From lawn care services to restaurant owners, small businesses play a vital role in Pennsylvania’s economy. In fact, small businesses employ 2.5 million people and account for 99.6% of businesses in the state. Most small business owners know sales tax is part of doing business, but not everyone understands their responsibility for use tax under Pennsylvania law.
To bring you up to speed, Gift CPAs is taking a deep dive into Pennsylvania sales and use tax.
What is the Sales Tax in Pennsylvania?
Pennsylvania has a sales tax of 6%. It is collected on most transactions like retail items, rentals, items sold for consumption and business services. Pennsylvania allows local jurisdictions to add additional sales tax. The state, a county or a municipality can also add specialty taxes such as accommodations and rental taxes, to name a few.
Pennsylvania allows several items to be exempt from tax. These items include:
- Unprepared food
- Candy and gum
- Most clothing items
- Computer services
- Residential heating fuel
While most small businesses focus on sourcing from local vendors, the demand for products and services stretches across the nation and around the world. Working with vendors outside Pennsylvania who do not apply sales tax can cause confusion. In fact, many small business owners unknowingly evade sales tax when making out-of-state purchases. This is where the use tax comes into play.
What is the PA Use Tax?
Pennsylvania use tax is payable to the Pennsylvania Department of Revenue. The use tax rate is 6%, which is the same rate as state sales tax. The use tax is applied to any purchase where Pennsylvania sales tax was not applied but the goods were delivered to an address within the state and are intended to be used in the state.
In a world where online orders are part of our daily lives, you can easily see the use tax in action. Small business owners routinely make online purchases from vendors outside of the state for use in the state.
In addition to online purchases, the use tax also applies to:
- Purchases made via toll-free numbers
- Purchases made via mail-order catalog
- Purchases made in out-of-state locations
Was the Use Tax Created Because of Online Business?
From a 2023 small business owners’ perspective, it is easy to think use tax was a recent development because of online commerce. However, the use tax was actually created in 1953. It has become more top-of-mind over the past decade as online purchasing has skyrocketed.
The use tax is beneficial to Pennsylvania small businesses. Without the use tax, local business owners could choose to make purchases outside the state to avoid the sales tax. The use tax levels the playing field for Pennsylvania businesses.
How to Pay Your Business’ Use Tax
The Pennsylvania Department of Revenue has guidelines for small business owners to pay their use tax.
- For businesses who don’t expect to incur the use tax on a recurring basis: Fill out the PA-1 Use Tax Return Form and submit the form and your tax payment by the 20th of month after your purchase was made.
- For businesses who expect to pay use tax on a recurring basis: Register for an account number with the PA Enterprise Registration Form, PA-100.
Failing to report and pay use tax can have consequences. You may be required to pay the original amount plus penalties and interest costs which could amount to 30% or more. This is not a position any small business owner wants to be in. It is important to understand and comply with the use tax. For more information, the Pennsylvania Department of Revenue offers a brochure that provides an overview of use tax. Read the full brochure here.
At every step in your small business venture, Gift CPAs can help support your needs and answer any questions you may have. We are here to help small business owners thrive in Central Pennsylvania.
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Contact Gift CPAs for more information on our full scope of accounting and business services. We have years of experience working with small businesses to help with bookkeeping, taxes and other business needs. Make an appointment to meet virtually or at one of our five locations in Harrisburg, Mechanicsburg, Myerstown, Ephrata or Lancaster!