Don’t forget the use tax

 Commentary, Main Street Fairness Act, Streamlined Sales Tax, Tax Specialist  No Responses »
Dec 012012
 

States scramble to get a cut of online shopping taxes

Preliminary data show that internet sales are keeping pace with local brick-and-mortar sales so far this year. With this much revenue on the line, states are scrambling to inform the cyber-consumer about taxes due on internet purchases.

To date compliance has been, to put it mildly, not good.

Whether or not states have special internet sales legislation on the books, most states require the payment of use tax on any untaxed purchase, including those made over the internet or from out-of-state vendors.

Use tax is due on any taxable tangible product purchased by non-tax-exempt entities when no sales tax was collected at the time of purchase, regardless of where the item was purchased. This includes items purchased over the internet or from out-of-state sources including Amazon, eBay and others.

States have identified unpaid use tax as a significant loss of revenue during a time when budgets are stretched to the breaking limit. An estimate by the Streamlined Sales And Use Tax group claim $20 billion a year is being lost.

Identifying the problem and figuring out what to do about are two different things. Most states have been at a loss as to a practical remedy. Some have included a self-reporting section on the state income tax return. Other states rely on press releases, news coverage and guilt. None of these methods have so far show much effect on compliance with some sources saying as little as 20% of these taxes are collected.

Federal legislation is being closely examined by both the senate and house to try to come up with a “fair” solution to this uncollected tax problem.

The Main Street Fairness Act, which has failed in previous years, was introduced this year by Sen. Richard Durbin (D-IL) and is currently being reviewed by the Senate Committee on Finance. The bill proposes to promote the simplification, administration and collection of sales and use taxes. If made law, a minimum revenue threshold would be determined and online retailers above that line would be forced to collect sales taxes on all transactions, even those made to out-of-state purchasers. Versions of the bill are before both the senate and house and are being actively promoted by states signed on to the Streamlined Sales and Use Tax Agreement, several retailers associations, and even Amazon.com

Unfortunately, like most of the issues involved the fiscal cliff miasma, this one seems to have little chance of resolution before year’s end. You can track the bill’s progress at http://www.govtrack.us/congress/bills/112/s1452.

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Hotel taxes put online booking companies under the microscope

 Commentary  No Responses »
Sep 262012
 

Dozens of states are actively targeting online travel companies claiming they are owed millions of dollars in hotel booking taxes.

Hotel tax litigation pits states against online travel sites

The negotiator mascot is unlikely to broker many compromises  as dozens of states bring lawsuits seeking to apply hotel and lodging taxes to profits made by online travel sites.

A recent summary ruling in Washington, D.C. found that online travel companies (OTCs) including Expedia, Travelocity and Priceline are accountable for the 14.5% tax due on the full retail price of hotel rooms rented in the district rather than the greatly reduced wholesale rate they had been collecting.

As a result of this ruling, D.C. expects to collect an additional $6 million to $10 million annually and that as much as $200 million is owed in taxes and penalties dating back to 1998.

The city cannot begin collecting the tax yet since portions of the lawsuit are yet to be decided. In fact, the case may not be decided for years to come since the OTCs, represented by the Interactive Travel Services Association, have not announced whether they intend to file individual appeals.

Unsurprising, the Interactive Travel Services Association disagrees with the court’s decision.

“It is also an outlier as most other courts nationwide that have reached judgment have ruled in favor of the online travel companies,” Joe Rubin, association director, said in a statement.

In fact, just last month the U.S. Sixth Circuit Court of Appeals ruled against an appeal brought by Ohio municipalities basically finding that OTCs are not subject to the application of lodgings taxes for their services because they do not “operate, furnish, lease or maintain hotel rooms”.

The trade group claims that their industry has prevailed in 22 of 29 similar lawsuits.

Rubin said in a press release, “We hope other municipalities will recognize this recurring trend.  As demonstrated by these decisions, there is little basis for states and localities to continue to pursue dead-end litigation that wastes taxpayer resources.”

States, on the other hand, might not see such litigation as “wasting taxpayer resources” as they continue to struggle to make up for record budget shortfalls. While general sales tax collections continue to be less than hoped for in many regions of the country and hundreds of thousands of vacant homes depress property values and the related tax collections, it seems unlikely that states will turn a blind eye to what they see as lost lodgings taxes.

And other industries should be prepared to be put under the microscope as well. As congress continues to squabble over the vagaries of reinstating various kinds of taxes, the states are under increased burden to find their own creative solutions.

