April 17 - Doubly A Big Tax Day!

April 17 is the due date for 2017 individual returns as well as for calendar year corporations. It's not April 15 for 2018 because that was a Sunday so even with e-filing, a weekend date moves the due date to the next weekday.  But, if that is a holiday in the District of Columbia, then it is the next day. April 16 is Emancipation Day in DC making April 17 tax day.  But, isn't everyday really tax day since we pay taxes every day?

But April 17, 2018 is also a big day because the U.S. Supreme Court will hear oral argument in South Dakota v Wayfair, et al. The issue is whether the physical presence standard for sales tax nexus, dating back to 1992 from the Court's decision in Quill, should be changed. The relevance is that per Quill, if a seller does not have physical presence in a state, it doesn't have to collect sales tax from its customers in that state. The customers must instead self-assess and pay the use tax (same amount as the sales tax). States don't like this because many consumers don't know about use tax and it is much easier to have vendors charge it and remit it.

I have more on the background and relevance (and links) at this blog for the Southwestern Federal Tax textbooks that I help write and edit - here.  I hope you'll take a look.

What do you think? Is the physical presence standard outdated or still necessary to allow e-commerce to continue to grow?

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.

Use Tax Lookup Tables

Source: Kentucky 2014 Individual Tax Form Instructions

 I like use tax lookup tables. These are tables a few states allow for individuals to estimate their use tax owed, which they then include on their state income tax form to become use tax compliant.  No need to keep records of all use tax transactions.  I'm not sure what data and projections states use to create the look-up tables.  I compare three state tables in this post, originally posted on SalesTaxSupport.com.

In preparing state income tax returns for 2014, many individuals will see a line on that form for paying their use tax. The majority of states have such a line. A few states take that good idea one step further and make it easy to put a number on that line by using a "look-up" table. The table shows an estimate of use tax based on the individual's income. There might also be an adjustment for items purchased at a cost over a specified amount, such as $1,000 used in California.

What data and assumptions go into creating these look-up tables?  I have no idea and cannot find anything about this.  So, I decided to look at the look-up tables for three states (see below) to see if anything can be gained from the variations. The figures for Kentucky are higher than for California and New York? Why?

Here are factors I think would be considered:

·         Data about online and mail order sales by individuals for which sales tax is not charged.

·         Whether there are neighboring states without sales tax or a much lower sales tax such that people may be inclined to make purchases there.

·         Whether large web and mail order vendors, such as Amazon.com and collect sales tax from residents.

·         Whether there is an affiliate nexus law.

	California	Kentucky	New York
State sales tax rate:	7.5%	6.0%	4.0%
Use tax look up table base:	State AGI	State AGI	Federal AGI
Look up table amounts for these AGI levels:
$10,000	$5	$4	$9
$25,000	$9	$20	$18
$40,000	$16	$28	$30
$70,000	$26	$60	$45
$100,000	$39	$70	$60
$150,000	$57	AGI x 0.08%	$80
$190,000	$66		$96
$200,000	AGI x 0.035%		$96
Over $200,000			AGI x 0.049%(or $250 if less)
Adjustments:	Add use tax on items costing $1,000 or more.
Reference:	BOE website.	Instructions page 12.	Instructions page 23.
NCSL estimated uncollected use tax on all remote sales for 2012 (business and individual)	$4.2 billion	$224 million	$1.8 billion
Population per US Census Bureau (2014)	38.8 million	4.4 million	19.7 million
Does Amazon.com collect sales tax in the state?	Yes	Yes	Yes
Affiliate nexus law?	Yes	No	Yes

So, why the variations in look-up table amounts among these three states?  Do state tax agencies share their formulas among themselves? Why not make the assumptions and formula public?

What do you think? Do you use one (if available)?  Do you think they are good estimates?

California Oddity - Use Tax Exemption on Certain Foreign Purchases

There are many tax rules that might may puzzle us as to why they are there.  One I'd like to see repealed is the use tax exemption that a California resident gets if they bring back up to $800 of taxable goods from outside of the U.S.  This exemption can be used every 30 days. The goods must be hand carried back. If they ship them, they owe use tax. If they buy the same goods while traveling in Delaware (where no sales tax would have been charged), they owe California use tax.

