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Wednesday, July 27, 2016

Use tax - ideas for improved collection

My Moving Forward? column in State Tax Notes for July 18, 2016 was on Lessons from State Personal Income Tax Forms” ($). I looked at the personal income tax (PIT) forms and instructions as well as state tax agency websites for all 50 states and D.C.  I also looked at how each state collects the consumer use tax.  Most have a line on the PIT form; there are several variations among the state. Here are a few suggestions I have for improving use tax compliance, which represents a significant tax gap for all states.
  • Income tax return line: A line on the personal income tax form for use tax that that also explains the purpose. For example, the line might state: “Use tax due on internet, mail order, or other out-of-state purchases, where applicable sales tax was not charged.”
  • Mandate compliance: A requirement to enter a number (including zero) on the use tax line or to check a box to confirm that no use tax is due. Or, if consumer use tax can be paid on a separately filed return, a box should be checked to indicate that such a return was filed. These actions should help stress the importance to the filer that use tax is part of the filing and they are indicating under penalty of perjury that the proper amount is shown.
  • Simplified tax calculation: A look-up table should be permitted to enable individuals (with or without records) to estimate use tax based on their income. As most states with a look-up table do, for purchases at or above a specified amount, such as $1,000, use tax on that item should be added to the amount indicated in the look-up table. This is easier than expecting individuals to track all of their non-taxed purchases during the year (see what Louisiana provides – a form for tracking purchases). The look-up table is better.  Also, this approach enables individuals to prepare an accurate return where they can sign under the penalty of perjury statement with confidence (that wouldn’t be true with the system of tracking all purchases during the year where sales tax was not charged or purchased from out of state in a state with a lower sales tax rate).
  • Use tax education: An additional helpful element of use tax compliance is to promote use tax education. Approaches for helping more people understand it include:
    • A specific line on the personal income tax form, such as “Use tax – you owe this if you purchase online or via mail order.” 
    • Why not create an icon or “badge” that in-state vendors and others who collect sales tax that they can add to their website that explains use tax. It can start with something along the lines of “Buying online does not mean the item is tax free. If it is something you’d pay sales tax on if you bought it at an in-state store, you need to self-assess and remit use tax when you buy it online if the seller doesn’t charge sales tax.” Links to the state tax agency website with additional information should be included. This information can also be available for in-state vendors to print and post in their store.   
    • If it doesn’t already exist, create simple materials that can be used in a high school math or civics or economics class that explains state and local taxes and how they are relevant to students in their roles as citizens and how to comply.     
    • Place pop up ads on other state agency websites (hopefully at no cost).
What do you think?

btw, I know it is election season and candidates have various tax proposals and states have some tax initiatives.  I’ll get back to that shortly and I’ll talk about the House Republican tax reform blueprint released in late June.

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