Remote sellers to tax digital goods in Pennsylvania, April 2019

Although in-state sales of digital goods have been subject to Pennsylvania sales and use tax since 2016, remote sales of digital goods are currently exempt. That will change April 1, 2019, when certain out-of-state sellers will be required to collect and remit sales tax on digital goods sold in the Keystone State.

Let’s back up.

2016: Digital goods deemed taxable in Pennsylvania

Act 84 of 2016 extended Pennsylvania sales and use tax to items delivered to a customer electronically, digitally, or by streaming, “unless the transfer is otherwise exempt,” as of August 1, 2016. According to the Pennsylvania Department of Revenue, “This includes music or any other audio, video such as movies and streaming services, ebooks and any otherwise taxable printed matter, apps and in-app purchases, ringtones, online games, and canned software, as well as any updates, maintenance, or support of these items.”

For remote sellers of digital products, the key phrase in the above paragraph is “unless the transfer is otherwise exempt.”

Back in 2016, remote sales were exempt from Pennsylvania sales and use tax. As in all other states at the time, the only vendors who could be held responsible for collecting sales and use tax were those with a physical presence in the state. Thus, sales of digital products by out-of-state sellers were exempt.

2017: Pennsylvania works around physical presence rule

To work around the physical presence constraint, Pennsylvania and a few other states developed non-collecting seller use tax reporting laws in 2017. These required non-collecting sellers (i.e., those that make sales but have no physical presence in the state) to make a choice: Either collect and remit Pennsylvania sales tax or comply with notice and reporting requirements for non-collecting sellers.

2018: Pennsylvania enforces non-collecting seller use tax reporting and requires marketplace facilitators to collect and remit tax on behalf of sellers

Pennsylvania Act 43 of 2017 imposed that choice on referrers, remote sellers, and marketplace facilitators with at least $10,000 in aggregate taxable retail sales in Pennsylvania.

Thus, as of March 1, 2018, such vendors are required either to comply with non-collecting seller reporting requirements or register to do business and comply with Pennsylvania sales and use tax laws. Learn more about that here.

For digital products, however, the effective date was delayed until April 1, 2019.

2019: Pennsylvania taxes remote sales of digital goods

April 1, 2019 is fast approaching. Businesses that sell digital products in Pennsylvania and meet the $10,000 threshold should prepare to comply with the non-collecting seller reporting obligations or register, collect, and remit Pennsylvania sales tax. It’s always advisable to consult with a tax advisor to determine the best course of action.

2019: Pennsylvania adopts economic nexus

Another big sales tax change is also taking place in Pennsylvania this year: The Keystone State will require remote sellers with more than $100,000 in annual gross sales in the state to collect and remit sales tax starting July 1, 2019.

Let’s back up again.

The physical presence rule that prompted Pennsylvania and other states to adopt non-collecting seller use tax reporting laws was overruled by the Supreme Court of the United States on June 21, 2018. In its decision in South Dakota v. Wayfair, Inc., the court found remote sellers’ economic activity in a state to be a sufficient basis for a sales tax collection obligation. Basing a sales tax collection obligation solely on economic activity is economic nexus.

More than 30 states have adopted economic nexus since Wayfair. The Pennsylvania Department of Revenue announced in January that it will enforce economic nexus starting July 1, 2019. Thus, as of that date, remote marketplace facilitators and online sellers with more than $100,000 in annual gross sales in Pennsylvania must register with the state and collect and remit Pennsylvania sales tax.

However, the adoption of economic nexus hasn’t done away with the use tax reporting requirements for non-collecting sellers. As the Pennsylvania Department of Revenue explains, remote marketplace facilitators and online sellers “with annual Pennsylvania taxable sales of greater than $10,000 but less than $100,000 in total sales are required to make an election to:

• Register to collect and remit Pennsylvania sales tax, or
• Comply with tax notification and reporting requirements”

Learn more about remote sales tax laws in all states at the Avalara resource page on South Dakota v. Wayfair, Inc.