Use Tax Notices Received by PA Businesses: What You Need to Know

Some Pennsylvania businesses have recently received Form REV aLO60 1, Potential Business Use Tax Exposure, a letter from the PA Department of Revenue (DOR) indicating that the business has not reported or remitted PA Use Tax recently. It is likely that a business owner receiving a notice from the Pennsylvania Department of Revenue regarding potential business use tax exposure may be concerned or possibly unsettled by the notice.

The purpose of this article is to provide an understanding of the Pennsylvania Business Use Tax and to explain that, in most cases, businesses receiving these notices generally may not be subject to use tax and therefore, may not need to take any action at this time.

Understanding Pennsylvania Business Use Tax:

Pennsylvania's business use tax is a lesser known but essential aspect of the state's tax system. The use tax rate in Pennsylvania is currently the same as the state's sales tax rate, which is 6%.

Generally, use tax applies when a PA business, or PA individual resident, makes a purchase, either online or in another state, of an item that would be subject to sales tax if purchased in Pennsylvania and receives or brings that taxable item to Pennsylvania for use within the Commonwealth. Examples might include a purchase from an online vendor that does not collect PA sales tax, or a purchase in Delaware, or another state that does not assess sales tax.

PA businesses that collect and remit PA Sales Tax can report and pay the PA Use Tax with the online filing of their PA Sales Tax Returns. Businesses that do not collect and remit PA sales tax but believe they owe PA Use Tax also use the online filing process through MyPath on the PA Department of Revenue website to file the Use Tax Return.

What to do if you receive a Form REV aLO60 1, Potential Business Use Tax Exposure Notice – in most cases no further action is required

First, do not worry or panic if your business receives one of these notices. The PA Department of Revenue seems to periodically send these types of notices to PA taxpayers as part of their efforts to raise tax revenue.

The reason a particular business receives such a notice could be that the business did file PA use tax returns in the past, or it may just be random selection by the DOR.

Overall, there is less PA use tax exposure since 2019

Previously, most PA use tax exposure resulted from online purchases. However, in 2018 there was a landmark US Supreme Court tax case, South Dakota v. Wayfair, which supported a state’s right to assess sales tax on sales from out of state online sellers. The Wayfair case was the topic of our 2019 tax blog article Wayfair a Year Later. Also in 2019, Pennsylvania enacted legislation requiring marketplace facilitator and marketplace sellers with more than $100,000 of sales in Pennsylvania to begin assessing sales tax effective July 1, 2019. This legislation required most if not all online sellers with sales to Pennsylvania purchasers to collect and remit PA sales tax. Now, due to the assessment of PA sales tax on most online purchases, Pennsylvania businesses and resident individuals face significantly less exposure to PA use tax. Therefore, unless your business has significant online purchases from out of state vendors not subject to the 2019 PA tax legislation, OR if you make purchases in Delaware, or other states with no sales, then it is unlikely that you have PA use tax exposure. If this is the case, there is nothing to report, and the notice can be considered merely informational.

However, on the other hand, if you believe you do have taxable purchases for which you did not pay PA sales you should consider filing a PA Use Tax return and paying the use tax. The DOR can conduct an onsite use tax audit - our firm was audited several years ago - and the auditor will review a range of invoices to determine if use tax should have been paid. Although it appears that more recently the DOR has conducted fewer onsite audits, it is still possible that an audit could occur. If an audit reveals a failure to pay business use tax when due the DOR may assess penalties and interest on the unpaid amount.

How to File and Pay PA Use Tax if you have Use Tax Exposure

If you determine that business use tax is owed, complete and file a Pennsylvania use tax return (PA-1) to report and remit the tax due. Generally, you need to file online through the Pennsylvania DOR website. However, it may be possible to file by mail using a paper form.

Additional information regarding Pennsylvania Use Tax is available on the Department of Revenue Website at Use Tax for Businesses and Use Tax for Business Brochure

PA Use Tax for PA residents – voluntary reporting on PA-40

Additionally, as indicated above, individual PA residents may also owe PA Use Tax on out of state purchases. Information regarding the tax for individuals is included on the Department of Revenue website at Use Tax for Individuals, which explains that beginning with tax year 2011, a line for use tax has been added to the PA-40 Pennsylvania Personal Income Tax Return for PA individual taxpayers to voluntarily report their estimated PA use tax. This is line 25 on the 2023 Form PA-40.

Conclusion

Receiving a notice about potential business use tax exposure may seem daunting. We hope that the information in this article helps to explain the nature of these notices and what action, if any, is necessary. By understanding the nature of these notices, knowing when business use tax applies, and following the proper procedures for filing a return, you can navigate this process with confidence. If you have any questions or need assistance, don't hesitate to contact your Herbein tax advisor.

Article Contributed by Chad Eisenhooth