The exemption has been around since the 1990s. It is intended to match the federal duty exemption, but it does not match it.  There are several special rules in the federal exemption. Also, the purpose of a duty exemption has no relationship to why you might want to have a use tax exemption.  I'm not sure why you'd ever want a use tax exemption.  By use tax exemption, we mean that there is still sales tax, only if a use tax would apply, would there ever be a need for a use tax exemption. 

I've got details and a link to an article in my SalesTaxSupport blog post.

What do you think?

One logical way to get vendors to collect use tax

For decades, states have sought ways to get remote (non-present) vendors to collect sales/use tax when they sell to customers in the state. States have been pushing Congress to provide assistance and many have enacted laws to broaden their nexus reach (see a nice list from Sylvia Dion here; my list needs updating but links are useful).

I've been researching, writing and testifying on this topic for many years. One of my suggestions has been to only let the state and its agencies purchase from vendors that are registered with the state to collect sales tax. That is, if a vendor wants to have the state or any of its agencies be a customer, it must register to collect sales/use tax.

Before California enacted its "Amazon law" in 2011, I always thought it was odd that my employer (the State of California) did not mind that I purchased books, such as for speaker gifts or students, from Amazon.  Of course, I paid the use tax since it was on my credit card and then I got reimbursed (perhaps the State paid the tax as well).  (And, I've been paying my use tax obligations since long before there was even a line on the state income tax form.)

I see that Missouri has a law that any vendor that wants to do business with the state must register to collect use tax even if it has no physical presence in the state.  Here is an excerpt from its website:

"Vendors Contracting with the State of Missouri Must Collect and Remit Sales/Use Tax
      Any vendor and its affiliates selling tangible personal property to Missouri customers should collect and pay sales or use tax in order to be eligible to receive Missouri state contracts, regardless of whether that vendor or affiliate has nexus with Missouri."

Why don't more states do this? It only seems fair and logical - if a vendor wants to do business with the state, one of the requirements should be registering for sales tax. Why should the state do business with a company that doesn't collect sales tax for the state? 

What do you think?

Additional links:

• Sales and use tax nexus
• Testimony and other information on California tax collection

Sales tax exemption oddities - California's exemption for some foreign purchases

Since 1990, California has allowed Californians traveling abroad to bring back up to $800 ($400 prior to 2008) of goods without having to pay use tax on them. I think that's odd because it is so high (and can be used every 30 days), unfair to people having to pay use tax on the same goods purchased in the US or not hand carried back, and unnecessary due to easy ways to pay use tax today. The exemption ties to a federal duty exemption amount although there are exceptions to the federal duty that California does not follow, such as bringing back a $10,000 piece of fine art (no duty, but California would want use tax on $9,200 of it).

I've got more on this exemption (R&T Section 6405) in a post on SalesTaxSupport.com - here.  Please take a look. I'm interested in hearing other views and whether other states have a similar exemption (I have not found any, but perhaps it is too obscure to easily find).

California advertising its use tax

For several years, I have taken any opportunity to promote ways that states, particularly California, might increase use tax collection. That is, reduce its use tax gap. (Click here for links to a paper I presented to legislative and BOE staff in February 2013 another presented to a Sales Tax Commission in Vermont in October 2012.)

One suggestion is to run ads. Ideally, pop up ads on websites where people might be ordering goods for which they won't be taxed use tax. Ads in other locations would also be good, such as in lobbies and windows of government buildings. There could also be messages on pay stubs of state employees and on letters sent to any individual or business in California. The ads should let people know what a use tax is and that if we were collecting this tax that has been on the books since 1935, perhaps we could lower other rates.

Well, I was pleased to see, what I think is a new effort, to do a bigger educational push. I found links in a November 15 cyber shopping release from the BOE. It includes links to some short videos and an infographic (also here).  I'm not sure how many people are seeing the videos though. I just watched the use tax basics video (under 2 minutes) and that was only the 140th view it had in the 8 days since the press release!

One of the videos is about use tax when you travel abroad and bring items back.  It says you "may " owe use tax, but does not explain the very odd sales tax exemption for up to $800 of goods hand carried back to California every 30 days. This is a wacky and inappropriate exemption! (I'm working on a paper now to present to legislative and BOE staff in February. This is R&T Section 6405 and should be repealed. It is puzzling why the video doesn't mention the rule. It is summarized on the BOE website with an overview of the use tax.

