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Saturday, March 19, 2011

California likely to get use tax look up table - SB 86 and AB 110

In California, SB 86 and AB 110, that are moving along, having passed in Assembly and Senate. One of the provisions in this legislation is to start using a "look up" table for use tax for taxable purchases under $1,000. This means that individuals do not need to keep records of every purchase they make for which they were not charged use tax. They can instead opt to use the "look-up" table which based on their income, will tell them what amount they can report on the use tax line on their state income tax form. For any purchase of an item costing $1,000 or more they would have to keep track of such purchase and add its use tax to the table amount. The table is optional; buyers could keep records instead.

I have suggesting this since at least 2007 as one of a few ways to improve use tax collection and make it easier. So I am very pleased to see this improvement. It had been included in AB 1957 as amended on March 25, 2008, but that bill was not enacted.

What does a look-up table look like? Well, examples exist because other states, including New York and Michigan, have been using them for a while. I included examples in testimony I submitted to the Assembly Revenue & Taxation Committee for their use tax hearing on 2/28/11 (see picture at end of this blog post or see page 11 of my testimony for a nice one-page explanation of use tax that Michigan provides to its taxpayers - here).

I think the look-up table is going to cause more people to report use tax. Hopefully the line on the 540 for use tax will direct people to the table and tax prep software will likely ask if people want to use the look up table or report actual (and ask if any individual purchase was $1,000 or more). The bill includes a revenue estimate of $10 million annually (including a portion that belongs to local government). This is NOT a tax increase because the tax is already on the books (since 1935!) it just makes it easier for people to pay their tax.

Some additional measures to increase use tax compliance:
  1. Require that individuals and businesses without seller's permits may only pay use tax on the state income tax form (540 or 100) and the line cannot be left blank.
  2. Continue and broaden educational efforts about the use tax - what it is, its importance and now, the ease of computing it. For an approach used in Michigan, see page 12 of my 2/28/11 testimony.
  3. Main street resellers should consider promoting use tax education as well. This should help them, the state and perhaps encourage some Internet vendors to voluntarily start collecting. Sometimes, at the grocery store, they have two shopping carts piled with goods. One has a sign that says this costs you $121 at Store X and the other says this costs you $99 at this store. Main street retailers could have signs that say - "This book costs $21.76 here, while at Amazon, it costs $x + $y shipping ++ $z use tax that you have to pay on your own (and the total is more than $21.76 - otherwise, not a good ad!). Here, we will take care of the use tax for you!"
  4. Be sure state agencies are not buying from vendors that don't collect sales tax. In fact, it would be interesting to see if state agencies (including state schools) pay their use tax when they buy items from out-of-state vendors.

What do you think?


Anonymous said...


I agree with much of what you say here; I don't think it's going to be all that effective. In North Carolina we've had use tax lookup tables for a long time and it's still a rare day when we get a client who actually self reports it (no matter how much we might prod them to do so).

As you suggest, I think it will be useful for local brick-and-mortal merchants to provide visible reminders that people are required to pay use tax on Internet purchases. I also agree that states could do more to control their own purchasing habits (although sometimes their hands are tied by by procurement laws that force them into a different direction). But ultimately, states need better tools to audit use-tax eligible purchases.

Anonymous said...

While I understand the rationale and pros and cons of the use tax, too many resources are being addressed towards this by states. This is especially true as it pertains to Internet sales. States such as New York, Rhode Island, Texas and the like, have tried to force nexus status on firms such as Amazon and Overstock. The result has been the end of affliate programs and the closure of distribution centers.
The loss in sales, employment, and income tax revenues far surpasses the attempt to collect sales taxes on an industry which constitutes about 7% of all retails sales.
States would be wise to focus on budget modification and reforms, as well as finding ways to improve job forecasts, than to waste their time on insignificant sales and use tax collection from individuals who purchased $50 or so in merchandise from the Internet.

Professor Nellen said...

Anonymous - thanks for the comment. A lookup table though, should reduce the need for the state tax agency to ask people about receipts on online and catalog sales because the consumer can just use the look up table. This option makes recordkeeping simpler for those with several taxable purchases.