States want you to pay sales tax on online shopping
More are asking residents to 'fess up on annual tax forms.
Will you cheat on your taxes again this year?
Time was when it was easy for citizens to avoid paying sales taxes on some purchases made online or out of state. Ebay and Craigslist wouldn't be as fun otherwise.
But skirting the law is getting more difficult. Now 24 states, plus D.C., are pricking shoppers' consciences with a special line on the tax return that requests a payment for sales taxes on any goods bought out of state, including those from online retailers -- up from 20 states in 2008.
Other states collect the tax in a variety of ways, some with special forms that taxpayers are supposed to fill out voluntarily. If, like many, you don't fess up, you may get a bill.
States are trying to recoup some of the $20 billion or so they lose each year to online-sales-tax evasion. The gap exists for a quirky reason: States with sales taxes always have a "use tax" on items residents buy from out-of-state vendors. But a 1992 Supreme Court decision affirmed that out-of-state vendors don't have to collect the tax. It's up to taxpayers to track what they owe. Most don't.
"These rules are poorly understood and they make a lot of people mad," says Jim Eads, head of the Federation of Tax Administrators, a group of state tax officials. He points out that New Mexico even has a law on its books prohibiting enforcement of its use tax.
This year Kansas, Nebraska, West Virginia and D.C. added a line to their 2009 returns asking residents to pay use taxes, according to CCH. Many states warn against leaving the line blank and include a table of "suggested" contributions by income level. In New York, this works out to $78 for a return showing $200,000 of adjusted gross income. Items costing more than $1,000 are supposed to be handled separately.
Such piecemeal efforts will not be necessary if Congress passes a bill many states are pushing for: the Streamlined Sales Tax. States would harmonize their rules (but not necessarily their rates) and then collect tax on outbound sales and send it to the inbound state. So far 23 states have signed on, although holdouts include big ones like California and New York. Lawmakers seemed poised to pass the measure last year before they became preoccupied with health care, but the bill could return.
Meanwhile, some states are forging ahead. When Alabama tax officials were disappointed by the response to their line -- in 2007 it yielded only $320,000 to fill a gap they peg at more than $200 million -- they decided to act. Soon the state will be sending letters to 150,000 residents who haven't paid use taxes for three years. New York has long been famous for its aggressive collection of taxes on high-end items like airplanes and art.
Several tax preparers said clients hardly ever pay the tax.
"They all tell me to put down zero," says one New York City accountant who asked not to be identified. The rare exceptions, says CPA Leonard Williams from Sunnyvale, Calif., are residents who have bought items abroad. U.S. customs declarations are shared with state tax departments.
Honest souls who want to figure out what they owe will find it tough, because of a crazy quilt of current practices.
Sales tax on cars is usually collected as part of the registration process, but many online retailers collect only in states where they have a physical presence. For Wal-Mart Stores, that's everywhere, whereas L.L. Bean collects only in nine states.
Because it is a marketplace, eBay leaves sales tax collection to its vendors. Amazon, which is involved in bitter battles with several states on this issue, collects only in five (Washington, North Dakota, Kansas, Kentucky and New York). It preserves sales-tax data in customer accounts that taxpayers can retrieve.
Scott Peterson, executive director of the Streamlined Sales Tax initiative, used credit-card statements to work out what he owed Tennessee for 2009: $768. "I made a spreadsheet," he says, "so figuring it out only took about four hours."
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