States Want Those Sales Tax Dollars

It's a big sticking point with many states that so many purchases made over the Internet don't include sales tax. For instance, if you live in Washington State (as does your's truly) and you buy something from a company that has no presence in this state, you pay no sales tax. If they have a presence here, under the same corporate name (like Amazon) sales tax is collected.

If you live in Washington State and you buy one of my paintings, I must (and do) charge sales tax. But if you live in New York State or any of the other 48 states, I will not charge you any sales tax. I do report the sale when I fill out my Washington State business tax forms, but I get to deduct it as an exception since it was an out-of-state sale.

All this, of course, is a real sore point with Washington and all the other states that charge sales tax. They want those tax dollars! But there is a way they can collect them, especially if they come after you.

You see, every state that has a sales tax, also has a Use Tax. What's that, you ask? Its basically a law that says if you buy something from out-of-state and are not charged sales tax, you are required to pay your state the same amount of tax that you would have paid in-state in the form of a use tax.

Example...you live in California and go to Oregon, a state with no sales tax. You buy $100 worth of goods. California's use tax is 7.25%, therefore you would be required to pay the state of California $7.25. In Washington State, you are required to pay the same amount of use tax that you would have paid had you bought the item in your home town, since every area here has its own tax rate.

Of course, very few consumers report their out-of-state or non-taxed Internet sales. But states are looking to beef up their enforcement of use tax collection. Here is how California is doing it:

Last year, California added a line on its state income tax form that requires residents to estimate how much use tax they owe. So, if you report nothing and did actually do some tax-free Internet buying, you are lying to the state (remember, you sign your tax form under penalty of perjury) and, if you get audited, you could wind up paying a pretty hefty penalty.

This year, the state tried a use-tax amnesty program that brought in about $2.3 million. That leaves the estimated $1.34 billion that went uncollected, according to California. Other states report similar shortfalls.

From the perspective of state tax collectors, the simplest solution would be to require out-of-state shippers to collect taxes. But shippers generally can't be compelled to do that, thanks to a Supreme Court decision that said only businesses with offices or other tangible connections in the destination state can be required to collect sales taxes.

Still, state officials are lobbying Congress to change these rules. They're proposing a so-called "streamlined sales tax." The idea is to create a uniform set of rules effectively permitting tax agencies to require out-of-state sellers to collect use taxes.

Look for state governments to keep hammering to get these sales and use taxes any way they can. Remember the old adage from Howard Jarvis..."if you've got a dollar in your jeans, there is always some government agency trying to take it."