Here is the infographic:

 The main BOE website has a banner about use tax:

Hopefully this tag line with intrigue people who don't know about a use tax to take a look, but they also might not know from the description that this even pertains to them. I'd be stronger - Have you paid your use tax?

What do you think? Do you think this is a step forward or not enough.

Affiliate nexus legislation - everyone loses

I've written on aspects of this topic many times for many years - the state challenges in trying to collect all of the sales and use tax they are due for sales to their in-state consumers and businesses. With the requirement that a vendor only has to collect sales tax if they have a physical presence in the state and e-commerce enabling businesses to have customers everywhere but perhaps only one physical location, states become more dependent on trying to get their in-state consumers to self-assess use tax.  States tend to do a poor job educating these folks about their use tax obligation.

It would be far easier to just have all vendors collect. However, that is unlikely to happen, even with federal legislation (such as S. 743, the Marketplace Fairness Act).  This legislation is likely to exempt some type of small vendor. Also, it is unlikely to have impact on a vendor located outside of the United States.

State efforts through affiliate nexus/click-through nexus/Amazon laws, will not capture the entire amount owed. And, it is too easy for vendors to avoid these laws by cancelling their arrangements with in-state affiliates. Meanwhile, consumer use tax bills pile up.

I've got a short article summarizing and offering my perspective on the current state of affairs which involves litigation (costly and time-consuming) and still leaves use tax obligations on the table.  See Affiliate Nexus Litigation - Everyone Loses in the AICPA Corporate Taxation Insider for 11/14/13.

What do you think?

States still seeking sales tax

States continue to find ways to improve sales tax collection from online sales. They would like to see Congress help, but in the meantime, they find other ways.  In 2010, Colorado enacted a law to require vendors with over $100,000 of sales to Colorado customers to notify the customers of possible use tax responsibilities. In addition for any customer with over $500 of sales in the year, the remote vendor also had to issue an annual summary statement to the customer, and a report to the state of all customer purchase totals. When first challenged, an injunction was issued to not enforce the law. That was recently found improper.

Utah and Missouri have taken more recent actions to address varying aspects of the sales tax colletion issue.  I have more in a short article in the 9/12/13 AICPA Tax Insider - Still seeking sales and use taxes.  Please take a look.

What do you think states should do to improve sales and use tax collections?

How states can improve sales and use tax collection

Line 95 is the use tax line on the California personal income tax form. Line 22 is from the Michigan form.
Which do you think better explains what the line is for?

As I've noted in the blog a few times, there are ways that states can improve sales and use tax collection (beyond waiting for Congress to allow them to collect from some remote vendors). I have a short article in the AICPA Corporate Taxation Insider (10/25/12) that provides some legislative and administrative actions states might consider. Here is one suggestion:

• Allow state agencies to purchase only from vendors that are registered to collect sales tax.

I also suggest that when there is a line on the state's personal income tax form for paying use tax, that they be sure it is clear what the line is for (see the example lines above; see article for larger picture). Please take a look.

What do you think?

Sales and Use Tax Collection Issues

A recent article (9/1/12) in a Tennessee paper - "Politicians among online tax scofflaws - Amazon shoppers supposed to voluntarily pay use tax," by Josh Brown, notes that some politicians had not paid their use tax. Namely, some campaigns, although the article notes that it has since been paid.

I am not surprised.  I am surprised though about states allowing state agencies to make purchases from vendors who do not collect sales tax.  These agencies might not have systems in place to be sure the use tax is paid. How do they identify which invoices did not have sales tax included? What about employee reimbursements?

I've got a few pieces on the Scholastic Book Clubs case (see here and here). Schools need money, consumers do a poor job of self-assessing and paying use tax, most cities have bookstores or Internet vendors who collect sales tax, so, why do the schools allow the teachers to hand out the Scholastic order forms during work hours? Could the legislator pass a law saying the schools may only do it if they collect the use tax on the orders?  This is likely just one example.  

Query - how much do states and their agencies and local governments spend on purchases from vendors who do not collect sales tax?  For such sales, for what percentage is the use tax paid?

