Next Year's Pa. Income Tax Forms Will Include 'Use Tax'

[Editor's Note: Eric Boehm is a reporter for PAIndependent.com. He can be reached at 717-920-1819.]

The 2011 Pennsylvania personal income tax forms will have a new line, but if residents leave it blank, the state Department of Revenue will have difficulty proving they are not telling the truth.

The new line for "use taxes" is part of the state’s ongoing effort to capture a small part--about $5 million--of the estimated $350 million in unpaid sales taxes from online purchases each year. The state charges a 6 percent use tax on items subject to Pennsylvania's 6 percent sales tax when no sales tax is collected at the point of sale. 

Residents must account for all online purchases throughout the year to accurately complete the form, said Dan Hassell, the state Department of Revenue deputy secretary for tax policy. To make things easier, the Revenue Department will provide estimated amounts based on income brackets. 

But if residents only fill in a zero, "the follow-up is going to be difficult,” said Hassell. “The cost of doing an individual tax audit would probably outweigh any benefit we could get.” 

The Revenue Department said it hopes putting the new line on the actual income tax forms will make more Pennsylvanians aware of their tax obligations. Currently, residents must pay the use tax for online purchases on a different form when they file their income taxes; however, most residents do not fill out the extra form, Hassell said. 

The change to the income tax forms does not require any legislative or executive approval, because it is not a new tax, but merely a change in how the state asks residents to report taxes.

State Rep. Kerry Benninghoff, R-Centre, chairman of the House Finance Committee, said adding the new line to the tax form was a “good first step.” 

“Whether it generates a lot of revenue or not, I think it’s an education tool that reminds people if you make a purchase over the Internet, it’s no different than if you buy something in a box store in your local neighborhood,” Benninghoff said.

Even so, state Rep. Scott Boyd, R-Lancaster, said the inclusion of the new line places an “undue burden” on the people of Pennsylvania. 

“I personally think that’s insane to ask our constituents to do,” Boyd said. “I don’t want this to go down the road of expecting me to have to collect that use tax.” 

Asking residents to report their unpaid sales taxes is far from an ideal solution, but it's the state's only recourse, Hassell said. A 1992 Supreme Court decision 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--known as a “nexus”--in the state. 

Large online retailers, such as Amazon.com, get around the nexus requirement by establishing warehouses and distribution centers as independent firms and licensing with them to do business. The online sales giant has several distribution centers in Pennsylvania, but it does not remit sales tax to the state. 

Sales and use taxes in Pennsylvania accounted for $8 billion of the state’s revenue in fiscal year 2010, up from $7 billion in 2000, but down from the pre-recession high of $8.6 billion in fiscal year 2007. 

Through the first 10 months of the fiscal year, the state has collected $6.9 billion in sales and use taxes, 4.5 percent ahead of this past year’s rate. 

The Department of Revenue estimates that $350 million in e-commerce sales taxes were not collected by the state this past year, a figure which “has been exploding” in recent years, Hassell said. In the long run, the legislature wants businesses--not individuals--to collect and report sales and use taxes. 

The state House Finance Committee is gathering information about possible approaches, such as expanding the state’s nexus laws or joining a multi-state compact in the hopes of getting congressional attention. 

Benninghoff said it was ultimately an issue of tax fairness. 

“We’re trying to preserve the businesses that we have in the commonwealth and we want to have a tax structure that is fair across the board,” Benninghoff said. 

Several lawmakers said they would prefer Congress to address the issue, since it is a matter of interstate commerce. However, few said it would be a priority at the national level. 

“I suspect since they aren’t going to get the money, it’s not as big a priority for them as it is for us,” state Rep. Phyllis Mundy, D-Luzerne, said. 

Ron Barnes, vice president of the Direct Marketing Association, a national advocacy group representing online and direct mail retailers, said his members also would prefer a congressional solution, rather than dealing with the different approaches from the 44 states and the District of Columbia with sales taxes.