States Add Use Tax to Tax FormsSeveral states are making a concerted effort to collect use taxes from their residents because of lost sales tax revenue from an increase in remote sales by catalogers and e-commerce merchants; Michigan and North Carolina joined 10 other states this year to add a line on their income tax forms where residents can calculate how much they owe for out-of-state purchases.
Use taxes are at the heart of the current remote sales tax battle that centers on a Supreme Court decision passed in 1992 saying sellers have to collect sales taxes only where they have a physical presence. As more consumers purchase goods online and through catalogs, fewer go to brick-and-mortar stores in their states and, as a result, contribute less sales tax to their state governments.
All 45 states with a sales tax have a companion tax for purchases made outside the state. Since 1937, consumers have been required by law to pay a use tax when they purchase goods out of state from a retailer that hasn't charged sales tax in their jurisdiction. However, if a person is not audited, it's difficult to enforce the law and too expensive for a state to single out for special audit treatments, tax experts said. In addition, some states have privacy laws that prohibit state governments from tracking credit card information to see where consumers have purchased products and whether they have paid the appropriate use taxes.
However, many states are trying to get that money back. North Carolina, Virginia, Maine and Michigan have all made efforts in the past few years to get broader participation in fulfilling their residents' obligation to pay use taxes.
"With the birth and rapid growth of Internet sales, revenue lost from non-reporting of the use tax is becoming substantial," said Michigan state treasurer Mark L. Murray. "Noncompliance has been a problem for years with mail-order sales, but the issue of remote selling becomes much more serious with the fast growth of Internet sales."
Michigan's consumers purchased an estimated $7.3 billion in 1999 through remote sales -- both mail-order and Internet -- and remote purchases by the state's residents are expected to grow dramatically in the coming years, mostly because of sales over the Internet, Murray said. In addition, the state is losing an estimated $173 million in use taxes from remote sales in fiscal 2000. As a result, Michigan "elevated the level of information in our income tax booklet this year so the first thing you see is information about individual use tax obligations," he said.
The booklet explains what the use tax is in plain language and offers a work sheet allowing people to estimate their use tax based on their income level. The state also added a line to the income tax form itself so residents don't have to file a separate form. Line 30 requires residents to report a year's worth of out-of-state purchases made online or through catalogs. North Carolina added a similar line this year with a similar goal.
Michigan's Treasury Department also set up a special section on its Web site, www.treas.state.mi.us/mitax/suw/useindex.htm, that teaches consumers about use taxes. Part of the Web site shows catalogers that charge sales tax in the state and those that don't.
"Right now, when a purchaser buys a sweater from Eddie Bauer in this state, Eddie Bauer takes care of the sales tax obligation for them," Murray said. "If they buy a similar sweater from L.L. Bean or Lands' End, that tax is not being collected and that is a meaningful burden to the consumer, to ask them to keep track of their purchases. As more consumers become aware of their [use tax] obligation in Michigan, they will come to appreciate the companies that take the burden off them, and that might help make direct marketers become sensitive to it."
Direct marketers have mixed feelings about these states' increasing efforts to collect use taxes. Some fear it may turn consumers off from buying remotely.
"It cuts both ways," said Stanley Sokul, a Washington-based lawyer and member of the Association for Interactive Media. "On the one hand, if the states take this approach, the direct marketers will not have to confront the tax collection burden themselves. They will not be audited and they will not have to know every sales tax code for each state. On the other hand, if these states are going to harass the purchasers, it could make them not want to bother buying products from companies that do not have a physical presence in that state."
Murray said he is waiting for the tax season to play out to see whether the increased awareness will have any effect on use taxes.
"I don't have any predictions," he said. "But I can say that I do not think this is going to be a one-year effort. I think it is going to take some time to see whether or not this improves any complications."