Did you buy stuff online, by mail order, or out-of-state last year and think you were saving sales tax? Well, think again; there’s a good chance you’re supposed to report it on your 2011 state tax return. In an effort to chase revenue, states are ramping up efforts to collect “use tax.” There’s now a line item on individual returns, demanding use tax on these purchases, in 26 states and the District of Columbia.
In a tedious exercise, you add up purchases where you didn’t pay sales tax, apply your state’s sales tax rate, and report it on your state personal income tax return or a separate use tax return. (Another 6 states tell taxpayers about the duty to pay use tax in state income tax information booklets. Do the state tax authorities really think taxpayers are reading through these booklets?)
It’s not that the use tax itself is new; it’s just that states are trying to nudge taxpayers to comply. A use tax line item is new for Arizona taxpayers this year; Illinois and Nebraska added use tax lines on returns last year. Another inducement to pay: California added a lookup table this year, giving its taxpayers a safe harbor way to estimate their use tax liability for purchases under $1,000 a pop.
Many states have become more aggressive about compliance with and enforcement of the use tax obligation, and one of the ways they try to make it more convenient for individuals to report and pay it is by including it on the state personal income tax return, says Carol Kokinis-Graves, an analyst with CCH, a Wolters Kluwer business.
Indeed, states with line items for use tax have a higher percentage of taxpayers who report use tax, says Nina Manzi, a legislative analyst for the Minnesota House of Representatives who has studied use tax collections in other states. For example, Michigan use tax collections increased from $240,000 in 1998 to $2.9 million in 1999 when it introduced a line item for use tax, and reached $5 million in 2009.
States providing taxpayers with a use tax lookup table (you look up a safe harbor use tax liability based on your adjusted gross income) have higher participation rates (1.6%) than those that don’t (0.6%), Manzi found. Maine has the highest participation rate by far at 9.8%, possibly the result of its once assuming use tax liability based on income if none was reported, and an aggressive publicity program in 2006.
But more than half the states with use tax line items have reporting rates of less than 1%. In Connecticut only 12,676 individual returns reported owing use tax out of 1.688 million returns in 2009, bringing in $8.3 million in revenue. In California, only 60,731 individual returns reported owing use tax out of about 15.5 million returns in 2009, bringing in $10.3 million in revenue. (The number of California returns reporting use tax is ticking up, from 38,076 in 2008 and 53,282 in 2009.) The Board of Equalization expects its new lookup table will increase reporting further.
Sure, lookup tables make life easier. In California, a taxpayer with an AGI of $200,000 can simply put down $140 and forget about combing through old Visa and American Express statements (individual items bought for $1,000 or more still must be calculated separately).
That sure beats the effort Connecticut taxpayers were supposed to go through this year, making separate lists of items taxed at 0%, 6%, 6.35% and 7%, depending on the date of purchase and the purchase price of each item. Connecticut had an all-year tax exemption for clothing and shoes under $50, but it was repealed as of July 1, 2011 (the same day the state sales tax went up from 6% to 6.35%). A new luxury tax, also as of July 1, meant each item of clothing and shoes that cost more than $1,000 got dinged with a 7% tax. And the new 6.35% sales tax was lifted for clothing and shoes priced up to $300 bought during Connecticut’s sales tax holiday—Aug. 21 to Aug. 27. Oh, and any item costing $300 or more has to be listed separately.
But are the lookup tables fair? In a fact sheet on the Arizona tax, the state explains why it decided not to publish a look-up table based on a taxpayer’s income or family size, recognizing that buying habits vary widely, with some taxpayers making a lot of Internet and catalogue purchases and others making none at all: “A chart would assume everyone had the same buying habits and some taxpayers would be reporting an amount not owed and others would have tax forgiven.”
Manzi figures Minnesota could collect up to $4.6 million in additional use tax if it added a use tax line item to the state individual income tax return, implemented a lookup table, and eliminated the current de minimus exemption for up to $770 of purchases (that’s the amount that would have generated $50 of tax at the 6.5% rate in effect when the exemption was enacted). In 2009, only 734 individuals reported owing use tax, bringing in a total of $370,000 in revenue. Minnesotans can bank on the exemption, at least for now. “We’ve had a strong bias from our legislators and the governor’s office against doing anything that could be cast as a tax increase,” Manzi says.
Here are the line item “use tax” states, according to Manzi: Alabama, Arizona, California, Connecticut, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Nebraska, New Jersey, New York, North Carolina, Ohio, Oklahoma, Rhode Island, South Carolina, Utah, Vermont, Virginia, West Virginia, and Wisconsin (and the District of Columbia). And here are the “use tax” states that provide information about the tax in their income tax booklets: Colorado, Idaho, Iowa, Minnesota, North Dakota and Pennsylvania. Can’t say you didn’t know about it.
