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Thursday, December 24, 2009

Use Tax - New Attention, Old Ideas and How to Track

The use tax - despite news reports and a line on most state income tax returns for it, remains a mystery to most people. Ask anyone if they have paid their use tax and most will likely ask what a use tax is, a few will laugh as if it is not an important tax and a few will say that they have paid it. [More info on the use tax - here.]

I was quoted in a recent LA Times article on the new California rule that requires businesses with $100,000 or more of gross receipts to register ("California tax collectors want their cut on out-of-state sales," by Zwahlen, 12/21/09). (For Board of Equalization information on this new rule - here.) That story caught the attention of at least two Bay Area radio shows who had stories on the use tax:
  • KQED - interviewed Professor Alan Auerbach at UC Berkeley and Assemblymember Nancy Skinner on 12/22/09. Assemblymember Skinner had introduced copycat legislation of the New York "Amazon" law which was vetoed by Governor Schwarzenegger. She said she would be re-introducing it (more on that below).
  • KCBS - interviewed BOE member Betty Yee on 12/24/09. She notes that uncollected use tax in California is about $1.1 billion per year!

The California use tax has been around since 1935 - it is not a new tax. It is owed by businesses and residents in California that purchase something subject to the sales tax (such as books or equipment) but for which the seller did not charge sales tax because the seller is not subject to sales tax collection. If a vendor does not have a physical presence in California - they do not have to collect sales tax (per the US Supreme Court's analysis in Quill). BUT - the buyer has to self-assess and pay the use tax. Both businesses and individuals can use a line on the California income tax return to report that. The rule that requires that line is expiring, but likely will be (and should be) renewed.

A few more observations:

  1. How to make compliance easier - some states, such as Maine, include a table with the individual income tax form where the filer looks up their income amount to find a use tax amount. While that is an estimate (so not accurate), it means that the consumer doesn't need to keep records unless they want to report the true amount of use tax they owe. That would make compliance easier. Also, software programs for tax return prep would likely incorporate the table and compliance would go up. Such a law should also include that if a purchase for which no sales tax was collected was $1,000 or more, the actual use tax amount for such purchases should be added to the table amount. This enables the table to be more realistic of people buying low-cost items on line including on eBay. AB 1957 (March 2008) called for this change, but was not enacted. It should be re-introduced and enacted.
  2. Getting more people to know about the use tax - a public awareness campaign - public service announcements by the Board of Equalization, pop-up ads by the BOE on popular websites, AND let's create education standards for high school students that will require that they learn about federal and state taxes, their obligations and public finances in general. This should help students become responsible citizens and knowledgeable (and hopefully compliant) taxpayers.
  3. Skip the Amazon approach started by New York - this won't work and diverts time from more effective approaches. This approach creates a rebutabble presumption that if a vendor has associates in the state that have links to the vendor's website for purchases and such purchases total at least $10K in the prior four quarters, there is a rebuttable presumption that the vendor is required to collect sales tax. When NY introduced this in April 2008, Amazon started collecting the sales tax, but cancelled its associate relationships so was no longer subject to the new rule. A trial court decision in New York ruled in January 2009 that the law was fine. But that will be appealed. Other states have attempted to introduce the legislation. Governors in Hawaii and California vetoed the bill, but it was enacted in North Carolina and Rhode Island. In those states, Amazon cancelled its associate relationships. So, it is questionable if any use tax is getting collected from the new laws. A BETTER approach - state legislators should work with Congress to see what would get Congress to use their Commerce Clause authority to let states require remote vendors to collect sales tax. Also, be sure auditors are taking a close look at the operations of remote vendors to see if they have any physical presence in the state such as use of an agent to help make sales. AND, keep educating consumers about the use tax and the importance to everyone of being tax compliant. I've got more on all of this, including - (1) articles and links, (2) 8/4/09 blog entry, and (3) Grabbing Remote Vendors, AICPA Corporate Taxation Insider, 7/31/08. For a view favorable to the Amazon law approach, please see the excellent analysis by Michael Mazarov of the Center on Budget and Policy Priorities (11/09) - here; it highlights the severity of the problem and why change is needed.
  4. A simple way for consumers to be compliant - most Internet purchases are charged to a credit card or Paypal account. Just highlight the purchases on each month's billing statement for which sales tax wasn't collected. At year end, go through the year's statements, total the amounts, multiple it by your local sales tax rate and enter that amount on your Form 540 or 540A.

Improvement is needed. It is very easy to be an Internet vendor with locations in one or just a few states, but with customers in all 50 states. And Internet sales as a percentage of retail sales continue to grow. A 12/22/09 Harris poll indicates that at least 50% of people online made a purchase.

I continue to stress the need for educational efforts as necessary for use tax compliance and for effective legislation. Unfortunately, some policymakers either do not understand the use tax or take advantage of the public's low understanding of it. When Governor Schwarzenegger vetoed AB 178 (CA's version of the NY "Amazon" law), he implied that it would be a tax increase on Californians. This of course is not true because the use tax has been around since 1935. If being compliant is a tax increase, federal, state and local coffers are in trouble. (For the governor's 7/1/09 statement upon vetoing AB 178, click here.)

How do you think states could get consumers to pay their use tax or for states to be able to get all vendors to collect it without putting them out of business due to compliance costs?

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