Guidelines Claim First Casualty

When the Pennsylvania Department of Revenue issued a new bulletin instructing online vendors about collecting state sales tax, tax reform advocates expressed a lot of concern. The new guidelines were intended to clarify existing law, but still leave a lot of things unclear, and room for the department’s judgment of “nexus.”

Following the new directive, at least one online retailer has cut off all Pennsylvania ties. The online store told the Commonwealth Foundation that “we did recently terminate our PA Affiliate Relationships based on the recent PA tax legislation” [though there was no legislation].

This means less revenue for Pennsylvania residents who sell or advertise with the site.

Federal courts have ruled that states can only require businesses with a “nexus” in the state to collect sales tax from shoppers, based on the Interstate Commerce clause. Residents are still responsible for the “use tax” on goods they buy out of state. While state law has always had broad definition of “nexus,” going beyond simply having a physical presence, the new memo implies that almost any connection — including advertising on Pennsylvania-based web sites — could subject a company to state law.

Recently states have tried to go after Internet-only retailers to collect more revenue. Often this comes in the form of “Amazon taxes,” targeted at, the largest online retailer, though the company on average represents a small portion of online sales. In fact, Amazon has come up with a new strategy to profit off of state efforts — offering to serve as “tax collector” for other retailers for a fee.

But other retailers, particular smaller ones, will face significant compliance costs to figure out which of the more than 8,000 sales tax rates across the country to charge each user. And Amazon taxes have backfired in other states, resulting in online retailers dropping all local ties and pulling out of the state, and frequently fail to generate significant revenue.

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