What do you think?

Governor support of Main Street Fairness legislation

On 6/10/12, The Hill reported - "GOP governors bolster online sales tax push," by Becker and Bogardus. This article notes that some Republican governors are supporting enactment of one of the Main Street Fairness bills. These governors include New Jersey Governor Christie and Iowa Governor Branstad and perhaps 10 more. The story reports that opponents to the governors' stand are some who say they should not be focused on increasing tax revenues but cutting spending.

I continue to be surprised and dismayed that people call collecting sales tax from sellers a tax increase.  So far as government revenues, in theory, they are the same whether the customer self-assesses and pays the use tax or the vendor collects and remits the sales tax. Of course, the government is more likely to get funds if the vendors handle collection rather than rely on millions of consumers to self-assess.

The vendors need a simple state sales tax system with simple reporting AND they should get some reimbursement from the states for collecting and remitting the tax. The three versions of the main Street legislation need to be reviewed to be sure they have these reforms. Discussion is also needed on the definition of a small vendor who should be exempt.  The current bills, provide definitions of under $100,000, under $1 million and under $500,000. That's a significant variation.

For more on the bills, see my Affiliate Nexus website. The House Judiciary Committee is expected to have another hearing on the topic in July.

What do you think?

20 years after Quill decision - still waiting for a solution

I'm honored to be a guest blogger on Forbes today compliments of fellow blogger Peter Reilly who is always finding interesting aspects of tax decisions and sharing his insights with taxpayers and tax practitioners.  My post is on the reality that it has been 20 years since the US Supreme Court reminded states and taxpayers that any solution to the challenge of collecting sales tax in a cross-border marketplace was with Congress.  That is - it is the 20th anniversary of the Quill decision. Check it out, along with Peter's always interesting posts - here.

fyi - there are links to the case and some current activity in the post.  You can hear the oral argument and opinion announcement for the Quill case here. The 1992 opinion was written by Justice Stevens, pictured here.

Justice John Paul Stevens, retired 2010

USA Today - story on shopper's use tax responsibility

One approach for increasing use tax collection that I have noted frequently is better education for consumers so they even know the tax exists. I think if you ask most people if their online sales where sales tax was not charged if they know they owe use tax, they would be surprised.

A 11/22/11 USA Today article - Your Money: E-shoppers' sales tax responsibilities, by Sandra Block, reminds shoppers that they likely owe tax on such purchases even though the vendor has not charged it. The article even mentions the 1992 decision of the US Supreme Court (Quill) that held that a vendor is only legally obligated to collect sales tax if it has a physical presence in that state.

What about reminders from states being published in places where shoppers will see them? I haven't seen any such reminders? Have you?

More on California AB 153 - so-called "Amazon law"

The San Jose Mercury News has an editorial in today's paper supporting AB 153, saying it "closes the loophole on Internet sales taxes." ("California should end online sales tax break" 3/9/11) It goes on to say that AB 153 would generate revenue that "could save the jobs of thousands of law enforcement officers and teachers."

This is not correct!

Consider:

