Amazon-Like Marketplaces Taxed Under Pennsylvania Proposal

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By Leslie A. Pappas

The Pennsylvania Senate narrowly approved a proposal that would generate $43.5 million by requiring internet marketplaces like Amazon.com Inc., Etsy Inc., and Ebay Inc., to collect a 6 percent sales tax on third-party sales facilitated through their platforms.

Under H.B. 542, which the Senate passed 26-24 on July 27, natural gas drillers in Pennsylvania would pay $80 million next year in a new severance tax and consumers would pay $405.8 million more for cell phone services, electricity, and natural gas. The state also hopes to pocket $40 million by shortening the period to file tax appeals from 90 to 60 days.

The proposal is the Senate’s solution to plugging a $2 billion hole in the fiscal 2017-18 budget, a $32 billion spending package the Legislature passed on June 30 without revenue to back it up.

All told, the measures in the Senate bill would raise $571.5 million in new revenue and permit $1.3 billion in new borrowing, according to a fiscal note accompanying the bill.

Gov. Tom Wolf (D), who pushed for a severance tax as part of his campaign, expressed support for the Senate’s bill.

“Governor Wolf commends the Senate for taking a responsible step toward balancing the budget and for their willingness to include a tax on Marcellus Shale,” governor spokesman Mark Nicastre told Bloomberg BNA in an email July 27.

House: A Heavy Lift

The bill now goes to the House, which has recessed until Sept. 11 unless the Speaker calls legislators back into session. It isn’t clear how much support the bill will receive.

“The House is a big question mark,” Nathan Benefield, vice president and chief operating officer for the Commonwealth Foundation, a free-market think-tank in Pennsylvania. House Republicans don’t want to raise taxes and haven’t been supportive of the Senate’s borrowing plan, he said.

The Senate’s proposal would impose a brand new gross receipts tax of 5.7 percent on natural gas, affecting 2.7 million households that use gas to heat their homes, Benefield said. The bill will also increase the gross receipts tax on telecommunications from 5 to 6 percent, and increase the gross receipts tax on electricity from 5.9 to 6.5 percent, which would affect nearly every household in the commonwealth, he said.

Yet the proposal ignores other structural changes that could have raised revenue, such as privatizing state liquor stores, removing horse racing subsidies, trimming budgets for parks and recreation, or making changes to the state’s welfare system, Benefield said.

“Taxpayers and families are getting hurt by all these tax increases without doing the structural changes,” he said. “That’s going to be a very tough lift in the House.”

Ralph Citino, a CPA and director at accounting firm Friedman LLP in Philadelphia, said the Senate’s plan seems to go against the governor’s original budget narrative, which aimed to raise funds by closing loopholes or raising revenue through specialty taxes like the severance tax.

“Wolf’s main push was that there was not going to be broad-based tax increases,” Citino told Bloomberg BNA July 27. Yet the gross receipts taxes in the Senate’s plan could cost consumers up to $405 million in new taxes for basic services that everyone uses, he said. “That’s a pretty big number.”

Marketplace Providers

Following a growing trend, the proposal would require marketplace providers, such as Amazon, to collect and remit tax on behalf of third-party marketplace sellers.

The bill defines “marketplace provider” as “a person who, either directly or indirectly through agreements or arrangements with third parties and pursuant to an agreement with a marketplace seller, facilitates a sale by a marketplace seller.” Marketplace providers wouldn’t be liable for failing to collect the correct tax amount if they could show the failure resulted from incorrect information provided by an unaffiliated seller.

Minnesota and Washington were the first states to enact laws requiring marketplace providers to collect tax on third-party marketplace transactions. Both laws passed this year, and many state and local tax practitioners predict more states will adopt similar marketplace provider measures.

At the heart of the issue is Quill Corp. v. North Dakota, the U.S. Supreme Court’s 1992 decision that prohibits states from imposing sales and use tax collection obligations on vendors without a physical presence in-state. States have employed multiple methods to manage the 25-year-old restraint in an ever-expanding digital economy. Collecting tax from marketplace providers like Amazon is a twist on the typical regime that targets vendors for sales tax collection.

The legislative language about marketplace providers is broad enough that it could be open to legal challenge, according to Robert E. Weyman, counsel at Reed Smith LLP. It might be difficult to force companies like Amazon and Etsy to collect on third-party sales if there is no clear nexus, he told Bloomberg BNA July 27. “There’s a real question as to whether this is constitutional.”

Practitioners have told Bloomberg BNA that they expect the Minnesota and Washington laws will trigger legal challenges.

Severance Tax

Meanwhile, the Senate’s plan would fulfill Wolf’s long-held goal to impose a severance tax on Marcellus Shale.

The proposal would levy a tax from 1.5 cents to 3.5 cents per thousand cubic feet of natural gas (Mcf) based on the average annual price of natural gas. In the current fiscal year, that amounts to 2 cents per Mcf, according to the fiscal note.

The new severance tax would be levied on top of the existing unconventional gas well fee (known as the local impact fee) under Act 13 of 2012.

Industry groups criticized the measure.

“This proposal—which creates new and even higher energy taxes for consumers and energy producers alike in addition to the impact tax that’s generated $1.2 billion in revenue—will erode the Commonwealth’s competitive advantage,” David J. Spigelmyer, president of the Marcellus Shale Coalition, a shale development industry group, said in a statement July 27.

To contact the reporter on this story: Leslie A. Pappas in Philadelphia at LPappas@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

For More Information

Text of H.B. 542 is at http://src.bna.com/q8R.

Text of the fiscal note is at http://src.bna.com/raX.

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