Whole Ball of Tax 2003

STATES CLAMPING DOWN ON USE-TAX SCOFFERs AND
CLAWING BACK CORPORATIONS THAT DON’T DELIVER ON PROMISES

New Streamlined Tax Agreement May Mean You’ll Automatically Pay
Use Tax On Internet, Catalog Purchases

(RIVERWOODS, ILL., January 2003) – While the federal government has provided some tax relief in recent years, many states are nearing crisis mode as their two most important revenue sources – personal income tax and sales tax – aren’t generating as much as states need to balance their budgets and deliver state-funded services. As a result, both consumers and businesses should expect to pay more to the local tax man in the coming years, according to CCH INCORPORATED (CCH), a leading provider of tax law information, software and services.

"Most states already have cut their budgets and drained their rainy-day accounts or spent their tobacco settlement funds. So, the options they have left are to raise taxes or do a better job collecting taxes under existing laws," said John Logan, JD, state tax analyst for CCH.

"From a political standpoint, going after uncollected taxes is clearly easier for state lawmakers than going back to their districts and telling voters they need to raise the personal income or sales tax rates," Logan added.

Uncollected sales and use tax is among the largest siphons of state tax revenue – and one that continues to grow as shoppers increasingly head online rather than out to the local mall.

Also, collecting taxes back from companies that were given tax breaks in return for promised future investments in the state – when those companies don’t deliver on their end of the deal – is another way states are attempting to recapture revenue.

While millions of shoppers may think it’s a great deal to shop with out-of-state and Internet retailers because they don’t charge sales and use tax, it doesn’t mean shoppers aren’t supposed to pay the use tax on these purchases, just that these retailers don’t have to collect the tax.

The reason out-of-state retailers don’t have to collect the tax stems from a 1992 Supreme Court decision that ruled states can’t require retailers that don’t have a physical presence or "nexus" in the state to collect sales and use tax, as doing so would put an undue burden on the retailer given the complexity of state and local sales and use tax codes.

"There are 45 states, along with the District of Columbia, that impose sales tax and thousands of municipalities within these jurisdictions that have their own sales tax rates," said Logan. "Not only are the rates all decided independently, but so are decisions about what’s taxed and how items are defined for tax purposes, for example whether candy is defined as a food item."

Seeing the increasing threat Internet shopping posed to the tax base, several states joined together to create the Streamlined Sales Tax Project (SSTP), an alliance focused on changing state and federal laws to make it easier to collect sales tax revenues.

Late last year, the group had its first major victory when 31 states approved an agreement establishing uniform sales and use tax provisions, including definitions of products. The agreement also calls for states adopting it into law to have a single statewide tax rate for each product by the end of 2005. Local governments within the states also are required to have a single, uniform tax rate for each product.

The next step is for the state legislatures to consider the agreement. Given the economic woes facing many states, it’s expected a significant number will take up the agreement for review this year, according to Logan.

Before the agreement goes into effect in any one state, however, the agreement requires 10 states comprising at least 20 percent of the total population of all states imposing a state sales tax to adopt the agreement.

"The SSTP members recognize that to convince Congress to consider passing legislation that requires all retailers to collect use tax, it has to show that there are enough states adopting the agreement to truly make state and local sales/use tax regimes simpler and no longer burdensome for out-of-state retailers," said Logan.

Also to address the burden issue, the agreement calls for simplified administration, whereby retailers would use a third-party service provider to calculate the applicable taxes made on purchases, apply them to the bill and then forward the collected tax to the appropriate state and/or municipality.

For consumers, this could mean that by the time Christmas shopping 2005 rolls around, they’ll be paying sales and use tax – regardless of whether they shop in the mall, via a catalog or online.

But don’t think you have a grace period until then. Under existing tax rules, you’re still obligated to pay use tax.

So, how do you pay your fair share?

The most prevalent method is by requesting a use-tax form from your state revenue department. Most states make this form available over the Internet. Some states have gone a step further and now include a line item for taxpayers to include the amount of use tax they owe directly on their state income tax returns.

Those who are tempted to take their chances on not getting caught should know the odds are getting worse.

"It’s now a widespread practice for state revenue departments to have information-sharing agreements with one another, and they’re taking a closer look at purchases of big-ticket items brought into their states," said Logan.

Those who get caught will get a note from their state telling them to pay. States also can impose a fine. If a state thinks it’s a flagrant intent to avoid the tax, it also could slap the individual with a tax-evasion indictment and take him or her to court.

An information-sharing arrangement is what ultimately landed Tyco International’s former chief executive officer, Dennis Kozlowski, in hot water with local government authorities. Kozlowski was charged with evading more than $1 million in New York state and local taxes on artwork he’d shipped from New York to New Hampshire and then shipped back to New York. New Hampshire is one of just five states that do not have a sales tax (the others are Alaska, Delaware, Montana and Oregon).

New Hampshire does, however, have an information-sharing arrangement with New York, allowing New York officials to spot possible tax dodgers.

State revenue departments also can take a look at what taxpayers returning from overseas are claiming with U.S. Customs to see if there are any big-ticket items they are bringing and then check the state tax receipts to determine if the individual has paid the state the appropriate use tax for the item.

Companies Get the Claw

But consumers shouldn’t feel they’re the only taxpayers being singled out by states. Corporations also are being targeted to pay their due.

Because states want to attract companies, they regularly provide tax breaks to businesses willing to commit to providing a significant investment or creating a significant number of jobs in the state.

For companies that don’t come through on their end of the deal, however, 18 states now have "claw back" rules, and these states are getting more aggressive about invoking the rules.

For example, Indiana and the city of Indianapolis used local claw back laws to recover more than $31 million in penalties from United Airlines last year after the carrier failed to invest $800 million in a maintenance hub at the Indianapolis International Airport. United faces additional penalties from these local governments for failing to come up with the entire 6,300 jobs it also had promised and hadn’t delivered.

"In the past, some states were reluctant to use the rules because they didn’t want to risk the relationship with the business or the business’ future investment in the state," said Logan. "But given their immediate financial straits, many states can ill-afford to forgive these current tax breaks in the hopes of future investment. They need the money now."

In addition to Indiana, Georgia and Vermont are among several states that have recently assessed multi-million dollar penalties on companies under the claw back provisions. And, more states are looking at adopting claw back rules with several expected to propose adoption of these rules during this year’s legislative session.

CCH INCORPORATED, headquartered in Riverwoods, Ill., was founded in 1913 and has served four generations of business professionals and their clients. The company produces more than 700 electronic and print products for the tax, legal, securities, insurance, human resources, health care and small business markets. CCH is a wholly owned subsidiary of Wolters Kluwer North America. The CCH web site can be accessed at cch.com. The CCH tax and accounting destination site can be accessed at tax.cchgroup.com.

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