Recently, Pennsylvania and Texas allowed businesses to absorb sales tax, meaning they can pay the tax due rather than collect it from the consumer. Is this a new trend?
It used to be against the law for a business to absorb sales tax in Pennsylvania. Sellers with nexus were required to collect all sales tax due from the consumer; failure to do so was a misdemeanor punishable by a fine of up to $1,000 or imprisonment for up to one year, or both. No trifling matter.
However, Pennsylvania law used to allow out-of-state sellers without nexus to absorb tax without penalty or to advertise tax-included prices for prepaid services, prepaid telecommunications, services that didn’t include the transfer of tangible personal property, or mobile telecommunications services.
Absorbing Sales Tax in Pennsylvania
Effective July 1, 2019, both in-state and out-of-state sellers are permitted to advertise that they’ll pay all or a portion of the tax owed on a Pennsylvania sale, provided:
All receipts and other sales documentations state that the seller will pay the tax on behalf of the buyer;
Sellers do not imply, indicate, or state that no tax is due on the transaction;
All receipts, invoices, sales slips, etc., separately state the amount of tax;
Sellers separately state the purchase price and the tax when recording the sale in books and records; and
The amount of tax is calculated by multiplying the total purchase price by the rate of tax.
Absorbing Sales Tax in Texas
A similar measure was enacted in Texas. It’s currently a misdemeanor for a business to advertise or otherwise indicate that it will absorb, assume, or refund all or part of the tax due on a transaction, or that it will not add the tax to the sales price. The penalty for doing so is punishable by a fine of up to $500.
Starting October 1, 2019, a retailer in Texas may directly or indirectly advertise, hold out, or state to a customer or the public that the retailer will pay the tax for the customer, provided:
The retailer states that it’s paying the tax for the customer
The retailer doesn’t state or imply that the sale is exempt or excluded from taxation
Receipts, invoices, and other statements separately state the amount of tax and indicate that the tax will be paid by the retailer
In both Pennsylvania and Texas, any retailer that opts to absorb the tax is liable to the state for the tax due, along with any interest or penalties due on the amount. Additional details are available in the text of Pennsylvania House Bill 262 and Texas House Bill 2358. But, Pennsylvania and Texas aren’t the only states that permit businesses to absorb sales tax.
States Where Absorption of Sales Tax is Permitted
States that permit the absorption of sales tax include:
Texas (as of October 1, 2019)
Virginia law generally prohibits the absorption of sales tax. However, retailers are allowed to absorb all or part of the sales or use tax due during the commonwealth’s combined sales tax holiday and during the 14 days immediately preceding the start of the sales tax holiday. According to the Virginia Tax Commissioner, “During this 17-day period, dealers may advertise that they will absorb the tax on any or all non-qualifying items.”
When sales tax is paid by the retailer, states generally require the tax to be separately stated on all invoices, receipts, etc. Additional requirements may also apply. For example, Louisiana law specifies that dealers must absorb the tax for all customers from a predetermined class of purchases; in other words, sellers can’t privately agree to absorb the tax for a particular customer to secure a sale.
States Where Absorption of Sales Tax is Prohibited
Absorbing sales tax is expressly prohibited in a number of states. These include:
District of Columbia
(*absorbing tax on sales of admissions is prohibited)
These policies are subject to change, as evidenced by the recent activity in Pennsylvania and Texas. Stay tuned for more updates as they come.
Gail Cole is a Senior Writer at Avalara. She’s on a mission to uncover unusual tax facts and make complex laws and legislation more digestible for accounting and business professionals — or anyone interested in learning about tax compliance.