Calif. Board Seeks to Increase Tax Collections on Out-of-state Purchases
August 24, 2011 (The Sacramento Bee, Calif.) SACRAMENTO, Calif. - A California tax board is examining more aggressive ways of persuading residents to pay taxes on out-of-state purchases, from sifting through shipping records to requiring tax preparers to ask clients if they bought goods online.
The five-member Board of Equalization, which oversees sales and use tax collection, contemplated such ideas this week while discussing unpaid taxes. Longstanding law requires California residents to pay use tax on out-of-state purchases.
Board researchers estimate that $2.3 billion, or 5 percent, of sales and use taxes go uncollected each year, with use tax accounting for $1.2 billion.
California has debated online sales tax collection for years, but the issue reached a political peak this summer after Gov. Jerry Brown signed legislation aimed at forcing out-of-state retailers to collect California sales taxes. Amazon.com has already contributed $5.25 million toward a signature drive to upend the law, Assembly Bill X1 28.
The Seattle-based retailer has not collected taxes so far on California purchases, believing that it remains exempt because it severed ties with "affiliates" who previously referred customers to its website. Under a 1935 law, Californians still owe use tax on out-of-state purchases, though few pay it.
The most controversial items proposed by Board of Equalization staff were pilot projects in which the state would sift through shipping records and marketing data to determine which residents have probably purchased goods out of state.
The idea is to identify Californians most likely to owe use tax, avoiding the need to blanket all residents with appeals to comply with the law. Board aides emphasized the state would inform residents of their responsibility rather than send itemized bills.
Still, it would mark the most direct approach the state has taken in contacting individual consumers. Since 2004, the state has offered taxpayers a way to voluntarily report use tax on personal income tax forms, but it has never communicated individually with consumers.
A Board of Equalization report last week found that only 0.42 percent of taxpayers paid use tax on their personal income tax forms, though others may have paid through different means.
The board acknowledges that enforcement of use tax for small purchases isn't feasible. "It's not cost effective, especially when you think about how many individual consumers we have in California," said board member Betty Yee.
Instead, the board is focusing its efforts on persuading residents to pay on their own.
Other states have reached out directly to consumers. The Alabama Department of Revenue has sent letters randomly to taxpayers informing them they may owe use tax on out-of-state purchases.
The data mining ideas drew immediate opposition from business groups. Gina Rodriquez of the California Taxpayers Association said it raised privacy concerns and questions about how the board would determine whether someone purchased a taxable item.
"I think it's way too intrusive," said board member George Runner. "It assumes they're a criminal."
Runner, a Republican who opposes AB X1 28, said he would prefer that the board conduct a poll to determine which demographics are most likely to owe use tax and which arguments would sway them.
Other board members were likewise skeptical. Yee said she wasn't sure whether consumer records would be specific enough to prove helpful. Like Runner, she had privacy concerns.
The board may also ask lawmakers to pursue bills that would reach consumers through tax preparers. One idea would require tax preparers to take courses in use tax law to meet continuing education requirements. Another would require tax preparers to ask clients whether they made out-of-state purchases.
Former Gov. Arnold Schwarzenegger vetoed a 2007 attempt by Assemblyman Mike Eng, D-Monterey Park, that would have required taxpayers to pay their use tax obligation on their personal income tax forms rather than do so voluntarily. Schwarzenegger said the bill was too immediate and wanted more public education of use tax before imposing a mandatory requirement.
Lenny Goldberg, executive director of the left-leaning California Tax Reform Association, said the "real benefit of that bill was by making it clear that use tax was mandatory, that puts the tax preparer on the spot."
Ultimately, Yee wants online retailers to begin collecting sales taxes rather than have the board pursue voluntary compliance.
"We're going to great pains to educate consumers," she said. "If we could actually enforce (the law) requiring retailers to collect taxes, it really would take consumers off the hook."
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