States team up to collect `use taxes' from out-of-state shoppers
People who recently bought an appliance, boat, jewelry, or other consumer item out of state may soon receive a bill from their state's tax department. State taxing agencies, facing revenue losses from cross-border sales and the fast-growing mail-order business, are going after consumers who either deliberately avoid paying these sales taxes, or who don't know they have a tax liability.
While the states have tried several tactics to collect the taxes, one of the latest is the interstate tax compact. The compacts are formed to collect ``use taxes,'' which are duties imposed on the consumer who does not pay a direct sales tax and are assessed for the ``privilege'' of using items from out of state. Historically, use tax laws have been difficult to enforce: If consumers did not step forward, it was virtually impossible to identify who owed the tax.
Under provisions of the Great Lakes States Sales Tax Compact, formed in July 1986, businesses are encouraged to collect use tax for other states in the compact. So if an Indianapolis merchant ships merchandise to a consumer in Michigan, the merchant won't impose a direct sales tax, but will levy the Michigan use tax and later turn it over to that state.
If a business does not collect the tax voluntarily - the law prohibits one state from ordering businesses in another state to cooperate - the compact has a provision for identifying those consumers who owe taxes.
For example, an Indianapolis business that ships merchandise to Michigan is subject to business laws in Indiana. A state tax auditor can order the business to produce lists of customers in Michigan. This list is turned over to Michigan officials to see if the buyer paid his use tax.
From the time the program began until the middle of August, the Illinois Department of Revenue, using lists supplied by Indiana, Michigan, Minnesota, Ohio, and Wisconsin, had sent out 277 bills seeking over $82,000 in unpaid taxes. One high-level Chicago executive was hit with a use tax of $13,000 for a yacht purchased in 1985, says department spokesman Verenda Smith. He was also charged interest of $4,700 and assessed a penalty of nearly $1,000.
The Great Lakes tax compact is one of many either in existence or being formed, says John Gambill of the National Association of Tax Administrators. The first was the New York-New Jersey compact formed in February 1986. Louisiana and Mississippi recently signed an agreement, and the Tri-State Compact for Sales/Use Tax Enforcement has just been formed by Massachusetts, Connecticut, and Rhode Island.
If direct-marketing companies do not advertise, maintain facilities, or otherwise have an out-of-state business presence, they are not required to charge sales tax. The Advisory Commission on Intergovernmental Relations estimates that up to $1.5 billion is lost each year to state and local governments because of the inability to tax direct-marketing sales.
Tax agency officials contend that the use tax is a protection for home-state businesses. Without the tax, they say, out-of-state businesses would draw consumers across the borders with lower prices.
But Robert Levering of the Direct Marketing Association argues that the loss is only about half that. He says many mail order companies are opening stores and distribution centers in more states, and then charging sales taxes there.
Direct-marketing firms have vigorously opposed formation of the interstate compacts. According to Mark Bugher, deputy secretary of the Wisconsin Revenue Department, the direct-marketing companies are a ``very formidable force in this state.'' When they saw what they believed to be the ``first small step toward nationwide sales tax collection,'' they mounted a strong campaign and were sufficiently persuasive that Gov. Tommy Thompson ordered the Wisconsin Department of Revenue to withdraw from the Great Lakes compact, Mr. Bugher says.
While not aimed at imposing a national sales tax, there have been efforts in Congress to force businesses to collect use taxes. A bill introduced by Rep. Jack Brooks (D) of Texas would give states the authority to require out-of-state companies that are ``soliciting'' customers across borders to collect use tax for these states.