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PA Delays Enforcement of Online Sales Tax Law

Out-of-state online retailers will not collect sales tax on goods they sell to Pennsylvania residents until Sept. 1.

By Stacy Brown | PA Independent

Out-of-state retailers will not collect sales tax on goods they sell online to Pennsylvania residents until Sept. 1, according to the Pennsylvania Department of Revenue

Meanwhile, as retailers adjust to the newly interpreted tax law, state residents must track the 6 percent sales tax on the goods they purchase and declare that amount on their 2011 tax return forms, according to the state tax code. 

Opponents of the new law, which originally was expected to go into effect Feb. 1, said the state will lose more than $22 million in revenue, because Internet companies won't do business here. 

Proponents said the law in the long term will allow Pennsylvania to collect an estimated $380 million. 

The delayed enforcement of the new tax law was timed to allow Congress to pass national legislation on collecting sales tax on online purchases. 

Under the state tax law, out-of-state retailers have a physical presence in the state, known as a nexusand collect the tax from consumers if they have affiliate marketers. These marketers are companies connected to Internet merchants and distribute their products or carry their advertising in exchange for a commission. 

In 1992, the U.S. Supreme Court ruled that states do not have the authority to require out-of-state businesses to pay sales tax, unless the business has a physical presence in the state. 

Fingerhut Direct MarketingOverstock.com and others have stopped advertising on local websites, because they have been declared to possess nexus. 

Mostly, the merchants are third-party websites, which contract with retailers to advertise their products or services. Some are used by online shoppers to hunt for bargains, as well as small mom-and-pop blogs that run affiliate marketing ads. 

About 1,000 of Pennsylvania's 9,000 affiliate marketers terminated agreements because of the law, according to California-based Performance Marketing Association, or PMA, a nonprofit that advocates for affiliate marketers around the country. 

"Affiliate marketers in Pennsylvania earned more than $700 million in 2010, and paid about $22 million in state income tax," said Rebecca Madigan, PMA executive director. "When similar laws passed in other states, affiliate marketers lost 25 (percent) to 35 percent of their income when just 800 to 900 out-of-state retailers terminated their advertising campaigns to avoid sales tax collection nexus." 

As retailers face new tax obligations, Pennsylvania residents who buy goods online have been expected to declare the sales tax, but few do. This year marks the first time the state has included a line item for Internet purchases on individual tax forms. 

“Collecting the tax (was) a voluntary compliance initiative," said Revenue Department spokeswoman Elizabeth Brassell, who estimates that with enforcement the state would collect about $380 million in tax revenue. 

"However, as with any tax, if...the department comes across...a liability (that) was not accurately reported, we have the authority to go back and pursue penalties and interest,” she said.  

The state isn't seeking to penalize consumers. It simply wants retailers to comply with charging the state’s six percent sales tax on purchases, Brassell said.

In an interview with Forbes Magazine this week, Revenue Secretary Dan Meuser said he and Gov. Tom Corbett want to enforce the law in a reasonable manner.

Out-of-state sellers who have not collected state sales tax can register to remit the taxes by Sept. 1, and the state will not pursue them for previous sales taxes they should have collected, Meuser said.

After that, Meuser said, Pennsylvania could pursue merchants for back taxes.

Enforcement tools include assessments, audits, liens and criminal tax evasion prosecution by the state attorney general, Brassell said.

The enforcement requirement was lauded by those who say mom-and-pop outfits--as well as brick-and-mortar stores--needed help in leveling the playing field with bigger online retailers.

"While Main Street retailers are disappointed with any extension, we understand the need to make sure online-only retailers absolutely and unequivocally comply," said Dan Hayward, a spokesman for the Pennsylvania Alliance for Main Street Retailers, which advocates for small businesses and supports the online tax. 

"Compliance has always been the most important component to bringing e-fairness to the commonwealth," Hayward said. 

Pennsylvania joins California and Colorado, who want online retailers to collect sales tax. 

According to the New York Times, when California Gov. Jerry Brown signed similar tax legislation into law last June, Amazon terminated its relationship with some 10,000 California affiliates. One of them was MyBargainBuddy.com, a 12-year-old affiliate marketing-based shopping portal based in Murrieta, Calif.

As a result, more than 60 percent of the more than 3,000 retailers whose products were advertised there decided to drop the site, leaving it to post links only to the small group of retailers with physical stores or other operations in the state.

In Colorado, Invisible Shoes, a two-year-old maker of huarache-style running sandals based in Boulder, lost in two ways during a similar battle over sales tax.

Because of a Colorado law passed in 2010, Amazon canceled the company’s affiliate account, which meant Invisible Shoes could not run affiliate advertising for the third-party products, such as books and creams sold to its shoe customers. 

National legislation ultimately could save affiliate marketers and retailers, Madigan said. Twenty-four states have signed on to the Streamlined Sales and Use Tax Agreement, a plan to simplify sales taxes. 

The U.S. Congress is considering a federal bill--USHB 3179--that would give states that simplify their sales tax systems the right to make out-of-state retailers collect taxes.

While the national bill is far from becoming law, affiliate marketers are breathing easier.

"Moving the deadline to Sept. 1 is great news because we're hopeful that, before then, Congress will act in our favor and we won't have the problem," Madigan said.

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