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Most People Are Supposed To Pay This Tax. Almost Nobody Actually Pays It.
Originally published on Tue April 16, 2013 2:17 pm
The majority of Americans have now filed their taxes. And the majority of Americans have done so incorrectly.
There is one mistake, in particular, that lots of people made: They bought tax-free things online or in another state — and they failed to pay tax on their purchase in their home state.
It's called a use tax. As far as I can tell, accountants and tax lawyers are some of the only people who pay it.
Forty-five states have a use tax. About 1.6 percent of the taxpayers in those 45 states actually pay the use tax. So I figured I'd ask a representative of that particular 1.6 percent to explain this thing most of us are supposed to be doing every year.
"Its a lot of fun," Daniel Gottfried, a lawyer at Rogin Nassau in Connecticut, told me. "I go through my credit card receipts ... page by page."
He finds something he bought from Amazon last May for $22.98. He didn't get charged sales tax on the purchase, which means he owes the state of Connecticut $1.40 for that purchase.
Gottfried spends hours adding up all these charges in a spreadsheet. He not only has to find all his online purchases; he has to figure out which online sellers already charged him sales tax, and which didn't.
He owes the use tax for the online retailers that didn't already charge him. But, this being the tax code, there are exceptions for everything from college textbooks to firearm safety devices.
He started buying diapers from Diapers.com last year. Are diapers exempt from the tax?
"Medical goods like disposable pads for incontinence are exempt," he says, "but I don't think my baby is incontinent. I think he's just a baby who needs diapers."
There's a rumor floating around among Connecticut tax professionals that the state's tax department would love to nail a tax lawyer or CPA on use taxes — someone they could easily prove was aware of the use tax and did not pay it.
But when I brought up the idea with Kevin Sullivan, the commissioner of Connecticut's Department of Revenue, he laughed it off.
"I don't think we have any particular plan to single out any class or caste of taxpayers," he said.
Like most states, Connecticut rarely goes after anyone for use tax violation, Sullivan told me. But, he said, the expectation that taxpayers would voluntarily go through all the trouble of calculating what they owe is completely reasonable. In fact, he says, figuring out what you owe and paying your debt is the foundation of the US tax system.
But states seem to be abandoning the idea that people will pay the use tax. Instead, states are trying to force online retailers to collect sales tax. If they can do it, they could bring in an extra $11.4 billion a year.
STEVE INSKEEP, HOST:
The IRS, by the way, says it's going to grant Boston-area taxpayers extensions on filing, since yesterday was tax day. But even an extension is not going to save them, and most Americans who file this year, from making a specific mistake. If you bought something online and did not pay your state's sales tax, you broke the rules. Same thing if you bought a book in New Hampshire, where there's no sales tax; but you live in Massachusetts, where there is. You're supposed to pay Massachusetts tax on that book anyway; it's called a use tax. Chana Joffe-Walt, of our Planet Money team, has been wondering who actually pays that tax.
CHANA JOFFE-WALT, BYLINE: Tax lawyers and accountants - I believe that's the answer. Forty-five states have instituted a use tax, and about 1.6 percent of those taxpayers actually pay it. So I figured I'd ask a representative of that particular 1.6 percent to show us what this thing we're all supposed to be doing every year, actually looks like.
DANIEL GOTTFRIED: Well, it's a lot of fun. Um - I go through all my credit card receipts...
JOFFE-WALT: Daniel Gottfried is a lawyer at Rogin Nassau in Connecticut. And Daniel's use-tax obligation is mostly thanks to online purchases. Some online vendors collect sales tax; some don't. If they don't, Daniel himself has to figure out what he owes, and then pay it when he files his return.
GOTTFRIED: And I would look, and I'll see my charges from Amazon. Right now, for example, here's one from May, where I bought something for $22.98. So my purchase that was $22.98, I have to pay, you know, an additional $1.40 to the state.
JOFFE-WALT: This process can take hours, partly because Daniel often has to go back and check if the vendor actually did charge him sales tax. He knows Amazon did not. Best Buy did. But there's a bunch he doesn't know.
GOTTFRIED: Oh, I'll need to figure out a new one this year. There's Diapers.com. We have a baby, and we discovered Diapers.com recently. I have no idea if they assess sales tax or not, when they sell me things.
JOFFE-WALT: So Daniel says he'll have to go back and find the email receipt from Diapers.com; at which point Daniel's colleague David Buckley, sitting there with him, points out it's possible there is a use-tax exemption on diapers. Oh, yeah - then David turns to me and says, did you know there's a long list of things that are exempt?
DAVID BUCKLEY: Bicycle helmets, child car seats, college textbooks, firearm safety devices...
GOTTFRIED: I don't think there's an exemption for the diapers. I have no idea. I'm looking here - it says medical goods like disposable pads for incontinency, are exempt. But I don't think my baby is incontinent. I think he's just a baby who needs diapers.
JOFFE-WALT: And those are things that the average person in Connecticut is supposed to know?
GOTTFRIED: Yeah. Yeah.
JOFFE-WALT: This is what the use tax asks of millions of taxpayers every year. And every year, Daniel and David oblige because they know the rules. Plus, there's a rumor floating around the tax professionals community in Connecticut, that the Department of Revenue would love to nail a tax lawyer or a CPA on use taxes - someone they could easily prove was aware of the use tax and did not pay it, to make an example of him or her.
This is a notion I heard from multiple tax lawyers, and one that the Department of Revenue's own commissioner, Kevin Sullivan, seemed to find hilarious.
KEVIN SULLIVAN: I don't think we have any particular plans to single out any class or caste of taxpayers.
JOFFE-WALT: Sullivan says the state basically never goes after someone for use-tax violation. Most states don't. Think about how expensive it is to audit someone versus the 60 bucks or so the state could potentially collect. But Commissioner Sullivan says the expectation that taxpayers would voluntarily go through what Daniel and David do every year, is completely reasonable. In fact, he says, volunteering to figure out what you owe, and then paying, is the foundation of the U.S. tax system.
SULLIVAN: The system works because people pay their taxes. By and large, in America, people don't have to be, you know, rousted out of bed at gunpoint in order to file their income tax. Most people do it.
JOFFE-WALT: But this is like, the most extreme version of..
SULLIVAN: That's correct.
JOFFE-WALT: ...of voluntary obligation.
SULLIVAN: This is the ultimate honor - code of honor, right? And...
JOFFE-WALT: Right. And it seems like we're failing the test of the ultimate code of honor.
SULLIVAN: I think people are to be somewhat forgiven for simply not knowing. And is it easy to beat this tax? Sure. You just don't do it.
JOFFE-WALT: Enough people just don't do it that states seem ready to abandon the honor code - at least, in part. Right now, states are on the path to forcing online retailers to collect sales tax - through the courts, or through a bill in Congress. If they can do it, estimates show they could bring an extra $11.4 billion a year.
Chana Joffe-Walt, NPR News. Transcript provided by NPR, Copyright NPR.