More States Expect Taxpayers to Report Their Use Tax

An increasing number of states around the country are including a line on their tax forms where taxpayers are asked to report and pay any uncollected use taxes they might owe.

Nearly half of states are now asking taxpayers to report and pay any uncollected “use tax” when they file their state income tax return, according to CCH.

“Many people are unaware of their obligation to pay use tax,” said CCH senior state tax analyst Carol Kokinis-Graves. “Sometimes online and other mail order retailers do not collect the tax from the purchaser. However, even when a retailer doesn’t collect the tax, consumers are required to report and pay the use tax.”

The use tax complements the sales tax. The sales tax applies to the sale and/or lease of tangible personal property (and sometimes services) purchased from in-state sellers. Use tax applies to purchases made from out-of-state sellers but used or consumed within the state, such as online transactions. The use tax is not new, and in most cases, was enacted at the same time as the state sales tax. If an online retailer does not collect tax, it is still the purchaser’s obligation and liability to report and pay the use tax.

One way most of the states are now attempting to collect the tax is to include a line item on their state income tax return for reporting uncollected sales tax. Currently, more than one-half of the states, 27, and the District of Columbia include a line item on their state tax return:

However, the phrasing and detail on the forms vary. For example, line 23 on the Illinois state form 1040 provides a space for declaring “use tax on internet, mail order, or other out-of-state purchases;” and line 59 on the New York full-time resident form IT201 provides a space for declaring “sales or use tax.” Additionally, Missouri mentions use tax reporting in its 1040 instructions, but also requires taxpayers to file a separate schedule (Form 4340).

In California, taxpayers are encouraged to utilize a “Use Tax Lookup Table,” that allows taxpayers to estimate their use tax liability, based on California adjusted gross income, on non-business purchases of individual items that cost less than $1,000. The table is included in the instructions that accompany personal income tax returns. For 2011, the tax table includes a use tax liability ranging from $7 for a taxpayer with an AGI of less than $20,000 to a use tax liability of $123 for a taxpayer with an AGI up to $199,999. The tax table instructs taxpayers with an AGI of $200,000 or more to multiply their AGI by 0.070 percent to determine their use tax liability.

“Many taxpayers do not track whether they paid tax on their online or mail order purchases. California provides an easy way for people to estimate their use tax liability so that they can comply with their obligation to pay the tax,” said Kokinis-Graves. “As states focus more on compliance and enforcement, this may be an approach that other states consider as well.”

“Amazon” Laws: Other Initiatives to Compel Use Tax Collection

All states want taxpayers to comply with their use tax obligations. As a result, many states have engaged in campaigns to increase consumer awareness of the use tax and the obligation to report and remit the tax. However, very few consumers voluntarily comply with their use tax obligation. Additional initiatives are under way at both the federal and state levels to help enforce compliance, generally by requiring retailers who currently don’t collect sales tax to begin doing so.

However, one of the roadblocks is that under existing laws, retailers are only required to collect sales taxes for purchases made in states in which they have a physical presence, or nexus. As more sales head online, it is projected that states lose billions of dollars annually in sales tax revenue they once collected from local retailers. As a result, states and federal lawmakers have proposed and, at the state level, passed a variety of remote seller collection bills in the past few years, also known as “Amazon laws,” to increase collection of taxes for online sales.

For example, 17 states have enacted broader nexus rules that require online retailers to collect sales and use tax even if the retailer does not have a physical presence in the state but does solicit sales through online links or pays commissions to an in-state business (known as click-through nexus); or if the retailer has an affiliation with a company doing business in the state (known as affiliate-nexus). These states include: Arkansas, California, Colorado, Connecticut, Illinois, Indiana, New York, North Carolina, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, and Virginia. The California, Pennsylvania, Vermont, and Virginia provisions are not yet in force, however. As of mid-April, 18 other states have such legislation or legislation that adds other requirements for remote sellers pending: Arizona, Florida, Georgia, Hawaii, Indiana, Iowa, Kansas, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New Mexico, Oklahoma, Pennsylvania, Tennessee and Vermont. Some of these states have reached an agreement with Amazon under which Amazon has agreed to start collecting tax at some future date.

The issue continues to rage all across the country and, as a result, the laws constantly evolve.

Some states have also enacted notice and/or reporting requirements (Colorado, Oklahoma, South Dakota and Vermont). These provisions generally require that the remote sellers advise consumers of their obligation to pay use tax, and they may also require the remote seller provide the state department of revenue with an accounting of the sales made to in-state customers. However, on March 30, 2012, a federal court permanently enjoined the imposition of Colorado’s notice and reporting requirements because it found them to be unconstitutional under the Commerce Clause.

For a chart of state sales tax activities, visit http://www.cch.com/cchamazontaxmap.pdf.

On the federal level, several bills also were introduced in 2011 to try to bring a uniform solution to the issue:

• The Main Street Fairness Act, introduced in July, sought to give states following the Streamlined Sales and Use Tax (SST) Agreement the authority to require retailers, with limited exceptions, to collect sales tax on online purchases, regardless of nexus. The SST effort is an initiative to simplify state sales tax so that there are common definitions for taxable products and uniform procedures across the states. To date, 24 states have passed laws to abide by SST rules. However, the Main Street Fairness Act was introduced in both the Senate and House of Representatives with only Democratic sponsors.

• The Marketplace Equity Act, introduced in October in the House of Representatives, and the Marketplace Fairness Act, introduced in November in the Senate, would not require states to join the SST Agreement or make the system changes required under SST. Rather, a state would be authorized to require remote sellers to collect tax for sales into that state so long as state law met certain requirements. The bills were introduced with bipartisan support.