DOR to taxpayers: Don’t forget use tax

Peanuts that add up

Revenue department commissioner Amy Pitter has three words for those still debating whether sales tax should be paid on Internet purchases: pay use tax.

Policymakers in Washington and on Beacon Hill may be split on whether out-of-state companies should be required to collect and remit sales tax on purchases made by Massachusetts residents. But Pitter says there is no dispute that Massachusetts residents are required to pay use taxes on purchases made out-of-state if the company selling the item doesn’t collect the levy.

Under state law, any Massachusetts resident buying a taxable item online, by mail order, or out-of-state who doesn’t pay the 6.25 percent sales tax to the vendor is required to pay the equivalent amount in use tax on their tax return. The problem is most Massachusetts residents don’t pay use taxes. In the 2012 tax year, the state collected roughly $3.5 million in use tax from individuals, which is under 2 percent of the estimated $200 million in potential use tax owed.

Some taxpayers don’t pay the use tax because they don’t think they’ll ever get caught, but Pitter thinks most people don’t pay because they really don’t understand how the use tax works.

“People don’t want to be dishonest; they want to do the right thing,” Pitter says. “Sometimes they just need to be shown what to do.”

Pitter says she is considering different ways to bring greater awareness to the use tax over the next year, but emphasizes that she is not talking about raising new taxes but instead collecting taxes that are already owed.

Peanuts that add up. The use tax is calculated two ways. People can either calculate their own use tax by saving receipts and totaling purchases, or they can pay a “safe harbor” use tax, an estimate of amount owed based on an individual’s adjusted gross income. As the accompanying chart shows, the use tax as a percent of adjusted gross income is well below 1 percent.

“It’s sort of peanuts, but it’s peanuts that add up,” Pitter says.

Verenda Smith, deputy director of the Federation of Tax Administrators, says she has spent over two decades brainstorming approaches to increase voluntary use tax reporting by residents across the country. Since people have grown up in an Internet era when shopping on the web was considered tax free, it’s not easy, she says. “You’re promoting a message that people don’t want to hear; it’s not free candy,” she says.

Massachusetts added a line for reporting use tax on individual tax returns in 2002, a move that increased the number of use tax payers from 200 in 2001 to 11,000 in 2002. As numbers plateaued, Massachusetts copied New Jersey by adding language on the tax form that specifically mentions Internet purchases as opposed to just out-of-state purchases. That move also increased the number of payers, and now state officials are looking at other ways to increase the number.

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Brick-and-mortar retailers have been complaining for years about the unfairness of a system where they are at a competitive disadvantage because they are required to collect a sales tax while their out-of-state or Internet competitors don’t. Under a 1992 court ruling, out-of-state retailers only collect the sales tax if they have a temporary or permanent physical presence, such as a store or warehouse, within the customer’s state. The rule has churned up battles between states and retailers across the country due to the lack of clarity in the description of what amounts to a “physical presence”.

Starting November 1, Amazon began to collect sales tax from Massachusetts residents on their purchases from the company’s website. The move is expected to bring in more than $30 million in revenue for the state by the end of the fiscal year. Amazon currently collects sales tax on behalf of 16 states and that number will soon be growing. Over the past few years, Amazon has built warehouses or other company facilities in some states in return for deals postponing sales tax collections. Those deals are now reaching their expiration dates. According to New York law, Amazon is required to collect sales tax on purchases made through New York-based affiliates of the website. Amazon appealed to the US Supreme Court, but the court refused to hear the case.

In Washington, Congress has been unable to reach consensus on taxing Internet and out-of-state purchases. The Marketplace Fairness Act, proposed to Congress in 2011, would have given taxation power back to the states and given them the ability to require out-of-state retailers to collect taxes on purchases. The act, despite the backing of many states, has failed to make much progress.