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California likely to start publishing tax decisions

 Commentary  No Responses »
Jun 282012
 
Charles F. Spielmann

Charles F. Spielmann

State tax law may be made available to the public

A bill has passed the California Assembly that, if passed, will require the State Board of Equalization (BOE) to issue written decisions within 120 days in tax cases involving amounts of a half million dollars or more.

California’s BOE is in charge of sales and use taxes, and fees including administration, assessment, and collection and prescribes its functions with respect to property taxes.

AB 2323, penned by Assembly Member Henry Perea, would require such court findings in tax cases to be published on the state web site and made publicly available as legally citable precedent. If enacted, each decision would be required to contain: findings of fact;  legal issue presented; applicable law; analysis; disposition; and names of adopting board members.

It makes me wonder why it has taken so long for California, and many states like it, to provide the public with open access to established tax law. Do legislators get some kind of pleasure blindsiding unwitting violators? Or, have they been avoiding providing facts in the fear that it might empower state businesses and individuals defending themselves in court?

View  profile.

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New York goes after telecommunications company

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Apr 262012
 
New York sues Sprint over unpaid telecommunications taxes

New York, with one of the highest telecommunications taxes in the nation, this month sued Sprint-Nextel over what it claims is more than $100 million in "uncollected taxes."

New York State Attorney General Eric Schneiderman, with the help from investigative group Empire State Ventures LLC, filed a lawsuit this month against Sprint-Nextel Corp., claiming it deliberately under-collected and underpaid $100 million in sales taxes.

According to the Associated Press, the lawsuit is based on a 2010 state law allowing the government to sue over tax losses due to fraud. If found guilty, the company could face a fine up to 3 times the amount NY claims was underpaid. The amount of the lawsuit could keep growing unless Sprint-Nextel complies with state law requiring taxes to be collected on the full amount of the of their monthly access fees for calling plans.

According to the complaint, Sprint failed to collect taxes on the interstate portion of the phone service, something AT&T and the other networks did collect taxes on. New York estimates  that since 2005 Sprint underpaid by about 25 percent and submitted false records.

Telecommunications taxes average out to 9.87% nationwide, but run the gambit from states  such as Oregon (1.81%), Nevada (2.08%) and Idaho (2.20%) , to those considerably higher than the rest, such as New York (17.78%), Washington (17.95%) and Nebraska (18.64%), according to The Tax Foundation.

With telecommunications taxed at such a substantial percentage, New York obviously has a vested interest in making sure the money is collected and remitted properly. ”We’re hoping to have more folks scrutinizing any rip-off of state and local governments,” said Schneiderman, who as a former state senator helped redraft the law making this lawsuit possible.

Want to see what states tax cell phones the highest/lowest? Check out The Tax Foundation.

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Simplified use tax could cause sales to be double taxed

 Commentary  No Responses »
Mar 012012
 

Charles F. SpielmannFor an item so nice, would you like to pay for it twice?

Collection of sales and use tax has become serious business. So serious, in fact, that there have been several highly publicized cases recently where federal lawmakers or individual states have attempted to force online retailers to collect tax on some, if not all, of their out-of-state sales.

Many editorialists, battling back and forth on the merits of an “internet tax,” are forgetting that states already have a method for getting their “fair share” of tax on out-of-state sales. It’s called use tax.

Unlike sales tax, which is collected and remitted by a retailer, use taxes are the responsibility of the purchaser and are due any time sales tax is not collected. All but a handful of states lay claim to it. The problem with use tax, as states see it, is that few individuals understand it, even fewer pay it, and it’s difficult to enforcing its collection.

Almost half of the states have recently included an entry on individual income tax returns where taxpayers can voluntarily calculate an amount for use tax liability. Still, very few individuals have proved willing to save a year’s worth of online receipts and pay their use taxes this way.

Many states are now allowing residents access to a simplified use tax lookup chart in the hopes that it will increase compliance.

The use tax chart is intended to make it easier for residents to meet their non-business related use tax obligation by providing them with a set figure based on adjusted gross income (AGI). For instance, Californians filing their 2011 state income tax with an AGI of between $150,000 to $199,999 will be allowed to enter $123. This chart can be used as long as any single item purchased cost less than $1,000 and the filer isn’t required to have a Consumer Use Tax account.

California has a vested interest in making use tax as easy as possible to pay. The Board of Equalization estimates about $1.1 billion in use taxes go unpaid each year. The state has been struggling with record budget shortfalls and it is estimate more than $10 million in additional use tax will be collected this year.

On the surface, this sounds like a great idea. Income tax filers are provided a simple figure to enter on their tax forms, saving them time and the hassle of collecting and calculating totals from individual receipts and e-mails for every out-of-state purchase they’ve made over the last year.

