Through a four-stage process over a decade the Pennsylvania state government steadily increased the sales tax revenue it collects on online purchases by consumers in Pennsylvania.
Like officials in many states, leaders of the Pennsylvania Department of Revenue recognized by the early 2010s that they were missing out on a lot of revenue because consumers were purchasing online without paying sales tax to web merchants—and then in most cases not voluntarily remitting the tax to the state. Through a four-step process that was aided mightily by the 2018 Wayfair decision, the state in its most recent fiscal year brought in more than $1 billion in sales tax revenue from online purchases.
More than a third of that revenue comes from operators of big online marketplaces like Amazon.com Inc. and eBay Inc. that collect sales tax on behalf of sellers on their platforms. That frees the commonwealth of Pennsylvania and other states from having to enforce its sales tax rules on many thousands of marketplace merchants.
In addition to bringing in more revenue, the changes that led to major online retailers collecting sales tax on purchases made by Pennsylvania residents also eliminated the price advantage e-retailers had over brick-and-mortar retailers in the state, a revenue department spokesman says.
“Prior to these changes, many local vendors had to absorb a 6% to 8% tax disadvantage on their sales as compared to online retailers selling the same products,” he says. In addition to Pennsylvania’s 6% statewide sales tax, Allegheny County, where Pittsburgh is located, adds a 1% tax and Philadelphia adds a 2% tax.
Pennsylvania’s four-pronged strategy for boosting online sales tax revenue
Here are the four steps Pennsylvania took to increase its online sales tax revenue:
- In 2011, the Department of Revenue sought out online retailers that did have nexus in Pennsylvania—a physical presence like a warehouse or store—and thus were required to collect sales tax, even before the Wayfair That led to some online retailers registering with the state and beginning to collect sales tax.
- In 2016, the General Assembly, the state’s legislature, passed Act 84 of that year, a law that extended the obligation to collect sales tax to digital goods, including electronic books and streaming services.
- Act 43 of 2017, required so-called “marketplace facilitators” to collect sales tax on sales made by merchants on their platform to Pennsylvania residents. That led to big online shopping sites like Amazon and eBay collecting and remitting sales tax to Pennsylvania.
- Following the Wayfair decision, the General Assembly passed Act 13 of 2019, ordering online retailers with “economic nexus”—that is annual sales of at least $100,000 in the state—to begin collecting and remitting sales tax.
The result was that in its fiscal year 2020-21, which ended June 30, Pennsylvania received $1.362 billion in sales tax from online retailers, more than six times the $187.5 million the state collected in fiscal 2016, before the Wayfair decision but after Pennsylvania enacted the law requiring sales tax collection on digital goods.
Other states are also reaping revenue windfalls from online sales tax. Michigan estimates it collected $500 million in 2020 it would not have received had it not been for the Wayfair decision, although a spokesman notes that number may have been inflated by the pandemic-induced spike in online shopping. Illinois, which only began requiring collection of online sales tax in 2021, says it received $159 million in remittances in the first five months of the year.
A big chunk of sales tax revenue comes from online marketplaces
Pennsylvania provided a detailed breakdown of its online sales tax revenue that highlights the weight of online retail marketplaces. Of the $1.362 billion collected in the recent fiscal year from online sales taxes, $484.1 billion, or 35.6% came from marketplace operators collecting and remitting tax on purchases on their platforms. That underscores the importance to states of requiring big marketplaces like those of Amazon, eBay, Walmart Inc. and Etsy Inc. to do the work of collecting and sending in sales taxes.
All 45 states that have a sales tax have passed marketplace facilitator laws like that of Pennsylvania. Those laws eliminate the price advantage marketplace sellers enjoyed when they could sell on a marketplace like Amazon without charging sales tax, but at least frees them from the burden of calculating the correct sales tax, registering with each state and making periodic payments of tax collected.
The Pennsylvania revenue department spokesman says the state cannot say how many remote online retailers are collecting sales tax now because the department doesn’t categorize online merchants differently from other registered retailers. But he says the number is not the important thing.
“It’s not necessarily about how many sellers are registered to collect and remit sales tax, but what percentage of online taxable sales are being captured,” he says. “We are confident that percentage is high due to everything that has taken place in recent years.”
With every sales tax state now passing laws like Pennsylvania’s that impose the sales tax requirement on larger online retailers and major marketplace operators, it’s likely that most consumers are accustomed to paying sales tax when buying online.
Indeed, retailers say adding sales tax in the shopping cart is no longer a barrier to most shoppers completing their purchase.
“We had a little bit of a competitive advantage until the Wayfair decision,” says Meg Hellerstedt, president of Sylvane Inc., an online retailer of dehumidifiers and other home air-treatment devices. “Customers were already getting used to it, and after that point they were very used to paying sales tax everywhere, so we haven’t considered it to be a real conversion rate killer. It’s just an accepted part of ecommerce these days.”
For more on online sales tax, read our in-depth article, “The barely bearable burdens of online sales tax.”Favorite