SALES TAX TUESDAY 2018: Pennsylvania

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William Penn proudly founded this state in 1681 on the values of tolerance and freedom. Pennsylvania is known as the ‘Keystone’ state.  References of Pennsylvania as the “the keystone in the federal union” and the “keystone in the democratic arch” date back to the state’s prominence in the independence of our country. A keystone is an architectural term for the central, wedge-shaped stone in an arch which hold all the other stones in place. Pennsylvania has always been at the center of America as a nation.

Thanks to Avalara, the 'tax people', this article is one in a new (2018) 50 part series, covering sales tax issues associated with each and every state tax jurisdiction in the United States. Insightful Accountant is publishing Sales Tax Tuesday 2018" articles every Tuesday to give you updated information as well as another look at some of the key information from our 2015 series. So, come take a ride with me in my big RV as we journey from state-to-state looking for what's great, and paying sales taxes all along the way.

Our third state in this new series is Pennsylvania, whose history spans five centuries and weaves a storied fabric of revolution, innovation, and vision. Our nation was born in Philadelphia on July 4, 1776...

saved at Gettysburg July 1-3, 1863...

and thrust into the Industrial Revolution beginning in the mid-1700’s with coal mining and continuing with Andrew Carnegie’s steel mills in the 1800’s.

Philadelphia is the epicenter of U.S. patriotism and was the U.S. capital city at one time. The Declaration of Independence was written and adopted there.

There we find the Liberty Bell and the very first American Flag sewed by Betsy Ross.

Pennsylvania's history is deeply rooted in freedom of religion and spiritual expression. These essential freedoms were principles set forth by William Penn and his followers in establishing Penn's Woods and in creating the frame of government.

Pennsylvania is one of four states that share the designation “Commonwealth.” The other three are Virginia, Kentucky and Massachusetts. The state’s first constitution (dating back to 1776) referred to Pennsylvania as both State and Commonwealth. While both terms are still used today, all legal processes make use of the term Commonwealth.

Pennsylvania was the second state admitted to statehood in the U.S. It is the only original colony not bordered by the Atlantic Ocean.

Pennsylvania is the 33rd largest state at just over 46,000 square miles; the 6th most populous at more than 12.8 million residents, and the 9th most densely populated of the 50 United States, with a median income of $48,600. Within that 46,000 square miles there are not only lots of places of history, but lots of places of beauty, like the Delaware Water Gap National Recreational Area which is a 70,000 acre protected area along 40-miles of the Delaware National Scenic River within not only Pennsylvania but New Jersey as well.

But if it is one thing other than our nation’s history I think about when I hear the name ‘Philadelphia’ it’s something great to eat in the form of a ‘Philly cheese steak’.  Experts will argue over the best, does it come from ‘Pat’s King of Steaks’ or ‘Geno’s Steaks’…why worry about it, just have one of each after all they are across the street from each other.

Many locals don’t even worry about the rivalry, they turn their attention to places like ‘Steve’s Prince of Steaks’, ‘Jim’s Steaks’, ‘Dalessandro’s Steaks’, or ‘Sonny’s Famous Steaks’.  It doesn’t matter where you buy your ‘Philly steak’ you will pay sales tax at all these places, but it’s still worth it. (And no, I’m not saying from which place this came.)  Of course, if you buy the ingredients at a local store and take them home to make your own 'cheese steak', you won't pay any Pennsylvania sales tax on those groceries.

But as big as Independence Day might seem to be in Pennsylvania, I'm not sure it tops another annual celebration held each February 2nd.  Perhaps if we had gotten this year’s Sales Tax Tuesday series started in early January we would have been ready to cover Pennsylvania in time for this notorious event held at Gobbler’s Knob in the Pennsylvania Wilds. 

I am of course talking about the celebration of Groundhog Day when Punxsutawney Phil, prognosticates as to the end or continuation of Winter. This celebration has been observed in Punxsutawney ever since 1886 and now more than 20,000 visitors trek into the small community each year to watch Phil make his forecast.

Besides home to the first 'Groundhog Day' celebration, Pennsylvania lays claim to many other “firsts,” including the first computer, the first daily newspaper, the first presidential mansion, the first public zoo (founded by Benjamin Franklin), the first baseball stadium (Forbes Field) and the first Little League World Series (held in Williamsport, PA).

Another first, the forerunner of what today we call “Sales Tax”, academics have traced the origin of sales tax in the United States back to a mercantile license tax introduced in 1921 in Pennsylvania. That's why we had intended to bring you Pennsylvania as the first state in our 2018 Sales Tax series, but we felt we had to preempt that status in order to provide information on the two states with immediately impending sales tax amnesty.   

And speaking of sales tax, did you know that for many states, other than income tax, sales tax is the largest source of tax in the majority of states that collect it.  Similarly, for many local jurisdictions, with the exception of property taxes, sales tax fills the majority of their coffers as well.  No matter what state you live in, or where you travel, most state and local governments are out to collect every dollar of tax they think is due them, along with plenty of fines, and penalties if they decide you are delinquent, past due, or have underpaid.

