In a COVID world, masks have become more necessary than underwear. Their ubiquitous presence has instantly become part of our lives. Not because they are essential clothing, but because they protect us and others from potential infection.
The retail world around us worked tirelessly over months to quickly develop, distribute and sell masks to save lives. Every retailer should be making a small profit on each mask. Most states make money on each sale by imposing sales tax on the cost of the mask.
But in Pennsylvania, a new group expects to make $100.00 on the sale of each mask. This group of bounty hunting plaintiffs’ lawyers has decided, based on an ambiguity and change in interpretation of the Pennsylvania sales tax law, that any retailer that charged sales tax on a mask sale owes them $100 per sale. They say such sales violate the state’s Unfair Trade Practices and Consumer Protection Laws. The lawsuits seek to punish retail sellers to the tune of millions of dollars for collecting sales tax.
Sales tax has always been a damned if you do, damned if you don’t, mandatory job for retailers. In Pennsylvania that’s been particularly true given the difficult rules applicable to sales of clothing. Most clothing is exempt from sales tax; some items are not. Understanding whether underwear is taxable is easy, but when you get outside of mainstream clothing, there are many things the state says are taxable.
Safety clothing is one. Masks were historically in that category according to the state Department of Revenue. If a retailer sold masks and didn’t collect sales tax it would be audited and penalized. Now, for retailers who followed the department’s rules, there is a new problem.
Nearly 40 retailers were just sued in class actions in Allegheny County for charging sales tax on masks despite the state’s longstanding view that masks were taxable. Retailers were trying to assist Pennsylvania customers by making masks available during the pandemic. The prize for doing so, and trying to comply with the states unusually complicated sales tax regime, is an effort by plaintiffs’ law firms to penalize retailers $100 per violation under the Unfair Trade Practices and Consumer Protection Laws.
Are you kidding me? Collecting pennies of tax for the state deserves a $100 fine per sale?
Under normal circumstances, face masks in Pennsylvania are subject to sales tax ranging from 6-8%, pennies on most mask sales. However, the argument goes, that under Gov. Tom Wolf’s declared disaster emergency, in March 2020, protective face masks sold at retail magically became exempt from Pennsylvania sales tax. This is presumably because the order made them less like accessories and more like medical equipment and supplies, such as ventilators and disposable syringes.
On Oct. 30, 2020, the Pennsylvania Department of Revenue declared, “Masks (both cloth and disposable) could now be considered everyday wear/clothing,” a category generally exempt from Pennsylvania sales tax, “as they are part of the normal attire.” These announcements, made without legislative backing, changed the state’s longstanding view that masks were not ordinary clothing exempt from tax but were safety clothing and subject to tax.
Despite the late announcement by emergency regulation, the class action plaintiffs allege that, between March 6 and late October, retailers “engaged in fraudulent or deceptive conduct” when they collected “unlawful sales tax” on mask purchases. This conduct, plaintiffs claim, led to their “financial detriment.”
In every state with a sales tax, a simple refund of the tax would be in order – a reasonable resolution, especially given the circumstances. But not here. In Pennsylvania, plaintiffs obviously thought that retailers should have anticipated the change in classification and their failure to do so creates a liability of $100 per violation.
I and hundreds of other tax lawyers spent the last 20 years trying to convince Pennsylvania to change its rules and join the Streamlined Sales and Use Tax Agreement so that this situation could not occur. More than half the sales tax states did. Pennsylvania sat in the back of the room for those meetings but did not join. The agreement aims to reduce the burden of sales tax compliance by implementing uniform, simplified definitions, procedures, and rules, including a bar on sales tax class action lawsuits until after the customer seeks a refund from the seller.
Our front-line essential businesses have been forced to adapt to the pandemic faster than any other industry. Remain open, figure out how to stock needed items, risk infection and the health and wellness of their staffs – all to face an extraordinary threat of liability for selling masks. Why should anyone have to face $100 fine per sale for trying to do the state’s job of tax collection?
The legislature and governor should step in and fix this. If not, retailers should consider whether the few cents in profit is worth the $100 fine. If they stopped selling masks in Pennsylvania maybe the outcry from consumers would reach Harrisburg.
Stephen P. Kranz is a tax lawyer and partner at international law firm McDermott Will & Emery.
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December 14, 2020 at 08:54PM
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