Pennsylvania Sales and Use Tax Issues That Businesses Should Be Aware Of

Recently, there has been an increased number of audits for specific types of sales and use transactions. While Pennsylvania’s statutes and regulations have not recently changed on these transactions, there are three assessments that businesses should familiarize themselves with in regard to state and local tax:

1. Sales Tax on Mixed Transactions Charged at a Gross Amount

 Unlike other states, Pennsylvania does not provide a “true object” test when a sale includes both a taxable and an exempt component under one charge. A state with a true object standard provides that the true object of the transaction should be considered when determining taxability. Since Pennsylvania does not follow the true object standard, any taxable component of a transaction could therefore make the whole transaction taxable in Pennsylvania. Some examples that Pivot has seen lately are membership fees and managerial service fees. We suggest taking a close look at not just the invoices, but also the agreement itself to determine whether a taxable component may unintentionally exist. For example, if a membership provides the ability to access and download digital products or any other tangible personal property, it could potentially result in that total membership fee being taxable.

Pivot dealt with this issue during an audit where a membership to an organization provided a poster that was to be used in the businesses’ lunchroom to detail the benefits of the membership. During the audit, it was proposed that this poster would result in the entire membership fee being taxable. Fortunately, this was not the outcome of the final assessment. However, Pennsylvania did issue a Letter Ruling (SUT 20-001) that addressed the taxation of a membership fee, based on the concerns raised. This Letter Ruling was pulled from the Department of Revenue’s website, but it appears the Department may still be applying this strategy in recent audits.

2. Sales and Use Tax on Computer Services

 Pivot has been made aware of numerous assessments on computer services that were historically exempt from sales and use tax. The assessments are based on a historical change to the taxation of digital products from 2016 and additional clarification provided by the Department of Revenue under Bulletin SUT-17-001. The Bulletin provides the following from the Department:

“Act 84 also specifically included in the definition of ‘tangible personal property’ the ‘maintenance, updates and support’ of the newly defined electronic or digital tangible personal property. Specifically, you requested the Department’s interpretation of what is encompassed by the term ‘support.’ The Department considers ‘support’ to mean the providing of advice or guidance concerning otherwise taxable digital or electronic tangible personal property involving identifying the source of problems affecting the usability of the property and attempting to place the property in or restore the property to a useable state, including, but not limited to, what is commonly referred to as help desk support or call center support. The support may be delivered verbally or online, or through automated means that may reside on a customer’s device or by human means. The support may be delivered by the property vendor or a third-party support provider who may or may not have remote access to the customer’s device. Providing support is taxable regardless of the method of billing.”

Pennsylvania provides that “consulting” is not taxable support, that is unless Pennsylvania could take a position that the consulting is more truly deemed “support.” In addition, services provided before the actual implementation of an agreed-upon software use is also being assessed. Many of these issues have been assessed and argued through the administrative appeals process in Pennsylvania and are currently being appealed within the court systems. A careful review of invoices and agreements should be made by each business, and if possible, invoices should bifurcate taxable components from exempt components to reduce the sales and use tax exposure.

3. Sales and Use Tax on Intercompany Transactions

An area that has consistently been overlooked by businesses is inter-company transactions, with many treating these transactions as being eliminated for both income and sales and use tax purposes. Unfortunately, sales and use taxes are viewed legal entity by legal entity, and inter-company transactions of affiliated businesses are viewed just as any other transaction with an unaffiliated third-party would be viewed. Two main obstacles that Pivot sees are associated with taxable “help supply” services and rentals or use of tangible personal property amongst businesses in an affiliated group.

Help supply is specifically taxed by Pennsylvania under Regulation Sec. 60.4. Help supply is often associated with staffing companies, but it has been assessed by the Department of Revenue in many situations where employees are used amongst affiliated members for a fee for services not typically associated with a staffing company. To make matters worse, these inter-company charges are often not supported by an actual invoice nor are they associated with an actual agreement entered by the parties. Pivot often works with businesses to ensure that the transactions are properly documented through invoices and agreements, which can either substantiate the services are truly not help supply or reduce the potential exposure if the transaction could be deemed to be help supply.

Another area that we often run into is when property owned by one member of an affiliate group is used by other members with an associated charge. The rental or lease of property is normally taxable unless an exemption exists. Similarly, the right to use tangible personal property amongst affiliated members is often not documented by invoices and agreements. Prior to entering these types of arrangements, agreements should be closely reviewed to ensure sales and use tax considerations are made with regards to potential resale exemptions in the future, as well as use tax calculations for use of the property by the owner when not “resold.”

If you have any questions on sales and use tax laws in Pennsylvania, please contact Jason Skrinak, CPA.