1. Very little revenue would be generated: Legislative analysis of AB 153 indicates an uncertain revenue estimate of $152 million in FY 2011-12 and $317 in FY 2012-13. The analysis notes that these estimates drop to $114 million and $234 million, respectively, should Amazon do as it has said it would do and end its relationships with its California affiliates (see Business Week article, 3/2/11). The figures go down further if other Internet vendors, such as Overstock.com, do the same. The Board of Equalization bill analysis (1/18/11) explains that the revenue estimate drops even further if eBay sellers who become subject to sales tax collection in California stop selling on eBay.
2. Income tax revenues drop slightly under AB 153: The AB 153 analysis (3/3/11) notes that "the termination of affiliate programs would have an adverse impact on state employment, which would lead to lower income tax revenues." Termination of the relationships also means that California affiliates have less income and thus pay less California income taxes.
3. AB 153 is not the same as the New York law of 2008: AB 153 sponsor Assemblymember Skinner (Bloomberg video, 3/2/11) and others have said they are not convinced Amazon will cancel its relationships with California affiliates because they didn't do that when New York first enacted this type of legislation in 2008. However, in the two other states that copied New York - Rhode Island and North Carolina, Amazon canceled the relationships making itself not subject to the revised law. And Amazon has told lawmakers it would do the same in California. I don't know why Amazon did not cancel its relationships in New York, but I'll offer two possible theories. First, Amazon just didn't think of it or thought it might be bad PR. Second, and here is where AB 153 differs from the New York legislation, the NY legislation gave amnesty to those who started collecting, AB 153 does not. (Here is a summary of this from the NY tax agency (page 11) - "Part OO-1 also includes a limited amnesty, under which a seller that is a vendor only by virtue of this bill (and that meets certain other conditions) that registers as a sales tax vendor and commences collecting tax by June 1, 2008, will not be liable for past due tax.")
4. We all still owe use tax: If AB 153 were enacted and Amazon and other vendors cancel their relationships with California affiliates to avoid collecting California sales tax, consumers still must track and self-report and pay their use tax because AB 153 does not (and constitutionally can not) require all out-of-state sellers to collect California sales tax. And, even if no one cancels an affiliate arrangement, there will still be Internet and catalog sales to California consumers by sellers who are not subject to AB 153 meaning that the customers must still pay their use tax.
5. The problem (and the solution) is us: There is a line on Forms 540-2EZ, 540A and 540 for "use tax." If you purchased taxable goods but were not charged sales tax, keep record of that transaction. When preparing your return, total up those purchases, multiple the total by the sales tax rate in your county and put that number of the 540 use tax line. Until Congress acts to fix this situation, this is how (using the Mercury News angle) we save the jobs of thousands of law enforcement officers and teachers. Yes, the recordkeeping can be a challenge. So, let's encourage legislators to pass a bill allowing us the option of using a table to compute use tax based on income level as is done in New York and a few other states).
6. Use tax is not the only sales tax problem in California: The Mercury News editorial notes that sales tax revenues are down in California due to the recession and Internet sales. But, there is also another bigger reason. California's sales tax is out-of-date. It taxes the goods of the 20th century (tangible ones) and not those of the 21st century (digital ones). A sales tax should apply to all personal consumption with limited exemptions (such as perhaps for food and medicine as is done in California). But today, we consume a lot more digital goods (such as music and books) and personal services, than we did in the 1930s when the use tax was created. California needs to broaden and modernize its sales tax base. That would bring in far more revenue than AB 153 will. And that can be done while even lowering our sales tax rate which is above the 6% median rate of all state sales tax rates.

We need to solve California's real tax problems in ways that will work. Time spent on flawed AB 153 distracts from time needed to work with Congress and other states to really solve the problem, and distracts from the bigger issue of the need to modernize our sales tax base and lower the rate - a rate that is too high, which hurts low-income individuals and the state's ability to create high-paying jobs.

Further reading:

• Prior posts on AB 153 (1/24/11, 3/1/11, and 3/3/11).
• Prior posts on New York "Amazon" law (8/8/08, 8/4/09, 2/10/09) and short article from 2008 - "Grabbing Remote Vendors."
• My written testimony to Assembly Revenue & Taxation Committee for the 2/28/11 hearing on use tax, offering alternative solutions for improving use tax collection.
• AB 153 analysis from Board of Equalization and Assembly Rev & Tax staff.
• The need to broaden and modernize the California sales tax base - here.

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.

More on Colorado Use Tax Collection Approach

The Colorado Department of Revenue recently issued FYI Sales 79 - Sales of Taxable Items Over the Internet to provide specific guidance on which sellers are required to provide information to customers, such as on invoices, and file an annual report listing particular information about customer purchases for the year. For some reason, the information is not easily found on the Colorado DOR website - but here is their page with a few links about this reporting requirement that was enacted earlier in 2010.

This new Colorado system is a new approach to trying to improve use tax collection. They are not requiring the remote vendors to collect the use tax, but to help the state know about some of the people who owe it. (See my prior post - here.)

The Colorado rule applies to remote (non-present) vendors with annual gross sales of $100,000 or more to Colorado customers. Such sellers must provide a statement that is easy to find that is located near the price charged. The statement must note:

• The seller does not collect Colorado sales or use tax.
• The purchase is not tax-exempt just because it was purchased over the Internet.
• Colorado purchasers must self-report use tax at the end of the year.

