Pennsylvania Sales and Use Tax & Audit Guide

This guide is for businesses that need straightforward answers on the following Pennsylvania Sales and Use Tax subjects:

• Do I need to be collecting Pennsylvania sales and use tax?
• Should I be collecting or paying Pennsylvania use tax?
• What do I do if I should have been collecting Pennsylvania sales and use tax but haven’t?
• I received an audit notice from the Pennsylvania Department of Revenue, what should I do?
• Guidance on fighting a sales tax assessment in Pennsylvania.

Who Needs to Collect Pennsylvania Sales and Use Tax?

Like most states, to be subject to Pennsylvania sales tax collection and its rules, your business must:

1) have nexus with Pennsylvania, and

2) sell or use something that is subject to Pennsylvania sales tax.

How Is Nexus Established in Pennsylvania?

According to the Pennsylvania Department of Revenue (PDOR), sales tax nexus is created in Pennsylvania if a business has a physical presence in Pennsylvania, such as:

• Having any person, including employees, agents, or independent contractors (directly or indirectly through a subsidiary), in Pennsylvania for purposes of:

1. Taking orders,
2. Making sales,
3. Installing, assembling, servicing, or repairing tangible personal property.

• Maintaining an office, distribution facility, sales house, warehouse, or other place of business in Pennsylvania.
• Owning, renting, or leasing real property or tangible personal property in Pennsylvania, including a computer server.
• Delivering goods to Pennsylvania customers using your company-owned or leased truck.
• Maintaining inventory in Pennsylvania using a third-party fulfillment service, such as Fulfilled by Amazon (“FBA”).

NOTE: Pennsylvania has a related Hotel Occupancy Tax that is administered similar to its sales and use tax. This tax is applied to the rent paid for the occupancy of a room within a hotel. Pennsylvania routinely audits retailers for Hotel Occupancy Tax compliance.

Economic Nexus (Wayfair Law) And Internet Sales in Pennsylvania

As of July 1, 2019, businesses located outside of Pennsylvania (a.k.a. Remote Sellers) may be subject to its sales and use tax laws. Specifically, Pennsylvania’s Wayfair law requires that a purely out of state business register with the PDOR to collect and remit sales and use tax if the businesses’ gross sales into Pennsylvania exceed $100,000 during the preceding calendar year.

Calculating Gross Sales in Pennsylvania

Pennsylvania defines gross sales as the total the total sales though all channels, including taxable and nontaxable sales. Sellers must determine on a year-to-year basis if they have economic nexus in the state. Being that Pennsylvania uses the calendar year rather than a rolling 12-months of sales, they have created a delayed collection period schedule to allow taxpayers time to compile their previous calendar year of sales and make the appropriate tax collection plans for the upcoming year. The schedule works like this:

EXAMPLE: The collection period is July 1, 2019 through March 31, 2020 using Calendar Year 2018 sales to determine economic presence. The collection period is April 1, 2020 through March 31, 2021 using Calendar Year 2019 sales to determine economic presence. Subsequent years will follow the same cycle.

Which Sales Are Subject to Pennsylvania Sales Tax?

General Transactions

If you have nexus in Pennsylvania, the next step is to determine whether the products or services you sell are subject to Pennsylvania sales and use tax. Like most states, unless an item is specifically exempt, sales and rentals of tangible personal property are subject to Pennsylvania sales tax.

While the general rules seem straightforward, the application of Pennsylvania’s sales tax rules and their nuances, complexities, and application to your business can get complicated. We recommend scheduling a time to review your specific situation with one of our sales tax professionals.

Common exemptions from Pennsylvania sales and use tax include:

•  
• Groceries,
• Prescription medicines and medical supplies
• Coal
• Newspapers
• Caskets, burial vaults, and grave markers
• Many items used in farming or manufacturing, especially the Dairying, Mining, Printing, Timbering, and Processing industries

Services

Generally, services are not subject to sales tax in Pennsylvania with the exception of services that are specifically identified as taxable. Some of the taxable services in Pennsylvania are:

• lobbying services,
• credit reporting services,
• secretarial services,
• employment agency services,
• help supply services,
• Lawn Care
• Self-storage
• Catering Services

Because Pennsylvania taxes a fair amount of services, it is worth reviewing the complete list to make sure your services are not subject to Pennsylvania sales tax.

Software

Pennsylvania broadly imposes a sales tax on digital products including software and software as a service (SaaS) irrespective of whether it is delivered on a tangible medium or electronically transferred. That said, custom software is exempt.

Shipping & Handling

Pennsylvania has straightforward rules on whether shipping charges are subject to sales tax. In Pennsylvania shipping charges are taxable if they are sold in connection with a taxable item. If the item is not taxable, they are not subject to sales tax. If both a taxable and nontaxable item are sold, shipping is taxable.

Specific Industries

While the general sales tax rules seem straightforward, the application of those rules can get tricky when gray areas come up, and they inevitably do. These guides and lists were developed by Pennsylvania to provide some industry specific guidance on the application of Pennsylvania sales and use tax.

