Do you cheat on your taxes? Before you automatically answer no, hold that thought.
Does your state have a sales tax? According to Wikipedia, only five states don’t have a sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. There is a sales tax everywhere else. For purchases from an out-of-state store that does not collect sales tax, the states usually have a use tax, with the same rate as the sales tax. You are supposed to report and pay the use tax for these out-of-state purchases.
According to Wikipedia again, 22 states including New York, California, Ohio, and Virginia have a specific line for use tax on the state income tax return. If your state income tax form has a line for it, what did you put down on that line? Did you leave it empty? Did you include everything you bought online? If not, is that cheating on your taxes?
Whether the state includes a special line on the tax return or it requires you to fill out a separate form, you are still on the hook for paying the use tax. If you haven’t filed the separate use tax form, that’s still cheating on your taxes, isn’t it?
No confessions please. I don’t want to get anybody into trouble.
Most people don’t pay the use tax as required by law. And the states know it. They can’t do much about it because they don’t have any records about those out-of-state purchases. And people know it. That’s why they don’t pay that tax.
So it shows if people know the authorities don’t have any records, they cheat. People choose to disregard the law when there’s virtually no chance of being caught. You wonder where else people cheat on their taxes.
If most people don’t want to pay the use tax, and the states are not getting much revenue from it anyway, should use tax be taken off the books? I think so. The law should reflect citizens’ will, right?
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I actually keep records and pay the use tax as accurately as I can. No one else I know does this, and my friends actually make fun of me for it. I do it because it’s the law, even though I think it’s a terrible law that can be used to go after almost anyone for tax evasion.
North Carolina has one of these use tax laws and has a specific line item on the annual tax return for reporting it. In tax update classes I have attended in the past where state tax officials presented data, it was reported that the amount of returns including additional use tax was around 5%.
I buy next to nothing online, so it matters little to me either way, but I agree the laws should be repealed when you have so little compliance.
It also illustrates how critical employer tax withholding is for our current system. Without mandatory withholding of income taxes, you’d likely have high rate of non-compliance on income tax as well. And frankly, I think it would be a good idea. Ending withholding so people could more clearly be aware of what their annual tax cost was might just make people more critical of the roll and cost of government.
I’m a sales tax auditor, so I can vouch for the fact that very few businesses and individuals pay use tax on the items they purchase from outside the state. I would say that at least 90% of my audits include an assessment of use tax that the individual or company failed to self-assess. For the most part, though, this is due to ignorance and not a specific intent to avoid the law. In my state, there is a separate form for self-reporting use tax, so it is easy for people to miss it. People also are confused because they think there is a prohibition against tax on anything having to do with the internet.
Businesses are the primary target of use tax audits, but individuals aren’t immune from getting picked. Different government agencies share a lot of information these days, and computers make it easier to sort through the data and find people who aren’t paying. We haven’t gotten to the point where purchasing a few items from Amazon will trigger an audit, but if you are buying large dollar items, chances are that you will eventually get a letter asking you to explain why you didn’t pay tax on them.
The problem with eliminating the use tax is that it puts local businesses at a competitive disadvantage. Having to essentially pay the 5 – 10% sales tax out of pocket to remain competitive could easily force a business to close. If you eliminate the use tax, you really need to eliminate the sales tax as well.
“If most people don’t want to pay the use tax, and the states are not getting much revenue from it anyway, should use tax be taken off the books? I think so. The law should reflect citizens’ will, right?”
TFB, I think you have a terribly naive view about what the role of government is. Don’t worry, your generation will get a wonderful experience of ‘the law’ reflecting the citizens’ will (the question is always which citizen of course) being sandwiched between the Baby Boomer and the Millennial generations.
Another point: Technically, if you go across the state line and make a purchase from a brick-n-mortar store, pay 5% sales tax, and bring it back to your state that normally would charge 7% sales tax had you purchased the identical item within the state, you owe the differential 2% as reportable tax for which you’re liable. And, no, you don’t get a credit on your state income taxes if the %s were reversed in this scenario.
Wai Yip Tung says
I often bought from Amazon and other online retailers and have the goods ship to me from out of state. The difference in sales tax give them a big edge over local retailers.
The government should really crack down on this loop hole as soon as possible. I don’t want to pay any extra money. But there is something worst than me paying more tax, that is some people paying tax while other people get away from it. It is totally unfair for Amazon to enjoy this extra price advantage. The government should not make it a difficult choice for me to support local retailers.
I think use tax is ridiculous because it punishes people who are conscientious and honest and rewards everyone who says, “That’s stupid; let them try to catch me.” The states have to know it, but they just keep it on the tax forms.
I always paid it, but I would simply estimate what I had bought out-of-state. I didn’t shop a lot on-line but traveled some, so I’d put a few hundred dollars and pay tax on it. My husband is extremely careful about it and will go back through all of his credit card bills, making sure that every single purchase is paid. He moved from WV (which requires that if the other state has a lower tax you pay the difference) which I think is the most ludicrous thing I’ve ever heard. He may have been the only person in the state making sure he calculated the difference on every single purchase. Come ON!!! They know that normal people don’t do that! Why are they punishing people who are honest? Now since he lives in OH, he just has to pay use tax on items that didn’t have an original state tax, but that includes pretty much all on-line purchases. If he’s not sure if he paid tax on it, he pays it at tax time. So we’re losing money and many people have never heard of use tax. Most of the ones who know about it refuse to pay it. Something is wrong with this picture.
I worked on sales and use tax for several years for a multistate business that was a hybrid restaurant/specialty food retailer. Trying to categorize products properly and figuring out what is taxable and what is not in an operation like the one I worked for is a NIGHTMARE that I can go on and on about. If states want to collect the sales tax they think they are due, the states MUST get together and agree on what products and services will be taxable and they should, at a minimum, access one single tax rate by ZIP CODE if they hope to get compliance. Right now things are SO complicated and out of control that no one can be in compliance without hiring an army of beancounters to track each and every sales transaction and no business I have worked for is willing to do that- instead they just wait for auditors to show up and then they plead for mercy. Trust me, reading Nexxus laws and trying to setup tax classifications for multi-jurisdictional sales territories and dealing with these stupid “tax holidays” is enough to give anybody a migraine headache. These moron politicians that come up with these silly tax laws really need to get a real job and sit where I do to try to comprehend the law and develop a strategy to try to comply with these stupid policies that are designed to appease their special interest lobbyists and fund their local projects. The solution- a national sales tax that is applied universally throughout the entire country. One set of taxability rules and one tax rate for every product that doesn’t change regardless of the product is sold or shipped. That is the ONLY way this problem will be resolved. Once the taxes are collected, make the states, counties and cities fight for whatever share they think is theirs with the entity that collects and distributes the tax. This way the e-tailers and the retailers are all on equal footing and beancounters like myself will stop hanging themselves whenever they hear the term “Nexus”. But i guess asking a politician to cooperate with others and design a simple solution that makes sense is like asking a bear to shit in a toilet…