The vendors must issue an annual report to Colorado and the customer if sales to that customer for the year exceeded $500. For details and examples, see the Colorado FYI Sales 79 document.

Is this a good approach? Well, it will help educate more people about the use tax? Why doesn't the state of Colorado just give vendors a link to add to their order page or a pop up page so that customers will know about the use tax with even less effort required of the vendor.

A problem will if more states do the same but with different rules. The MTC has a draft law - here.

Also, what about buyers that do not get the annual statement, do they get a hidden message that use tax is not owed?

What do you think?

Should we just get rid of the use tax?

In my July 9 post about the California use tax, I noted that $1 billion goes uncollected every year and in 3 years of giving consumers the easy option of reporting their use tax on their income tax form, only $13 million was collected.

I think it is realistic to collect much more through simpler ways to compute yearly use tax and a public awareness campaign (see 7/9 post).

I think many people might say we should just get rid of the tax. Or some may say we should exempt a certain amount of annual purchases. But these are not the solutions to uncollected use tax.

First - exempting a certain amount of purchases each year still requires taxpayers to keep records to see if they are above or below the exemption amount.

Second - if we eliminate the use tax and keep the sales tax, it will be even more enticing for Internet businesses NOT to set up operations in California. With no operations in the state (offices, warehouses, employees), they will have no physical presence and not have to collect sales/use tax. Their goods will look like good deals compared to the prices at your local store. And who wants to pay more taxes than they need to? Buyers would take the extra effort to find a seller who doesn't have to collect sales tax and buy from them. Sales tax collections would drop.

Third - many businesses and individuals pay their use tax so if we eliminated the use tax, the state would lose more than $1 billion per year.

Finally - it may not be constitutional for the state to favor out-of-state businesses over in-state businesses in terms of price competition and tax obligations.

Have you paid your use tax?

Many California residents and companies have not paid their use tax. Over $1 billion of this tax, that has been around since 1935, goes uncollected each year! That money could really help the state improve health care coverage and education.

So, what's a use tax? It's a complement to the sales tax and imposed at the same rate. If a seller is not required to collect sales tax, such as because it has no physical presence (offices or employees) in the state, then the buyer owes use tax. The buyer must self-report and pay the use tax. For example, when you buy books from Amazon.com, no sales tax is charged because Amazon has no physical presence in California. So, you must keep track of these types of purchases. At year end, you add up all your purchases of taxable goods for which you were not charged sales tax and multiply that amount by the sales tax rate for your county.

For the past few years, California has done what many states have done for years - it added a "use tax" line to individual and corporate state income tax forms. This is a generous approach to collecting the tax because it allows taxpayers to avoid sales tax forms and let's you pay the tax late with no penalty (for example, you pay your 2006 use tax on your 2006 Form 540 which you file in 2007). However, the "use tax" line on Form 540 is elective because you could instead pay your use tax in the year it is owed using sales/use tax forms.

Well, not much has been collected. Only about $13 million over the first 3 years of the "use tax" line. The Board of Equalization thinks it has a solution and is sponsoring AB 969.

AB 969 removes the elective language and makes it mandatory to report use tax on the state income tax form (unless the taxpayer is a registered seller). This would also make it clearer that if you neither file use tax forms or use the line on Form 540, the existing sales/use tax penalties of 10% + interest apply. AB 969 also makes the "use tax" line a permanent part of the law (rather than expiring after 2008).

Is it realistic to think that people are going to pay the use tax?

• Perhaps if the state improves its efforts to educate consumers about the tax, more people will keep records and comply. Why doesn't the Board of Equalization put ads on Internet sites with info about the use tax?
• The Board needs to let people know it is serious about enforcement. Given how little is reported on Form 540, there are a lot of people and businesses that owe back use tax + penalty + interest. I think we'd be dismayed if the IRS were as lack in enforcing the income tax.
• Think you don't have your records to compute use tax? You'll likely find that many Internet vendors keep a record of all of your past purchases indicating the date and amount (Amazon has this - go to "your account" at the top of their webpage). You'd also need to keep track of your catalog purchases for which you were not charged sales tax. Why not keep a record that you complete each month as you pay your credit card bills?

