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Important Information for Individuals and Trusts That Are Residents of Pennsylvania

With the close of the 2011 tax year only a month away, we want to inform you of a major update to both the Pennsylvania Personal Income Tax Return (PA-40) and the Fiduciary Tax return (PA-41). Starting in tax year 2011, there will be an additional line on the Personal Income Tax Return, (line 25-Use Tax) and on the PA Fiduciary Income Tax Return, (line 17-Use Tax).  The purpose of the additional line is to report the Use Tax you owe on certain purchases made during the tax year.  Pennsylvania is adding these lines in response to the increasing rate of online commerce taking place each year.  Pennsylvania requires the individual or trust to assess and pay Use Tax if the seller of goods is not collecting Sales Tax for Pennsylvania residents.  The burden of reporting the tax and remitting it to Pennsylvania lies with the individual or trust. 

This is not a new tax being imposed by Pennsylvania.  This tax has existed for many years; however, the taxpayer was previously required to pay this tax using Form PA-1.   Pennsylvania believes that there will be a greater compliance rate if the tax is reported directly on the PA-40 or PA-41.  The new line that will now appear on the tax return requires an entry, even if the amount entered is zero.  The Pennsylvania Department of Revenue can assess penalties for falsely reporting the amount of tax due if it is later determined that you in fact do owe additional Use Tax on purchases made during the year.

Below are frequently asked questions that can aid your understanding of this new Use Tax reporting requirement.  Additional questions can be found on the Pennsylvania Department of Revenue website.

What is Use Tax and how is that different from Sales Tax?
Sales and Use Tax are essentially the same tax; however, when the tax is collected and paid by the seller, it is called Sales Tax.  When the tax is paid by the buyer directly to the State of Pennsylvania it is called Use Tax.  

What is the Use Tax rate?
The Use Tax rate is the same rate as Sales Tax which is 6%.  This rate is increased to 7% for residents of Allegheny County (Pittsburgh) and 8% for residents of Philadelphia.

Which sites are common sites that don't charge Sales Tax?
Amazon.com, bluenile.com, newegg.com, and most online stores that do not have a physical location. 

Items not subject to Sales and Use Tax in Pennsylvania include:
Clothing (excluding swimwear), food (that has not been prepared at a restaurant), drugs, textbooks (this does not include books sold for pleasurable reading), and residential heating fuels.  The Retailers Information Guide (REV-717) has a full listing of taxable and exempt property.

What if I don't remember how much I purchased online?
Pennsylvania has released an Estimated Use Tax Table which estimates your tax liability based on your Pennsylvania Taxable income (shown below).

Note: The Estimated Use Tax Table cannot be used if you had individual purchases of over $1,000 during the year.  Those individuals need to base their Use Tax liability on their actual purchases during the year.

What information should I submit for use in the preparation of my Pennsylvania Income Tax Return?

You will need to indicate in your tax organizer, one of the following:

1. Indicate that you did not have any purchases during the tax year that are subject to the PA Use Tax.  In this case, we will prepare your Pennsylvania individual income tax return indicating that no Use Tax is due.
2. Provide us with the actual amount of purchases made during the tax year that are subject to the PA Use Tax.  In this case, we will use the figures you provide and calculate the amount of Use Tax that you owe and report it on your Pennsylvania individual income tax return.
3. Indicate that you want us to use the Estimated Use Tax Table created by the Department of Revenue, and that you did not have any individual purchases during the year that were greater than $1,000.  In this case, we will use the Estimated Use Tax Table and based on your total Pennsylvania taxable income, determine the amount of Use Tax that you owe and report it on your Pennsylvania individual income tax return. 

Important:  Keep in mind that using the Estimated Use Tax Table is not a "safe harbor amount".  If Pennsylvania determines that the actual amount of Use Tax owed for a particular taxable year is greater than the estimate you reported, the difference is still owed and the deficiency could be subject to penalty and interest.

If you would like to discuss this in further detail, please contact your Alpern Rosenthal Representative.

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