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Thursday, March 19, 2009

A Better Way for California to Collect Use Tax

California individuals and businesses should notice a line on their California income tax form for reporting their use tax. The use tax is the complement to the sales tax and is owed when the seller of taxable goods is not required to collect the sales tax because they have no physical presence in the state.

A lot of people don't know what a use tax is and likely just skip that line. Some people think it is a joke and they are allowed to leave it blank (I have been at tax conferences where people - including some elected officials, have either said they just don't pay it or imply "who would ever keep track of records to pay that?")

It really isn't that hard for individuals to calculate how much use tax they owe. Most of these purchases on which people owe use tax - such as on items purchased from or on eBay, were purchased with a credit card. What I do every month is just put a * next to any charge on my credit card statement on which use tax is owed. At year end, I total the amounts and mutiply it by 8.25%.

I've advocated for a simpler option that several states use, that eliminates the need to keep any records. Under this alternative, the state creates a table where you look up your income amount and it tells you how much use tax to report. If you don't like this estimate, you could instead keep records to compute your actual liability. Last year, there was a legislative proposal to add the table option. For details, see "June 2008 update" here.

Some people, including some elected officials, are convinced that Congress is the only option for increasing use tax collection. Since the physical presence requirement is tied to the commerce clause of the U.S. Constitution, Congress could enact a law allowing states to require non-present (remote) vendors to have to collect sales tax when they sell to customers in the state. The physical presence requirement has been around for almost 20 years and Congress has not acted to modify that rule - it is unlikely they will do so soon.

Even if Congress does pass a law someday allowing states to collect sales tax from remote vendors, it will not help Califronia completely because:
  1. It will be allowed only for states that have adopated the Streamlined Sales and Use Tax Agreement. California has not adopted this.
  2. It will likely exempt small retailers, such as those with $5 million or less of gross receipts. Unless the state exempts the use tax on purchases from these small retailers, the buyers will still need to self-assess and remit the use tax.
  3. It's a "flat world" - Californians might be buying taxable items from companies not even located in the US. The foreign sellers will not be liable to collect sales tax, so customers will still need to self assess and remit use tax.

An example of legislation to allow SSUTA-adopting states to collect sales tax from remote vendors is HR 3396 (110th Congress).

We need a public education campaign to encourage individuals and businesses to pay their use tax. The amount that goes uncollected annually is estimated at $1 billion! That would buy a lot of textbooks for K-12!

For more information - please see a report of mine with background data and suggestions for how to collect more use tax.

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