California should consider one more improvement to use tax compliance. Give taxpayers a choice of keeping records to compute their actual use tax liability or using a table that indicates a use tax amount based on the taxpayer's income. Both Maine and New York use this simplified technique.

How do you track your use tax? Would you prefer the table option?

For more ideas on improving use tax compliance:
http://www.cob.sjsu.edu/nellen_a/TaxReform/Report2bSUTUseTax.pdf

Internet Taxation

One of the most misunderstood tax topics involves application of taxes to anything involving the Internet. Some people believe that no taxes should be applied to the Internet. They may mean that access fees should not be taxed to the payor and/or they may mean that anything you purchase via the Internet should not be taxed. Thus, if you purchase clothes at your local store, it is ok to charge sales tax. If you order clothes from a catolog, it is ok to be charged sales tax. But, if you get the same clothes from a vendor who set up a webpage to handle the sale, it should not be taxed. Such positions are hard to understand. (If you are looking for more information on these positions, you can find several through a Google search.)

While some of the people proposing no tax on anything related to the Internet may just want to see all or most taxes disappear, the statements likely also stem from lack of understanding of use taxes. A 5/23/07 article on CNetnews.com ("Net taxes could arrive this fall" by McCullagh) explains that states are working together to convince Congress that it should allow the states to collect sales and use tax from vendors who are not physically located in their state. The article notes that this would allow states to "collect billions of dollars in new revenue by next year." This does make it seem like a money grab by states with no rationale for doing so.

http://news.com.com/Net+taxes+could+arrive+by+this+fall/2100-1028-6186193.html
(Note - I'm not picking on CNet, there are many articles that say the same thing.)

But, what Congress is proposing is allowing the states a more effective approach to collect a tax that has existed in most states since the 1920's. The way sales and use tax works today, within requirements laid out in the U.S. Constitution, is as follows:

• States are allowed to create and impose taxes that are within their state and U.S. constitutions.
• Most states include a sales tax in their array of taxes. This is a tax imposed on the buyer of taxable items (most tangible personal property and some services; the rules vary from state to state). However, the seller collects and remits the sales tax.
• In 1992, the U.S. Supreme Court ruled in Quill Corp. v. North Dakota (504 U.S. 298) that a vendor must have a physical presence in a state before a state could require the vendor to collect sales tax from customers in the state. The constitutional premise is the Commerce Clause. This clause, at Article I, Section 8, provides: "The Congress shall have power ... to regulate commerce with foreign nations, and among the several States, and with the Indian tribes." The U.S. Supreme Court found that states and cities had varying sales tax rules such that what was taxable and the rate was different in every taxing jurisdiction. Thus, they concluded that if a vendor, for example, located only in Illinois, but with customers in all states, had to learn and keep track of and comply with up thousands of different sets of rules, the vendor would find that such rules did impede interstate commerce. In reality, the costs of complying with sales tax in more than one state is very costly and time-intensive. Very large companies with a physical location in many states purchase expensive software and hire many people to help them comply. Such costs for a smaller business would be enough to potentially put them out of business (or at least keep them from making sales to customers in other states). However, the Court did note that since Congress controls the commerce clause, Congress could pass legislation allowing states to collect the sales tax from remote (non-present) vendors.
• When a taxpayer buys something subject to its state's sales tax rules, but is not charged sales tax because the vendor is not required (per Quill) to collect the tax, THE CUSTOMER OWES USE TAX! The use tax is equivalent to the sales tax. So, today, if you buy books from Amazon.com and live in a state where Amazon.com does not have a physical presence, you are not charged sales tax. BUT, you need to keep track of this purchase so you are sure to self-assess and pay the use tax you owe. Many people think this is laughable because they have never heard of the tax and it sounds like a lot of records to keep track of - and, really, is the state really going to come after them?!

So - what is the solution to get the sales and use tax collected on all taxable purchases? Asking customers to self-assess the use tax will result in low compliance and asking vendors to voluntarily collect it is unlikely due to the cost.

So, in 2000, several states got together to solve the problem in light of what the Court said was the problem in Quill. That is, the rules are not uniform from one state to the state and that causes complexity. Thus, the solution is to create a model sales and use tax law, have states adopt it (replacing their current sales and use tax law) and then ask Congress to pass a law saying that states that have adopted the uniform law can require non-present vendors to collect sales tax. (Information on the model act can be found at: http://www.streamlinedsalestax.org/.)

