April 12, 2006 11:27 AM PDT
States push to tax Net shopping
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It's also trying to strong-arm large companies that are not legally obligated to collect taxes to do it anyway. "We're working with major retailers--don't want to give any names of course--to have them collect the tax and send that amount to the state of South Carolina," Brazell said.
Washington state has no income tax, so it's at a disadvantage when trying to collect use taxes on a form due on tax day, said Mike Gowrylow, a spokesman for the state Department of Revenue. Complicating the situation is the lure of shopping in nearby Oregon, he said, which has no sales tax.
"We try to enforce the use tax when we can come up with a paper trail, like artwork, boats, planes and other vehicles," Gowrylow said. "Very few people pay it...It's a huge problem."
Tim Connolly, a spokesman for the Massachusetts Department of Revenue, said the government tries to "make people aware that they should be paying" use taxes. In 2004, Connolly said, line 33 was added to state tax returns along with a table for use tax calculations on purchases less than $1,000.
Pennsylvania directs most of its use tax collection effort at companies rather than individuals, said Steve Kniley, press secretary for the Pennsylvania Department of Revenue. "We have just begun a pretty concerted effort to encourage use tax payments by business," Kniley said.
A proposal to add a use tax collection line on state tax returns has stalled because of an unusual reason: the relative simplicity of Pennsylvania's tax code. State residents enjoy a 3.07 percent flat tax on income, with no brackets or personal exemptions, ranking the Keystone State with Colorado and Rhode Island as some of the most straightforward among the states with an income tax.
"Our issue right now is we don't have room" on the tax return, Kniley said. "Right now we have a two-page form, and we would have to go to a third page, and there are all kinds of issues with that...It would be a significant expense." If Pennsylvania eventually does add a third page, such a requirement easily could show up, he said.
Audits are another enforcement tool. (New York says it does not audit solely on the basis of suspiciously reported use tax numbers.)
"In the event that we were auditing one of our customers, one of our taxpayers, if we found a use tax liability, yes they would be held accountable for that and there would be penalties," said Gore, the California tax agency spokeswoman. Those include an interest rate of 9 percent, and, if negligence is proven, a 10 percent additional penalty.
California residents pay a sales and use tax of up to 8.75 percent in some areas, one of the highest in the nation. Golden State laws are strict: If Californians travel to a state with a 5 percent tax and shop there, the law requires them to write a check to the state tax agency for up to the 3.75 percent difference upon their return.
Ending tax-free Net shopping
If state tax collectors get their way, the days of tax-free Internet and catalog shopping will come to an abrupt end.
The obstacle that state tax agencies are currently facing is a legal concept called "nexus," which means a company can be taxed by a state only if it has a sufficient business presence. Because Seattle-based Amazon does not have offices or shipping facilities in California, for example, it's not required to collect taxes on shipments to that state.
In a 1992 case called Quill v. North Dakota, the U.S. Supreme Court affirmed the requirement of nexus--and said that only Congress had the power to change those rules. (An exception is cigarette sales, which are covered by the Jenkins Act.)
More than 40 states are participating in the Streamlined Sales Tax effort, which is designed to do two things: simplify convoluted state tax codes and make tax collection mandatory for out-of-state sellers.
Once state tax laws are simplified, the theory goes, Congress can be persuaded to eliminate the nexus requirement. Two bills that would do that--and effectively override the Supreme Court's 1992 decision--are pending in the U.S Senate.
One bill was introduced by Sen. Mike Enzi, a Wyoming Republican, and the other by Sen. Byron Dorgan, a North Dakota Democrat who is a former state tax commissioner.
In an opinion article written for CNET News.com in 2001, Enzi warned that online shopping would shrink tax revenues. "The Internet is a sales-tax loophole that is threatening to reduce our local governments' ability to provide the services we have come to rely on," he said.
But because of the fall elections, most observers don't expect Congress to consider the legislation until 2007. Until then, said Brazell, spokesman for South Carolina's tax collectors, "it's still going to be a problem because more people are shopping online."
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