Posted on: Sunday, March 7, 2004

States seek to recoup tax money lost to online purchases

By Michael Gormley
Associated Press

ALBANY, N.Y. — Remember all those gifts you bought online during the holidays? Now it's time to pay sales tax on them. At least, so say the income tax forms of 20 states.

The latest to outstretch their revenue-seeking hands are New York and California, which this year added a line requiring taxpayers to declare any tax they owe on out-of-state purchases.

Though state revenue agencies similarly sought sales tax on mail-order items before the e-commerce boom of the late 90s, Internet sales have "really shined a spotlight on it and increased the urgency," said Harley Duncan, executive director of the Federation of Tax Administrators.

By law, residents are supposed to pay sales taxes to their states if they order books, clothing, computers and other items by mail or online from businesses based elsewhere.

"Nobody — very few — ever followed that rule," said Anthony Leone, a certified public accountant in Buffalo.

The National Governors Association estimates state and local governments will lose at least $35 billion this year from Internet sales.

The new tax return line, New York state officials say, forces taxpayers to confront their liability or potentially face audits that could uncover credit card statements and mounting tax debt.

But it looks like scofflaws need worry little. Officials from several states said they expect few, if any, tax returns to be audited — even if a taxpayer claims zero liability. And so the revenues should keep trickling in.

New York tax officials are expecting the new tax line, for which they've added seven pages of instructions and tables, to yield just $2.5 million. Like New York, most states let taxpayers estimate their liability based on household income.

California projects its out-of-state sales line will bring in $13 million this year — out of an estimated $1.2 billion owed by individuals and businesses, said California Equalization Board spokesman Vic Anderson.

"That's always a problem, making people aware of this liability," Anderson said. "It's one of the most misunderstood taxes out there."

New York loses more than $1 billion in sales tax revenues from out-of-state purchases, according to a University of Tennessee study.

When Maine added the line in 1989, it also created a "default assessment" of 0.04 percent of adjusted gross income if the line was left blank. By 1998, the default was gone because of concerns it wasn't fair for those who forgot or didn't know the rules, said Eileen Bemis, deputy director of the Maine Sales, Fuel and Special Tax Division.

A New York lawmaker has introduced a bill to drop the line.

"We're going to make tax evaders out of law-abiding citizens and policemen out of tax preparers and accountants," said Assemblyman Ronald Tocci, a Democrat in the chamber's majority. Who, he asked, "keeps tabs of what they buy on vacation in the Bahamas or Canada? Or anyplace? It's crazy. It's insane."

Forty-five states require buyers to pay sales taxes on Internet and other out-of-state purchases, although a few, including California, exempt the first few hundred dollars and focus on high-ticket items.

States with sales tax lines on their tax forms include Alabama, California, Connecticut, Idaho, Indiana, Kentucky, Louisiana, Maine, Massachusetts, Michigan, New Jersey, New York, North Carolina, Ohio, Rhode Island, South Carolina, Utah, Vermont, Virginia and Wisconsin.

Georgia, Hawai'i and the District of Columbia have separate forms in their income tax packages.