Simplified use tax could cause sales to be double taxed

For an item so nice, would you like to pay for it twice?

Simplified use tax

Simplified use tax

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.  The need for a simplified use tax seems to be growing.

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.

Sales tax return basics

By Charles F. Spielmann, Zip2Tax

Who needs to file when?sales tax return filing

Different states have different sales tax return filing dates. Sales tax remittance can be required on a monthly, quarterly or other basis, often based on how much sales and use tax a business collected in the relevant reporting period.

For example, New York breaks down the filing schedule into three categories: annual, quarterly and part-quarterly (monthly). How frequently you must file sales tax returns depends on the amount of your taxable sales (and purchases subject to the use tax) or the amount of tax due.

Businesses that owe $3,000 or less in sales tax during the annual filing period, defined as March 1 through February 28 (29 in a leap year), should file an annual return.

Quarterly returns must be filed if taxable receipts, purchases subject to use tax, rents, and amusement charges are less than $300,000 during the previous quarter. (Most vendors file quarterly when they first register to collect sales tax.) The filing periods for quarterly filers are March 1 – May 31, June 1 – Aug. 31, Sept. 1 – Nov. 30 and Dec. 1 – Feb. 28 (29 in a leap year).

$300,000 of taxable receipts or more in a quarter, or a business that is legally defined as a distributor has sold a total of 100,000 gallons or more of automotive fuel (taxable or nontaxable), and a part-quarterly (monthly) return must be filed. The filing period begins with the first month of the next sales tax quarter if the business files an annual or quarterly sales tax return.

The Prompt Tax return applies, in general, if the annual sales and use tax liabilities are greater than $500,000. The filing period is monthly.

Even if a business does not make any taxable sales or purchases during the reporting period, sales and use tax returns must be filed by the due date.

The method of filing varies as well. While many returns can (and must) be filed electronically using the Web File feature on the New York State Department of Taxation and Finance web site, certain others, including annual filers and certain taxes on parking services in New York City, must be printed out and physically mailed to the department.

Check with a professional CPA or tax lawyer, and contact your state’s tax commission or department of taxation/revenue to be sure your business is compliant and up to date.

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