CA: Internet tax police? Be wary of state board's impractical plan (to track "use tax" avoidance)

San Diego Union - Tribune ^ | 11/30/07 | Editorial

[NormsRevenge]

The Board of Equalization – which oversees collection of many state taxes – is one of the least-known important state agencies. But if the board gets its way, it could soon be both high profile and highly unpopular.

That's because it wants the Legislature and Gov. Arnold Schwarzenegger to give it a staggering number of new employees – 325 – over the next three years to serve as tax detectives hunting down the businesses and individuals who buy goods on the Internet but fail to pay the state's “use tax.”

What's that? You weren't aware that you owed the state treasury for your online purchases?

You and just about everyone else. It turns out that in 1935 – hoping to recoup sales taxes lost when Californians bought goods via mail-order catalogs from out-of-state companies – the Legislature imposed a use tax on such purchases and pegged it at the same percentage as the state sales levy.

Now, with Internet commerce exploding, the Board of Equalization says it's time Californians start paying up. It estimates $1.091 billion in use taxes went unpaid in 2005 – $409 million by consumers and $682 million by businesses.

But before state leaders desperate for new revenue sign up for the board's plan, they should take a hard look at it. A board member who dislikes the plan – Bill Leonard – calls it highly impractical. It would “take a police state to enforce” with board auditors hovering over every “mailbox and computer,” he said in an interview.

We agree. It's highly unlikely that taxpayers will keep a running tally of their purchases and then at the end of the year get out the calculator and cut the state a check for 7.25 percent of the amount. The Internal Revenue Service says compliance rates for what might be called “honor code” taxes is just 43 percent.

Instead, what's likely is that Internet revenue won't meet projections – and the board will try to salvage its project by sending out subpoenas to Amazon.com and eBay to identify California's use-tax scofflaws.

Leonard suggests having a transaction threshold – perhaps $5,000 – before the use tax kicks in. That makes sense.

But in the big picture, the most logical approach is for Congress to require sellers to do the collecting, just as they do with regular sales taxes. Software that adds applicable use or sales tax based on a buyer's ZIP code could easily be developed.

Unfortunately, any proposal to develop a uniform approach to collection of valid state taxes on online purchases is likely to be caught up in the larger congressional fight over the Internet and taxes. It's being fought on several fronts, including the question of whether federal taxes should be assessed on Internet service and the question of how vigorously the IRS should go after those who underreport income from their Internet-based businesses.

Too bad. Unless Congress steps up, Californians could soon be faced with an aggressive new tax-collection bureaucracy. Given the huge budget deficit, state leaders may find the Board of Equalization's proposal to be irresistible – whatever its obvious flaws.

[NormsRevenge]

Building bureaucracies to capture “revenue”. wow.

California is a sad yet excellent example of gubamint runamuck.

[rabscuttle385]

They could just make it nice and easy by confiscating all the income and property of every citizen of California, except I think people would then actually figure out what was going on and revolt against the State.

[antinomian]

Sooner or later we are going to get hit with Internet sales taxes. Governments cares more about taxes that anything else and they are going to get that revenue back.

It would be best to have a uniform policy that online purchases are taxable only by the state from which the item is shipped. That would create a competition between states to keep rates low since online companies can move their shipping operations pretty easily.

[HKMk23]

Too easy to defeat.

Make all on-line transactions using THIS:
http://www.thinkgeek.com/gadgets/security/99f1/

Ship to an out-of-state third party, and keep them supplied with plain, brown wrapping paper, packing tape, address labels, and well-compensated for their assistance.

Better yet, move out of state, and perform this service for clients in California. Just be sure to keep your list of clients on the above-references secure device, and an only copy on a second, duplicate device the existence of which you NEVER reveal.

When you get that letter of subpeona from the State of CA, send them the device with a simple note: “Here ya go; this is everything.”

[goldstategop]

Its impossible to enforce. No one prints out and saves receipts for online purchases. Or keeps them when the item arrives in the mail. The State Board Of Equalization would become a target of voter anger and my guess is its incumbents would be booted out of office after they imposed it - or more likely, they would cancel the tax to save their political skins.

"Show me just what Mohammed brought that was new, and there you will find things only evil and inhuman, such as his command to spread by the sword the faith he preached." - Manuel II Palelologus

[bubbacluck]

They could just make it nice and easy by confiscating all the income and property of every citizen of California, except I think people would then actually figure out what was going on and revolt against the State.

Maybe...

[ml/nj]

Instead, what's likely is that Internet revenue won't meet projections – and the board will try to salvage its project by sending out subpoenas to Amazon.com and eBay to identify California's use-tax scofflaws.

NJ did this with the formerly formidable 47th Street Photo in NYC. 47th Street Photo didn't resist, or resisted meekly. They went bankrupt within a year of giving their records over to the requesting government.

It's not clear to me how people who do purchase in-state and pay the sales tax can legally (equal protection and all that rot) be exempted from a "Use" tax. Don't these folks "use" their purchases too? And what about those who don't use what they order?

ML/NJ

[edcoil]

We passed prop 83 to track sex offenders and now, this tiny percentage of criminals they say cannot be done as it is too expensive and they are unable to do but, they can it seems tracks millions for taxes.

Right.