While “simple” is tempting, some individuals may find they are paying use tax on an item that sales tax has already been collected on.

Many states are filling budget holes by widening the taxpayer base.

Once, a business only had to collect and remit state sales taxes if they had a physical presence in that state – also known as nexus. Increasingly, states such as New York and California have redefined what constitutes nexus to include affiliate marketing.

California recently passed a law saying that any company advertising products on an in-state based web site, and paying said affiliate a commission, constituted nexus. A very public battle ensued between the state of California and Amazon.com resulting in the company vowing to terminate all affiliate programs within the state rather than collect the sales taxes.

Needless to say, California’s lawmakers understood what a huge economic blow that would be, and the lawsuit ended in a settlement which temporarily allows Amazon to retain their existing affiliates as is, with an ill-defined promise to begin collecting state sales tax at a later date.

It is already difficult for a consumer to predetermine whether an online retailer has a physical presence in their state. With ever-changing definitions of nexus, as well as inconsistent court rulings on the subject, it will be basically impossible. More and more online retailers will give in to the inevitability of having to collect sales taxes, and will start quietly adding tax on every sale. It will be easier and easier for purchasers to forget or misunderstand that they have already paid tax on internet purchases and that use tax is not required on those sales.

Until online retailers have a more clear set of rules to go by, you might find it is worth your while to hold on to those receipts and do the calculation yourself rather than fall back on the oh-so-simple state-calculated use tax chart.

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A federal Debt Reduction Sales Tax could be around the corner

 Commentary  No Responses »
Jan 022010
 

A brief look at what the recently proposed deficit reduction plan would mean for retailers and small businesses

 By Charles F. Spielmann

The Rivlin-Domenici plan, named for co-sponsors Alice Rivlin, Democrat and former Federal Reserve vice chairwoman, and former Senate Budget Committee Chairman Sen. Pete Domenici (R-N.M.), was unveiled Nov. 17 by the federal Debt Reduction Task Force. The plan charts a path to “create a balanced package of spending cuts and revenue increases that solves the debt crisis.”

While many of its provisions affect primarily private individuals, the plan outlines proposals that would have an impact on the corporate world. Payroll, health insurance offerings and more would be affected.

The plan calls for the enactment of a temporary “payroll tax holiday,” excusing employers and employees from paying the 12.4 percent tax into the Social Security trust funds during 2011 in an effort to create between 2.5 and 7 million new jobs over two years under Congressional Budget Office assumptions.

The plan’s roadmap to debt reduction calls for phasing in various elements starting in 2012. The biggest such element is the imposition of a federal Debt Reduction Sales Tax (DRST), which is also being referred to as a type of value-added tax (VAT). This new tax – which would start low and eventually reach a maximum rate of 6.5 percent – would fall on a broad base that would include privately funded healthcare costs, food and beverages, clothing, legal and accounting services, and many other items not typically captured by state retail sales taxes.

“States will benefit from piggy-backing their taxes on top of a broad-based federal sales tax. State tax authorities will benefit from access to IRS data from sales tax returns, just as they now rely on the IRS to help them enforce state income taxes,” the plan’s final report notes.

The plan would offer enhanced tax benefits in the form of new refundable credits for children and for the first $20,300 of a worker’s earnings to offset the DRST’s burden on lower-income families. Combined with the forecasted economic boost of the tax holiday, improved economic health and other provisions for working families, the DRST is not expected to pose a heavy burden on working Americans.

Another big change is the treatment of tax exemptions for employer-provided health insurance.

Effective in 2018, the plan would cap contributions by employers and employees who are eligible for tax-favored treatment, and then reduce the cap each year by equal dollar amounts so that by 2028, all contributions to employer-based health insurance will be taxed. In addition, the plan also calls for the eventual elimination of Health Savings Accounts (HSAs) as part of a move to remove the incentives for more expensive health insurance.

The Rivlin-Domenici plan would not affect individual states’ sales tax structures but would operate alongside state sales taxes and, as such, would require additional handling procedures to properly remit the federal DRST. This could create headaches initially for retailers, requiring retailers to receive training in the handling and management of DRST monies and the development and deployment of appropriate remittance structures.

While implementation isn’t guaranteed, the Rivlin-Domenici plan presents a path to reduce the federal debt and thus improve the economic climate, thereby creating incentives for business growth.

All in all, the plan looks like it could benefit the economy if it were to make it through congress, but it’s yet to be seen how retailers and businesses as a whole will respond to the “shift” in tax burden and paperwork headaches.

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