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Saturday, July 14, 2007

Should we just get rid of the use tax?

In my July 9 post about the California use tax, I noted that $1 billion goes uncollected every year and in 3 years of giving consumers the easy option of reporting their use tax on their income tax form, only $13 million was collected.

I think it is realistic to collect much more through simpler ways to compute yearly use tax and a public awareness campaign (see 7/9 post).

I think many people might say we should just get rid of the tax. Or some may say we should exempt a certain amount of annual purchases. But these are not the solutions to uncollected use tax.

First - exempting a certain amount of purchases each year still requires taxpayers to keep records to see if they are above or below the exemption amount.

Second - if we eliminate the use tax and keep the sales tax, it will be even more enticing for Internet businesses NOT to set up operations in California. With no operations in the state (offices, warehouses, employees), they will have no physical presence and not have to collect sales/use tax. Their goods will look like good deals compared to the prices at your local store. And who wants to pay more taxes than they need to? Buyers would take the extra effort to find a seller who doesn't have to collect sales tax and buy from them. Sales tax collections would drop.

Third - many businesses and individuals pay their use tax so if we eliminated the use tax, the state would lose more than $1 billion per year.

Finally - it may not be constitutional for the state to favor out-of-state businesses over in-state businesses in terms of price competition and tax obligations.

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