• Pennsylvania Sales Tax Guide for Farmers
• Pennsylvania Sales Tax Guide for Software, Digital Products, and Software as a Service (SaaS)
• Pennsylvania Sales Tax Guide for Short-Term Rentals via Airbnb and VRBO
• Pennsylvania Sales Tax Guide for Building Machinery and Equipment
• Pennsylvania Sales Tax Guide for Online Retailers / Remote Sellers

Determining Local Sales and Use Tax Rates in Pennsylvania

Pennsylvania’s base or statewide sales tax rate is 6%. However, an additional 1% local sales tax applies to items sold into or used in Allegheny County. And, an additional 1% local tax applies to items purchased or used in Philadelphia, making the total sales and use tax rate there 8%.

The local tax rate is determined based on the seller’s location because Pennsylvania is an origin-based state. However, out-of-state vendors should charge sales tax based on the applicable rate at the delivery address. Local surtaxes are remitted to the state as part of the Pennsylvania sales and use tax return. The combined Pennsylvania + County & local sales and use tax rates for the largest 30 cities are listed below.

I Should Have Collected Pennsylvania Sales Tax, But I Didn’t

Unlike many of our competitors who offer a one size fits all solution and blindly suggest filing a Voluntary Disclosure Agreement (VDA) in each state, our sales tax professionals will work with you to determine the best and most cost-effective solution for your business.

If you determine your business has nexus but you have not collected Pennsylvania sales tax, the primary options are to:

1. Register and pay back taxes, penalties, and interest, or
2. Enter into a VDA to eliminate penalties (and in some cases reduce your tax liability and avoid interest).

Here is what you need to know about each option to make the best decision for your business:

Option 1: Register to Pay Back Taxes, Penalties, and Interest

Sometimes the best solution for a business is simply to register with Pennsylvania and pay back taxes, penalties, and interest. A VDA is not cost-effective if the past liabilities and penalties are minimal. Be wary of the tax professionals that recommend doing a VDA in these cases, they are looking to make a buck rather than looking out for your best interests. If you’re unsure what your past liabilities are, contact us and one of our state tax professionals will work with you to conduct an analysis and help you make the right choice for your business.

When to consider registration and payment:

• If you established nexus less than 3 or 4 years ago.
• The sales tax penalty is LESS than the professional fees charged for the VDA.
• Your business does NOT have a sales tax collected issue.

Beware: registering does not generally eliminate past liabilities

Option 2: Voluntary Disclosure Agreement (VDA)

Pennsylvania’s VDA lookback period: 3 years

In many situations, voluntary disclosures are a useful tool to reduce extended periods of past exposure. For example, if you should have been collecting sales tax for 10 years, the voluntary disclosure limits the lookback period to 3 years. As a result, the benefit of doing a VDA often turns on:

• Whether the VDA limits lookback period. i.e. – you established nexus more than 3 or 4 years ago.
• The sales tax penalty savings is MORE than the professional fees charged for the VDA.
• You have a sales tax collected but not remitted issue.

I Received a Pennsylvania Sales and Use Tax Audit Notice, What Should I Do?

Pennsylvania regularly audits businesses that are required to charge, collect, and remit various taxes in the state. Businesses that receive a sales and use tax audit notice should consider the following:

• Unless you have experience handling Pennsylvania sales and use tax audits, how can you trust that the state’s auditor is abiding by the rules and following proper procedure?
• How will you know when to provide documents or when to push back?
• Do you have a thorough understanding of your sales and use tax areas of exposure?
• Controlling the audit is paramount to the limiting exposure and shaping the results. Are you confident in doing that on your own?

If you are unsure of the answer to these questions and you do not have experience handling Pennsylvania sales tax audits, hiring a professional might be right for you. Contact us and learn how our sales tax professionals can give you the peace-of-mind and confidence you need during your audit.

Additionally, these resource pages are full of detailed information to help you evaluate critical decisions during your Pennsylvania sales and use tax audit.

• The Audit Overview & Selection Process
• The General Audit Process
• Statute of Limitations Extensions & Issues
• Managing the Sales Tax Auditor

Pennsylvania Sales Tax Audit Process

Pennsylvania sales and use tax audits usually follow the process laid out in the following flowchart. See the detailed guidance for each stage of the process in the sections below.

What to Expect After You Receive a Pennsylvania Sales and Use Tax Audit Notice

Many audits begin with an unexpected call from a CDTFA sales tax auditor. Shortly after the call, your business will receive an audit notice confirming that your business was selected for a (field or desk) Pennsylvania sales and use tax audit. Lucky you!! But before you celebrate too much, it’s a good idea to prepare for the audit. We highly recommend you start by getting a state and local tax professional involved.

What to Expect From A Pennsylvania Sales Tax Auditor

• Auditor will conduct pre audit research.
• Auditor will often schedule and perform an entrance conference.
• Records will be requested (many of which the auditor is not entitled to and does not need).
• Usually, the auditor will tell you that, as part of the audit, they are looking for any areas where your business is entitled to a sales tax refund. While it is technically their job to look for this, they very seldom (if ever) do.

