States yearn to collect online sales taxes

The arrival of April 15 doesn't mean your tax worries are over. You may owe more than you think.

Online purchases from sites like Amazon.com and eBay may seem to arrive tax-free. Strictly speaking, however, purchasers are required to pay their own state's sales tax rate--the concept is called a "use tax"--and then voluntarily report the amount owed at tax time.

Few do.

That situation worries state tax agencies, which have long complained about individuals not volunteering how much use tax they owe from mail-order sales. The ballooning popularity of online purchases is making a bad situation worse, state officials believe. (All states with sales taxes have use taxes.)

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California residents, for instance, enjoy a 7.25 percent sales and use tax. State law is strict: If Californians travel to a state with a 5 percent tax and shop there, the law requires them to cough up the 2.25 percent difference when they return. Online purchases are taxed as well.

But compliance is spotty at best. California's Board of Equalization estimates the state lost $1.34 billion in 2003 because residents aren't paying use taxes--$208 million of that due to online purchases.

"We are looking at ways to help solve the tax gap in California," Anita Gore, a Board of Equalization spokeswoman, said Thursday. "We're doing the background and research necessary to bring in more of this money."

Last year, California took a step in that direction by adding a line on its income tax form that requires residents to estimate how much use tax they owe. This year, the state tried a use-tax amnesty that brought in about $2.3 million.

That leaves the estimated $1.34 billion left to collect. "We're always following leads that are given to us, whether it's another government agency or an individual, to look into the possibility that somebody might owe us use tax," Gore said.

Other states report similar frustrations. Michigan estimates it will lose $345 million in 2005. That's up from a loss of $210 million in 2001, and the state says the Internet is to blame.

South Carolina took the unusual step of sending out a press release just before tax day five years ago. "With the boom in catalog and Internet sales, many electronic shoppers are unaware they may have a tax obligation when they make purchases over the Internet if the tax is not collected by the retailer at the time of the sale," the release said.

South Carolina estimates it loses $40 million a year from unreported use taxes. Like California, it has added a use tax line on state tax returns.

From the perspective of state tax collectors, the simplest solution would be to require out-of-state shippers to collect taxes. But shippers generally can't be compelled to do that, thanks to a Supreme Court decision that said only businesses with offices or other tangible connections in the destination state can be required to collect sales taxes.

State officials are lobbying Congress to change these rules. They're proposing a so-called "streamlined sales tax." The idea is to create a uniform set of rules effectively permitting tax agencies to require out-of-state sellers to collect use taxes.

"The states have gained momentum in the last six months," says Steve DelBianco, director of the NetChoice coalition, which represents eBay, eRealty.com, Oracle, Time Warner and VeriSign.

DelBianco, a critic of the proposed changes, believes that state claims about use-tax avoidance are overstated. "I can't believe there are a significant amount of Internet-based purchases that are done to save sales taxes," he said.

One exception to the general rule about out-of-state tax collection is tobacco. A federal law called the Jenkins Act states that out-of-state sellers can be required to report cigarette shipments to the destination state's tax collectors. Some states have sent bills to residents.