Evading online sales tax is too easy

Online sales tax is a gray area for states and hard to enforce. While some believe in following the rules, others have a hard time voluntarily paying taxes. Many don't even realize they owe tax.

Our eight-year-old son wants to write the President. “He needs to get a law passed that will make it illegal to throw cigarette butts out of car windows.” I told him that littering was already illegal. “What?!”

In his mind, littering must be legal if everybody does it. He shook his head, incredulous. “But why would they ignore the law?” His older sister piped in: “In Singapore you get in big trouble for littering. Their streets are super clean.”

“I guess it’s too easy to litter here,” I told him. It’s hard to stop so many people who do one little wrong thing so often, and in so many places.  And maybe it’s hard to follow the rules when the car window is right there...

Our son made me think of another “little wrong thing” that a lot of people seem to do rather often: Evade online sales taxes. The law is clear: If you buy something that is taxable in your state, you owe the tax even if the retailer does not collect it.

In recent years, there has been quite a flap about whether online sellers should collect those levies. But whether they do or not, consumers are supposed to pay them. If they don’t pay at the time of purchase, they usually owe a “use tax” equal to what they would have paid if they bought in state. (Often there’s a place on your state income tax return to include the amount. Several states even let you estimate what you owe so you can avoid rummaging through your credit card receipts.)

Yet, in 2009, fewer than 2 percent of consumers paid the use tax. (It varied by state: In Maine, almost 10 percent of taxpayers reported paying some tax. In California, less than 1 percent did.)

I took an informal poll of some friends and acquaintances. Out of a dozen well-educated, well-informed, and generally civic-minded people, just three paid the sales tax that out-of-state online retailers did not collect. One even reviews a year’s worth of receipts. These tax compliant friends “wanted to be able to sleep at night.” They didn’t want a “red flag raised” for a potential audit.

A fourth friend knows he’s supposed to pay, but chooses not to. He finds the requirement to be, shall we say, akin to fertilizer. The remaining eight people had no idea they owe the tax. I asked if they’d pay, now that they know.

What do you think they said? It’s hard to imagine a person choosing to give up their money, even when they are supposed to.

It’s rational to avoid doing what you don’t really want to do, especially if you are fairly certain you can get away with it. (Have you ever tossed scrap of paper, or a chewed piece of gum, out of your car window? Or parked illegally? Or exceeded the speed limit)?

But there’s a cost when online consumers evade sales tax. State and local governments lose billions of dollars in tax revenue—money they could spend on public safety, schools, or roads. Or, we all may have to make up the lost revenue through higher sales tax rates or other levies. And Main Street businesses are at a competitive disadvantage when they have to collect sales tax while on-line sales are effectively tax free.

And yet, will those in my little poll now pay what they owe? Imagine shrugs, eye rolls, and eyebrows scrunched up in confusion. Once even a reproachful snort of “No!” Another expounded: “How would the state even know what I bought or where, how would it have the time or resources to find out?” Exactly: The state can’t know. It needs you to report it.

I told one friend that online retailing behemoth Amazon will generate a nice spreadsheet of all your purchases that shows whether it collected sales tax. He didn’t find this  information terribly helpful.

Congress has been trying to pass legislation to clarify the ability of states to collect online sales tax, but the going has been difficult. And Massachusetts lawmakers are working on the “Sales Tax Fairness Act” that would allow the state to collect its 6.25 percent levy at the time of online purchase.

Nobody casts these efforts as “getting consumers to pay their fair share.” But that’s exactly what they’re doing. Is that such a bad thing?

Another friend says he’s been paying his online sales tax faithfully for years—for nearly as long as Amazon has been around. He knows lots of well-educated, well-informed and civic-minded people, too. And almost none of his friends pay their use tax either.

He feels “like a chump.” He knows he won’t get caught if he doesn’t pay, but pays anyway. He just does what he’s supposed to do: He follows the rules, doing no “little wrong things,” at least when it comes to the use tax.

He’s no chump. Our son would be proud of him.

The Tax Hound, publishing the first Wednesday of every month, helps make sense of tax policy for those outside the tax world and connects tax issues to everyday concerns. Need help or have an idea? Post a comment.

The post The Case of the Little Wrong Thing: Evading Online Sales Tax appeared first on TaxVox.