April 12, 2006 11:27 AM PDT

States push to tax Net shopping

By Declan McCullagh and Anne Broache
Staff Writers, CNET News

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If you did, state tax collectors warn that you'd better say so by April 17 and write a check--or else.

Online purchases from sites like Amazon.com and eBay may seem to arrive in a state of untaxed bliss. But the law actually requires shoppers to pay their own state's sales tax rate--the concept is called a "use tax"--and voluntarily cough up the exact amount owed each year at tax time.

Tax bureaucrats for years have lamented the difficulty of collecting use taxes on catalog and mail order sales. Now, with online shopping growing rapidly and nearing $100 billion a year in consumer sales, tax collectors are adopting more aggressive tactics.

New York state has added a line to income tax returns requiring all residents to calculate how much they should pay on Internet, mail order or out-of-state purchases. The threat is explicit: Anyone who creatively underestimates will face stiff penalties if an audit occurs.

"If you've written zero or left it blank, during the audit we're going to make you produce your financial records, bank statements, credit card statements," said Michael Bucci, a spokesman for the New York Department of Taxation and Finance. "If we find out you have made purchases you haven't reported to us, not only are you going to be liable for the amount owed, the tax liability, but also interest and penalties, which...could be up to three times as much as what you actually owe."

For the first time this year, California has taken its thou-shalt-pay-up warnings to the Internet through banner advertisements on four newspaper Web sites. One on the Sacramento Bee's site warns: "Make online purchases? You might owe use tax." (It has the benefit of being easily, and accurately, misread as "You might owe us tax.")

"We won't know how effective any of this is or how much money comes in this year until after April 17," said Anita Gore, a California Board of Equalization spokeswoman. Gore said the campaign has resulted in 8,000 clicks so far--not many, though, in a state with a population of some 36 million people.

If you buy something over the Internet or a catalog from a business with an office in your state, expect to see sales tax added to your receipt automatically. For example, a digital camera bought through CircuitCity.com would likely be taxed because the company has stores all over the nation, but the identical purchase from B&H Photo and Video would be shipped tax-free to anyone not in New York state. (Some states such as Delaware and Oregon have no sales taxes at all, of course.)

A dispute over missing revenue
It's not clear how much use tax goes uncollected. For one thing, the vast majority of Internet and remote purchases are made by businesses, which state tax agencies acknowledge are highly likely to comply with use tax laws.

Business to consumer e-commerce sales were $86.3 billion in 2005, up about 58 percent from the year before, according to the U.S. Commerce Department. (Business-to-business sales are about 12 times greater.) At an average tax rate of around 6.5 percent, that means the total amount of use tax due from consumers would be a maximum of $3.6 billion.

California says its annual revenue lost to nonpayment of use taxes--including mail order and business-to-business purchases--is $1 billion. Washington state puts its lost revenue at $600 million; Pennsylvania at around $500 million; Connecticut claims some $230 million.

Not everyone buys those figures, which are calculated by tax agencies that may have their own incentives to embellish. Steve DelBianco, executive director of the NetChoice Coalition, said those numbers are overestimates.

"Nine out of every 10 dollars in e-commerce is business to business--that means business users, the vast majority of which pay their use taxes as a result of effective state audits," said DelBianco, whose coalition counts 1-800-Contacts, eBay, Orbitz and Yahoo as members.

Opponents of giving the government a larger percentage of Americans' disposable income say use tax collection efforts go too far.

"Unless we assume the tax man has the moral right to your entire income, I don't feel anyone should be obligated to pay" the use tax, said Lew Rockwell, an economist who writes frequently about taxation and government. "They already extract so much from us with little in return, just wars and welfare and general social trouble. The idea that we should turn over more is just outrageous."

Innovations in "use tax" extraction
States vary in how much force they apply when trying to squeeze use taxes out of taxpayers.

"One reason we want to collect the use tax and have been very aggressive about it is that 100 percent of the sales tax goes to education--the use tax does too," said Danny Brazell, a spokesman for South Carolina's Department of Revenue.

South Carolina is one of the more diligent states--or from a taxpayer's perspective, one of the most brutal. It has signed a deal with the U.S. Customs Service to obtain records about state residents who import expensive items from abroad; has sent out random mailings to taxpayers; and has added a line to its income tax return.

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