Pennsylvania imposes a “use tax” which, although it applies to everyone, is usually apparent only to businesses. The use tax is a tax on the use of a tangible item or service bought by a Pennsylvania resident for use in Pennsylvania. The use tax is assessed at the same 6% rate as the more familiar Pennsylvania sales tax and is generally, but not exclusively, aimed at taxing out-of-state purchases that otherwise would have been taxed if the purchase had occurred in-state. In theory, the buyer should be monitoring its purchases and paying a tax to the Department of Revenue. In this way, the sales and use tax casts a very broad net over sales made in Pennsylvania and even some sales made outside of Pennsylvania.
Although seemingly simple, the use tax calculation can be complicated. For example, while it generally applies to an out-of-state purchase made by a Pennsylvania resident who brings the item into the Commonwealth, the “Commerce Clause” of the federal Constitution puts limits on the extent to which such an out-of-state purchase can be taxed if the other state has collected its sales tax on the purchase. Sizeable sales and use tax disputes have frequently been reviewed by federal courts because of the wide variations on state taxes imposed by the various states and the even wider variation in cross-state transactions that may allegedly be subject to those taxes.
On a simpler level, there are a number of exclusions from the tax that are useful to individual consumers and businesses. For example, we are all aware that clothing is generally not taxed. However, there are other exclusions that are often invisible to the general public. As an example, there is a “resale exclusion.” If Walmart purchases an item with the expectation of reselling it, Walmart does not have to pay a sales or use tax on its purchase; does have to make sure that the sales tax is assessed on the sale to the consumer. There is a “manufacturing exclusion.” Though only applicable to manufacturers and fabricators, it is felt to be important to the Commonwealth at large because it stimulates manufacturing jobs. The manufacturing exclusion applies to sales of machinery, equipment, parts and supplies used in the manufacturing process.
Finally, some organizations are excluded from tax, even if the transactions they take part in are not. An exclusion is available to many charities and most churches. It is important to note that in order to obtain this treatment, the charity must get a certificate from the Department of Revenue. Frequently organizations that have obtained a charitable exemption from federal tax are surprised to find that they are not automatically excluded from paying state sales tax – getting the sales tax certificate is a completely different process.
Usually, sales and use tax issues arise because the Department of Revenue has audited a taxpayer. However, a business should be alert to the available exclusions and other quirks of the sales and use tax to ensure that they are not overpaying. Accountants are often very good at this function. Similarly, accountants and some lawyers have become adept at the “reverse audit” where businesses comb through their financial records to find taxed transactions that should not have been taxed. The goal is to insure that similar transactions are not taxed in the future and, when possible, to obtain a refund for taxes that were overpaid.
— Rod Fluck