- Days left

Why Your State Thinks You're a Tax Cheater

×
TaxesMost people pay their taxes voluntarily. With at least one type of tax, though, millions of Americans break the law every year -- and many of them probably never realize it. And now, states in desperate need of more tax revenue are trying to do something about that.

Online shopping has become one of the fastest-growing parts of the retail industry. Over the past holiday season, online sales rose 15% to a whopping $37.2 billion, according to comScore, setting an all-time record. On 10 separate days, sales online hit or exceeded $1 billion.

Savings and convenience were definitely two of the biggest reasons why shoppers stayed in front of their computers instead of taking to the malls during November and December. However, a big part of the price advantage that drives customers to Amazon.com (AMZN) and other online retailers comes from the fact that in many states, online retailers don't collect sales tax. That gives them an advantage over brick-and-mortar retailers in the state, an advantage that many increasingly see as unfair. That's what's behind the drive to force Amazon and others to start collecting sales taxes from customers no matter where those customers live.

States are focusing their attention on online retailers because it's easier to go after the big fish. But in reality, when you make an online purchase, you're typically breaking the law of your state if you don't report it and pay whatever use tax may apply.

Getting More Use

The 45 states that impose sales taxes all also have what's known as use tax provisions. Basically, the use tax is meant to cover for cases where the state didn't get to collect the appropriate sales tax. So if you go out-of-state to buy something -- perhaps to one of the five sales-tax-free states -- you technically owe use tax on your purchases.

As a practical matter, it's always been hard to enforce use taxes. One report from Orange County, Calif., revealed that 99.7% of residents failed to pay use tax on products that they bought out of state.

But in recent years, many states have added lines on their income tax returns covering uncollected sales and use taxes. In total, 26 states include a declaration of use-tax liability on their returns -- meaning that if you fail to mention such a liability, your signed return can be used against you on an audit.

More interesting, however, are some creative provisions that a few states are using to boost revenues. Rather than expecting you to keep track of all your online purchases over the course of the year, some states offer taxpayers so-called "safe harbor" provisions for meeting their use tax obligations.

California, for instance, lets taxpayers pay 0.07% of their adjusted gross income -- amounting to $70 for someone earning $100,000 in a given year. Michigan uses a similar approach based on 0.08% of income, but it expressly doesn't apply for purchases of more than $1,000, for which taxpayers have to pay additional tax on top of the calculated amount.

Will You Volunteer to Pay?

Given the difficulty that state tax agencies would have in enforcing even these beefed-up use tax provisions, you can expect most of the focus to remain on finding ways to force businesses to collect sales tax on the states' behalf. The big question then will be whether losing what often amounts to a 5% to 10% "discount" on online purchases pushes shoppers back toward traditional retail stores.

Nevertheless, if states do decide to make examples of individual taxpayers, not knowing about the use tax laws won't be any defense. With interest and penalties potentially applying, you might prefer to take advantage of the safe harbor provisions that some states are offering rather than rolling the dice.

More on Taxes:


Motley Fool contributor Dan Caplinger loves all things tax-related, for some bizarre reason. You can follow him on Twitter here. He doesn't own shares of Amazon.com, but The Motley Fool does. Motley Fool newsletter services have recommended buying shares of Amazon.com.



Increase your money and finance knowledge from home

Introduction to Preferred Shares

Learn the difference between preferred and common shares.

View Course »

Advice for Recent College Grads

Prepare yourself for the "real world".

View Course »

TurboTax Articles

Video: How to Claim the Affordable Care Act Premium Tax Credit (Obamacare)

The Affordable Care Act Premium Tax Credit is a new refundable tax credit that can lower your monthly health insurance premiums. If you qualify for the tax credit, you can claim the Premium Tax Credit throughout the year to lower your monthly health insurance premiums, or claim the credit with your tax return to either lower your overall tax bill or increase your tax refund.

Cities With the Highest and Lowest Taxes

Geography has a lot to do with personal finance, and where you live in the United States has an impact on your annual tax burden. While federal income taxes are assessed in a consistent manner coast to coast, state and municipal taxes, such as sales and property taxes, vary widely.

When the IRS Classifies Your Business as a Hobby

If your business claims a net loss for too many years, or fails to meet other requirements, the IRS may classify it as a hobby, which would prevent you from claiming a loss related to the business. If the IRS classifies your business as a hobby, you'll have to prove that you had a valid profit motive if you want to claim those deductions.

Hurricane Sandy Tax Relief

Several tax provisions were put in effect to help taxpayers who live or do business in areas affected by Hurricane Sandy - but a number of those provisions expired on Feb. 1, 2013.