The Pennsylvania Department of Revenue (PDOR) has a 44 page 'Retailer's guide' on State and Local Sales and Use taxes that is not even a complete listing of every possible tax and non-taxable item that could be sold. But using the simplistic definitions in that guide it would be easy for a merchant to get lured into a false sense of compliance thinking that they are collecting when they should, or when they shouldn’t. 

Staying current on the particulars of sales and use tax is almost a full-time job, that’s why you need a sales tax expert like Avalara to help you do more than just 'prognosticate' your sales and use tax liabilities, cause Punxsutawney Phil won't be bailing you out of a sales tax jam if you find yourself in an audit by the PDOR.

So, let’s take a look at just a few of the Pennsylvania sales tax facts. By the way, for some essential sales tax definitions be sure to check out the opening article to this series.

  • The Pennsylvania Department of Revenue is responsible for Sales and Use tax administration within the state. Businesses in Pennsylvania are required file and remit sales tax electronically.
  • Pennsylvania’s state sales tax rate is 6%. Depending on the local municipalities, the total tax rate can be as high as 8%.
  • Sales tax is to be collected on the full purchase price of taxable goods without any deduction on account of the cost of labor, shipping, handling, delivery or installation.
  • The following sales are not subject to tax: The services of repairing, altering, mending, pressing, fitting, dyeing, laundering, dry cleaning or cleaning wearing apparel including formal wear and shoes; residential use of steam; natural, manufactured and bottled gas; fuel oil; electricity; basic telephone service and subscriber line charges. Drugs or medical supplies. Coal (a major source of heating in the area). Grocery store food and water. And in their patriotic fashion, flags of the United States and Pennsylvania.
  • Pennsylvania is one of only 11 origin sourcing states. This means that sales tax is based on the location of the seller, not the buyer. Pennsylvania is not a member of Streamlined Sales Tax (SST)
  • Pennsylvania is one of 20 states that have enacted click-through nexus laws to require out of state sellers to pay sales tax on sales made through website links over a certain threshold. Maybe you are not aware of what ‘click-through nexus’ really is.  Let’s say you have an online store where customers purchase merchandise. You also have an affiliate program that lets other websites send potential customers to your online store (in other words your affiliates customers click through the affiliates website into your website). If you compensate your affiliates for purchases made via that ‘click-through’, then you have created a click-through nexus with the state in which the affiliate is located.
  • As of March 1, 2018, Pennsylvania will require non-collecting retailers to identify customers for purposes of use tax collections. In addition to reporting customer information, non-collecting retailers are also required to notify customers of their obligation to report and pay use tax.  Non-collecting retailers will have to file annual customer reports with the Pennsylvania Department of Revenue containing the name of the purchases, the address of the purchaser, and the total dollar amount of reportable purchases including shipping charges and fees. Non-collecting retailers must also provide their customers with an annual summary of total amount paid including taxable shipping charges and other fees, the dates of each purchase, the amounts of each purchase on those dates, and the taxability of each purchase.

Fireworks maybe used to celebrate the 4th-of-July almost everywhere across this country, but in Pennsylvania the birthplace of our nation, starting this past October (2017) the State now charges an additional 12% (firecracker) tax on the sale of consumer fireworks in addition to the regular amount of sales and uses taxes already imposed on such sales. 

At the exact same time Pennsylvania exempted Kegs for malt or brewed beverages from sales and use taxes under a special ‘beer keg exemption’.  The home of our nation’s independence must now think it better to celebrate Independence Day with ‘malt beverages’ rather than ‘firecrackers’.

Like many other states looking for additional sources of revenue, in 2016 Pennsylvania legalized marijuana for medical purposes.

While the Pennsylvania Department of Health is responsible for the regulation of medical marijuana, the Department of Revenue is responsible for taxation related to medical marijuana.  The sale of medical marijuana is not subject to sales tax; however, there is a 5% tax on the gross receipts received from the sale of medical marijuana by any grower or processor to any authorized dispensary under something they call the ‘Seed to Sale’ system.  Leave it to government to find some 'special name' for some 'special provision' for some 'special tax'.

And while you won't pay sales tax on medical marijuana, you will pay sales tax on coin-operated compressed air and vacuuming machines, so when it comes to putting air in your flat tire or cleaning out the residue of that 'reefer' in the floor of your car, you can't declare your independence from the Pennsylvania tax man.

Whether you are collecting sales tax on Philly Cheese-steaks, Fireworks, or compressed air, you need to know for certain that you are properly administering your responsibilities under Pennsylvania's sales and use tax code. Trying to remain compliant manually makes you prone to error and consumes valuable hours of your time in collection, accounting and reporting for what is pass-through paperwork rather than revenue-generating activities.

Avalara provides solutions for sales tax automation, including tax calculation, exemption certificate management, returns processing and 1099 filing and reporting. Automation via Avalara give you the assurance of compliance without sacrificing productivity so that your sales tax is way less taxing than ever before.