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Tuesday, March 1, 2011

Collecting Use Tax in California

I'm always surprised when people ask "what's a use tax?" For several years, in California and many other states, there has been a line on the state income tax form for reporting one's use tax. Now I suppose that if people don't know what "use tax" means, they are just as likely to skip that line as they are to go to the instructions to figure it out.

Well, today, many people owe use tax primarily because they buy taxable items online from Amazon, Overstock, eBay sellers and similar places and are not charged sales tax because the seller doesn't have a physical presence in the buyer's state. That is, the seller doesn't have a sales tax collection obligation. Well, that is where the use tax comes in. The buyer must self-assess and pay the use tax.

Yesterday (Feb. 28), the California Assembly Revenue & Taxation Committee held a hearing on use tax collection which in California yields a $1 billion tax gap. I wasn't able to attend, but I think two bills were part of the impetus for the hearing - AB 153 and AB 155. They are similar to legislation introduced and sometimes passed, in other states, although not always yielding the desired collection result, but instead yielding a challenge as to the constitutionality of the law.

I think more can be done to collect use tax. One of the most important activities is to educate people as to what it is, how they compute it and how they pay it. People need to be as aware of the use tax as they are of the income tax. There are also some things that can be improved on the state income tax form to make recordkeeping and paying simpler.

I offered some written testimony to the hearing offering nine suggestions to help reduce the use tax gap (please see the testimony for the details):

  1. Establish a Public Awareness Campaign and Educational Activities
  2. Mandate Use of Form 540 or Form 100 to Pay Use Tax
  3. Clarify and Improve the Use Tax Line on Form 540
  4. Implement Simpler Compliance Techniques for Individuals
  5. Pursue Technological Solutions
  6. Support Efforts to Find Non-Compliant Vendors
  7. Encourage Out-of-State Vendors to Voluntarily Collect Use Tax
  8. Avoid Legislation With a High Likelihood of Being Defeated
  9. Work with Congress and Other States

What do you think? Have you paid your use tax? If not, here is a recently released short video from the California tax agencies on paying your use tax. I offer a few suggestions in my testimony on how the filing can be even easier - with changes needed by both the legislature and the tax agencies to get us there.

1 comment:

Mark said...

Perhaps fixing the Use Tax process could be added as well.

A couple of years ago I was a Controller for a company with a small California presence. We brought some untaxed goods in from Taiwan as a one time transaction. This was not an insignifcant amount of money.

We contacted California about paying use tax and were informed, in writing, that if we weren't setup to pay sales tax we couldn't pay use tax.

We're smarter than that so we set up a contingency for the amount. Three years later California came looking for their use tax and we paid it. The letter got us out of any penalties but it sure felt no one knew how the process was supposed to work.

Mark