You’re either a tax cheater or one of the most organized, honest people on Earth.
That’s because most of us don’t pay something called a “use tax” – what we owe when buying items online or in another state without paying any sales tax. Here is a specific example from the Pennsylvania Department of Revenue…
You buy a book from a website that does not collect Pennsylvania sales tax. The book is delivered by the website through a freight company to you in Pennsylvania. You owe Pennsylvania use tax on the entire purchase price of the book, including any shipping and handling fees charged by the seller.
There’s a catch, though – each state has its own “use tax” rules. That’s why online marketplaces such as eBay don’t charge it automatically. It’s complicated, so they just dump the responsibility onto you, the purchaser. And according to a survey this month of more than 1,800 Americans by Toluna QuickSurveys, 73 percent don’t know how to pay use tax. Which makes sense, because they probably don’t know the rules, either. Here’s what else the survey found…
- 16 percent of Americans lie about how much use tax they owe
- 73 percent don’t worry about being audited over it
- 59 percent aren’t sure how much they owe
- 74 percent are likely to buy more online if there is no sales or use tax
The government wants its money
Americans bought $225.5 billion of stuff online sales in 2012, according to the U.S. Department of Commerce. On that, states lost out on a combined $23 billion in uncollected sales tax revenue, according to estimates from the National Conference of State Legislators.
A lot could be done with that money. (As we all know, because we did other things with it.) And state governments might soon find a way to get it.
“There has been speculation for some time that state governments might one day have insight into consumers’ online purchases and credit card statements, which might not sit too well with lots of Americans,” TaxAudit.com VP of customer advocacy Dave Du Val says. But even if the NSA doesn’t suddenly decide to share its treasure trove with state governments, new laws could accomplish the same goal.
And some retailers support it. Amazon long opposed the idea it should collect sales tax from users, but as it began opening shipping centers in more states, it gradually began collecting sales tax in more of them. Now it backs a sales tax proposal by the House Judiciary Committee for Internet sales, since it’ll have facilities in most states and can collect the tax.
How to figure out use tax
Kevin Sullivan, the commissioner of Connecticut’s Department of Revenue told National Public Radio, “The expectation that taxpayers would voluntarily go through all the trouble of calculating what they owe is completely reasonable.”
Reasonable to him, maybe. But what about the millions of people who don’t know the confusing rules? Here’s how you calculate your use tax…
- Save all of your online purchase receipts.
- Go through each receipt and separate the out-of-state purchases that were not charged a sales tax.
- For those items you weren’t taxed on, add your state’s sales tax to it. But…
- …in some states, different counties have different taxes. For example, California asks for a total of all purchases out of state and online that have not been subject to California tax. Then the specific county the taxpayer lives in is listed (to determine the correct sales tax rate) and you re-calculate the use tax.
- Declare these taxes on your tax form by April 15.
No wonder most Americans don’t go through the trouble. Many tax professionals don’t even ask their clients for their online receipts that haven’t been taxed. Dave Du Val echoes that point but also issues this warning…
“In my experience, many new clients inform me that they have never been asked about use tax. But with the inroads Big Brother is making, it will become an easy audit target for the states. In my state [California], strong-armed tactics could be used by telling big companies that they need to turn over customer lists to continue to do business in California.”
Maybe it’s time to start saving those receipts and coughing up the tax money, because your state could be itching for an audit. Currently, 45 states plus the District of Columbia impose a general sales tax. Here’s a list.