Add a Comment

*0 / 3000 Character Maximum

24 Comments

Filter by:
mmcki43802

The problem with sales tax is that it is hard to assess, collect and remit because it is charged in accordance with the location of the customer. A company may be in one state and ship to all 50. Each neighborhood in the USA has its own sales tax. Do you have any idea how hard it is to assess, collect, file and pay all of the taxes. Why don't they
try streamlining the system with a national sales tax rate to be assessed on all such sales. Only then will the states
actually see the sales tax revenue they so desire. But the states refuse to address this issue. And we get to pay less sales tax. Good for us.

February 24 2012 at 4:22 PM Report abuse rate up rate down Reply
Sylvie

comment

February 17 2012 at 8:26 PM Report abuse rate up rate down Reply
Sylvie

The states could do much better to tax the interest charged on credit card balances - above the state's usery limit. That would be done on the basis that the credit card companies use local banks and retailers to sign people up for the cards, and having an instate agent, the card companies they could justifyably be taxed. Further, use of the credit card within the state could prompt an additional justification for taxing the excessive interest charged.

February 17 2012 at 8:26 PM Report abuse rate up rate down Reply
Sylvie

The states could do much better to tax the interest charged on credit card balances - above the state's usery limit. That would be done on the basis that the credit card companies use local banks and retailers to sign people up for the cards, and having an instate agent, the card companies they could justifyably be taxed. Further, use of the credit card within the state could prompt an additional justification for taxing the excessive interest charged.

February 17 2012 at 8:25 PM Report abuse +1 rate up rate down Reply
mom4matt

Where does it stop? Say I purchase a used item at the thrift store. The governement received sales tax on the original item, sales tax on the item when I purchase it at the thrift store,then if I sell it online,they want sales tax on it YET again?How many times should you pay sales tax on one item?

February 17 2012 at 8:01 PM Report abuse +2 rate up rate down Reply
1 reply to mom4matt's comment
Scottilla

Each time a sale is made. It's a "sales tax."

February 23 2012 at 12:31 PM Report abuse rate up rate down Reply
Nikacat

Screw the states. The problems they have are entirely the fault of the free spending politicians who can't resist the urge to buy another vote.

February 16 2012 at 10:09 PM Report abuse +1 rate up rate down Reply
sgentilejr

It is sad indeed the author of this article is so ignorant. If he had some knowledge he would know that the US Constitution PROHIBITS the States from taxing Interstate commerce. No taxing of interstate commerce is very CLEARLY in the US Constitution. "NO tax" means exactly that " NO TAX"____ regardless if they want to call it a sales tax, consumption tax of use tax.
If the States want to tax Interstate Commerce then they must approve that change to the US Constitution first. We are not "Cheating" on our taxes and instead the States are attempting to Violate the US Constitution. The states Sales tax revenues are down ONLY because our pockets are empty and we cannot spend as much as we did in the past. Also because many businesses that cannot make ends meet are not sending in to the States all of the sales taxes they collect. Come on get real___is anyone foolish enough to believe the Mon and Pop stores are sending in to the States all of the sales taxes they charge their customers????

February 16 2012 at 2:36 PM Report abuse +4 rate up rate down Reply
Miles

Cheat on my taxes?? Are you serious? The government takes 40% directly out of my paycheck, taxes me on every purchase, service, and other aspect of life, and then spends it with reckless abandon. Then they call ME a thief because they didn't get a piece off some purchase that they are not entitled to in the first place? Wow, what a system!

The true thieves are the government workers who spend any tax money collected for purposes other than vital government services. Subsidizing illegals, bailing out failing businesses, wealth redistribution, etc. are all unconstitutional & illegal uses of tax monies, and is THEFT.

I hope Amazon & the other online retailers fight this every step of the way. The government gets far more of my money than I will ever use in services, and they call ME a thief. Just amazing!

February 16 2012 at 1:50 PM Report abuse +5 rate up rate down Reply
bobbysfbay

I personally buy almost all of my high value items at brick and mortar stores that are located outside of my home state. I pay the sales taxes on the items purchased at the much lower rate in the town and state where I travel on business. I virtually never pay the outrageous sales taxes in my home state of California. So, if I pay the full state sales tax in the state that I make the purchase in and not my home state that is supposed to be illegal and I owe California taxes on my purchase also? Or are we only talking about out-of-state purchases online?

February 16 2012 at 1:08 PM Report abuse +1 rate up rate down Reply
Steve

The tax savings is a minimal consideration when shopping online. . . the main reason is that items can be purchased for 20-50% less than the local brick and mortar store charges . . . even paying the state "use tax", many items are just less expensive when one can shop nationally/internationally with the stroke of a keyboard . . .

February 16 2012 at 12:59 PM Report abuse rate up rate down Reply