This is what Senator Enzi has proposed with S. 34 (5/22/07). It is not the first time such a bill has been introduced. S. 34 explains the requirements that must exist in the state sales tax law to be considered simple (and it is a long list!).

Benefits of S. 34:

• Responds to positive state actions to simplify sales tax compliance for vendors by having the rules and definitions similar form state to state and providing simplified collection methods. Not all states have been involved with the uniform law activities and not all states have enacted it. California has not adopted the uniform law (and probably won't anytime soon - more on that in another entry).
• Enables states to more effectively collect a tax that is already on their books rather than looking for needed revenues through tax rate increases.
• Simplifies use tax compliance for individuals because the vendors would be collecting the tax eliminating the need for them to keep records and self-assess the tax.
• The uniform law (SSUTA) provides for technological solutions for vendors and compensation for their collection efforts.

Weaknesses of S. 34 and the SSUTA:

• It will not eliminate use tax issues for all consumers. First, not all states have adopted the SSUTA so won't benefit from S. 34. Also, S. 34 will only enable sales and use tax to be collected when the vendor is in the U.S. If you buy something from a vendor in Germany, you still need to self-assess and pay the use tax on the item.
• The SSUTA is not as simple as many vendors would like. One originally called for simplification was to have one rate per state. That is not required in the SSUTA. This means that vendors must keep track of, for example, what the rate is in Denver, Boulder and all cities in Colorado as they will differ. Also, while definitions are uniform, a state can exempt items in a cateogry (in effect a tax rate of zero) so vendors must also keep track of what is taxable and what is not.
• The SSUTA governing structure gives each adopting state a single vote. This is not very attractive to large states such as California and New York and may prevent them from joining. (But, perhaps an argument can be made by California given the size, that it as a state has a uniform system (although rates can vary from county to county, but the tax base does not) and is large enough that any U.S. vendor should be required to collect use tax on sales to CA customers.)
• The SSUTA will lead to winners and losers within most states in that it requires sales to be "sourced" at destination. This is not the way all states (including CA) apply sales tax today. In California, if a business has one location, it charges sales tax based on the rate for that city. Thus, if I sit at my computer in San Jose and buy a book online from a Los Angeles store, the city of Los Angeles gets the city tax (origin approach). Under the SSUTA, the destination is the required sourcing. So under it, the LA store would need to know where I live and charge me the sales tax rate for San Jose. This change would lead to winners and losers in terms of city and county revenue. If a city today tends to have a lot of vendors selling outside of the city, it benefits (it gets the tax). If a city tends to have a lot of customers (who buy from elsewhere), it would become a winner under SSUTA because its customers would now be generating sales tax for the city. The city that has customers outside of the city, will be a loser. The dollars where could be substantial for some cities and this would make it difficult to enact the SSUTA in California. The required use of the destination rule also made the SSUTA problematic for some vendors in other states. For example, in some states, a florist only had to collect tax based on the rate in their city (origin approach). However, under the destination approach, it must collect sales tax based on the rate of the city where the customer resides, thus requiring more recordkeeping.

Now - back to the original statement - do bills like S. 34 allow states to easily collect NEW revenue? No. First, it would only apply to the states (over 20 of them) that have enacted the SSUTA. Second, it would enable states to collect a tax already on their books, rather than create a new tax. Of course, with use tax compliance being so low and the reality that it will be easier to collect the tax from vendors rather than consumers, it will lead to greater collection by the states, but a use tax is not a new tax.

There are lots of subtopics here:

• Is the sales tax still the best form of a consumption tax given the Internet and digital transactions (for example, where is the customer who downloads a book while sitting at an airport somewhere?).
• What other tax issues are raised by the Internet and e-commerce and how can they be resolved in order to move tax systems into the 21st century?
• What about the Internet Tax Freedom Act where the federal government prohibits state and local governments from collecting tax on Internet access fees? The current moratorium expires in November and Congress is looking at whether to renew it again.
• How does all of this fit in with other needed reforms in California, other states and at the federal level?

more later...

Thanks for reading. I look forward to your comments.