What to Expect During The Audit

• Once the necessary records are received, the auditor will:
  • Conduct the sales tax audit by comparing your Pennsylvania sales and use tax returns to your federal income tax returns or bank statements to determine whether all applicable sales, or gross sales, were reported on your Pennsylvania sales tax return(s).

NOTE: A slight error in how tax was charged on even a single type of transaction, when multiplied over three years, can add up to a considerable sales tax liability.

• Once the auditor is confident all sales are accounted for, they will review your exempt and out-of-state sales.
• Conduct a use tax audit – the auditor will request a detail of certain documents / accounts to make sure use tax was properly paid on applicable purchases. Common areas audited include:
  • Advertising Expense
  • Auto & Truck Expense
  • Repair and Maintenance
  • Rent (including related party rent)
  • Office Expense
  • Miscellaneous Expense
  • Supplies
  • Equipment

Despite publications to the contrary, if a business buys an item online without paying use tax, the business still has an obligation to remit the tax to Pennsylvania. This often leads to shocking results for the unsuspecting taxpayer during an audit.

After the Audit – Understand and Defend Your Businesses Rights

Upon completion of the audit, there will usually be an exit conference with the auditor. The auditor will produce an audit report with corresponding workpapers to support the Pennsylvania sales and use tax assessment. It is advisable to have a sales tax professional present during this meeting as this is your first opportunity to see the auditor’s findings and push back on areas where they have overstepped their bounds or misapplied Pennsylvania’s sales tax laws.

We recommend businesses refrain from agreeing to the sales tax assessment until a sales tax professional has reviewed it for issues that should be challenged. Many businesses wind up drastically overpaying the state because the business owner or in-house accounting personnel were not well versed in the sales tax laws that, if challenged, could have reduced their Pennsylvania sales tax liability.

The process of challenging a Pennsylvania sales tax audit assessment is discussed in detail in the following sections.

Pennsylvania Sales Tax Audit Protest Flow Chart

Contesting Audit Findings with the Auditor

After an audit, the auditor will issue a Pennsylvania Audit Report. This document details the auditor’s findings so it’s important to carefully review and understand its implications. Any issues with the results are handled as follows:

• Auditee has 30 days to contest findings with the auditor.
  • Documentational issues (exemption certificates, proof tax was paid, etc.) and calculations are worth addressing with the auditor.
  • Legal interpretations of sales tax law are often not resolvable at this stage.
• If a resolution cannot be reached with the auditor, the next step is to appeal/protest the issue with the Pennsylvania Department of Revenue.

Appeal / Protest with The Pennsylvania Department of Revenue

Any contested issues that were unresolved prior to the audit report being issued can be protested / appealed by the auditee. This is done after the Pennsylvania Department of Revenue issues the Notice of Assessment. Generally, a protest / appeal must be done within 60 days of the Notice of Assessment issuance.

If you have received a Notice of Assessment and have not at least talked to someone experienced in Pennsylvania State and Local tax, now is the time before these deadlines are missed.

Pennsylvania Board of Appeals Decision

If you cannot resolve the Pennsylvania sales and use tax dispute through the protest / appeal process, the Pennsylvania Department of Revenue will issue a Notice of Decision. The Board of Appeals decision usually includes findings of fact and discussion of law. If you still disagree, you can file an appeal with the Pennsylvania Board of Finance and Revenue.

Settling a Pennsylvania Sales Tax Liability

Along the way, or even after one the critical notices are issued, there is the possibility to settle your Pennsylvania sales tax case by negotiating with PDOR. Often, you can get better results here than with the auditor. If you or your professional seldom does state and local tax work, it might be difficult to evaluate fair versus unreasonable settlements. DO NOT try to negotiate a settlement without an experienced Pennsylvania state and local tax lawyer or other professional.

Contest a Pennsylvania Jeopardy Assessment

Pennsylvania may issue a Notice of Jeopardy Determination in certain situations. The jeopardy assessment gives PDOR accelerated rights and it may immediately begin to try and collect. Due to the jeopardy nature, the taxpayer only has a short period of time to contest the assessment and must place a security deposit to fight the issue.

Pennsylvania Board of Finance and Revenue

If you cannot get your audit resolved within the agency or your deadlines have been missed, you can still fight your Pennsylvania sales tax assessment by going to the Pennsylvania Office of Tax Appeals. This Board has more settlement authority, and it is more likely to get your case settled at this stop, instead of within the Department of Revenue.

If your case is filed for board review, and the case proceeds to hearing, it is heard and decided by a three-member board. Our team has handled hundreds of administrative court cases and can help your company receive the resolution it is entitled to. It is very similar to a court hearing and having an experienced representative is imperative.

If the Board of Finance & Revenue cannot resolve the case, the case can be appealed to judicial court, called the Commonwealth Court, within 30 days of the Board of Finance & Revenue’s decision.

Other Pennsylvania Sales Tax Resources

• Pennsylvania Department of Revenue Website
• Pennsylvania Department of Revenue Board of Appeals
• Pennsylvania Department of Revenue Forms and Publications
• Pennsylvania Board of Finance and Revenue Decisions