By Teri Walker–
Did Aunt Ethel come back from her summer vacation in Amish country with a handmade butter churn she bought from an old farmer in a small store where he had been making the wooden churns the same way for the last 46 years? If she did, does she recall whether she paid sales tax? What if she skipped the trip to Pennsylvania and just bought the churn online from a vendor who didn’t collect sales tax?
If family members are fond of Aunt Ethel, it would be a good idea for them to sit her down while enjoying a pat of fresh butter on an ear of corn and explain to her about use taxes, for which the Arizona Department of Revenue will be holding her, and the rest of Arizonans, accountable come tax time.
Arizona legislators, led by District 4 Representative Jack Harper (R-Surprise), have brought a long-disregarded state tax out of obscurity and added a new provision that will move it onto state tax returns, where it can no longer be ignored.
In a nutshell, House Bill (HB) 2332 says that if a person traveled out of state or purchased an item online, without paying sales tax to the seller or retailer, that person must account for that purchase on their Arizona tax return.
Exactly where the line item will show up hasn’t yet been decided, but it will be there. And tax preparers will likely advise their clients not to ignore it.
“I’m not sure how the state thinks they’ll be able to enforce this law, but I will be telling clients to make sure they put something on that line item,” said John Folse, an enrolled agent with the Internal Revenue Service and a senior member of ABT Financial Consultants, LLC in Phoenix.
“A blank line will likely trigger an audit,” said Folse.
Not, Folse points out, that it’s ever advisable to ignore a requirement of the tax law, but in this case, there is a lot of confusion and speculation about whether the tax will be an effective one, because it may be difficult for people to accurately reconstruct their purchasing history and even more difficult for the state to accurately track an individual taxpayer’s obligations.
So, how will average taxpayers reconstruct their purchases for the year, and determine for what they did or did not pay taxes? Folse said in most cases it would require combing through credit card statements and trying to determine which purchases were made online or out of state, then referring to individual receipts to see if tax was assessed on the purchases. Of course, that’s assuming all purchases were made with credit cards. Cash purchases can be tracked through receipts alone.
“I think this law will be challenged at some point and the argument will be that it places an undue burden on the taxpayer,” said Folse.
Who’s to say that taxpayers will abide by the new provision? How would the revenue department even know about a purchase made across state lines?
“We won’t know anymore than we know now about an individual’s finances,” said Assistant Director of the Arizona Department of Revenue Anthony Forschino. “You voluntarily put the information on your tax return, like you do everything else.”
Which begs the question: if Arizona taxpayers opt not to come clean with all of their untaxed or undertaxed purchases, what is the state’s recourse?
Folse speculates one way the state might proceed would be to contact vendors known to do business in Arizona and request a list of their Arizona customers, then audit returns to see whether customers are reporting their untaxed purchases.
With potentially millions of online transactions, and the inability to track expenditures Arizonans make while out of state or out of the country, identifying all of the potential taxable purchases is a near impossible task.
Even auditing tax returns to see which individuals left the use tax line item blank leaves the department of revenue in a difficult position because, Folse said, most returns aren’t audited for three to four years.
“How can you ask someone to remember specific transaction details for purchases made three years ago, for which they may or may not have records?” Folse asks.
To complicate matters further, the use tax law does not apply just to unpaid sales tax. It also states, “If a lesser amount of tax was paid to the state of sale than would have been paid had the property been purchased in Arizona, the consumer is liable.”
In other words, consumers who do pay sales tax on items purchased online, out of state or out of the country, need to know whether the tax rate they paid was at least what they would have paid if they’d made the purchase in Arizona. If the amount of tax paid was lower, the taxpayer must account for the difference when preparing their state tax return.
There has been speculation that Arizona’s imposition of the new provision of the use tax is in response to the frustration felt by many states regarding the potentially millions of dollars in revenue that isn’t captured because so many online vendors, such as Amazon, do not pay some form of state taxes.
Companies like Amazon, which fulfill Internet orders from warehouses and distribution centers around the country, but do not have a physical retail store a person can walk in to make a purchase, fall into a legal loophole that frustrates state tax collectors: It is a violation of federal law to require a company to charge sales tax to its customers if the company is not located within that state.
States continue to keep trying to close the loophole by redefining what “located” means. California recently determined that a business is “located” in the state if it has a marketing arm, or other affiliate with a physical presence in California.
In response to the continued wrangling by California to make Amazon subject to a sales tax, Amazon opted to leave California altogether, taking thousands of jobs with it. The company brought some of those jobs to Arizona.
In recent weeks, Arizona Governor Jan Brewer heralded the announcement that Amazon would be adding 3,000 jobs in Arizona, and making a combined investment of approximately $150 million in Arizona, including a new facility in Phoenix scheduled to open this fall.
One could speculate whether the use tax provision is an end-run around the state’s inability to collect taxes from businesses by requiring consumers to pay up. Folse said it’s more likely that state leaders simply charged state departments with finding sources for revenue, and someone dusted off the aged use tax law and brought it into the light as a possible moneymaker.
Forschino reiterates the fact that while the provision for adding the use tax to tax returns is new, Arizona’s use tax has been around for a very long time.
He said that if taxpayers take a close look at the annual tax booklets that are provided explaining tax laws, they’ll find the use tax has been included for the past five to 10 years. While no one has enforced it before now, the use tax has actually been owed since 1955, when the law went on the books at the state legislature.
“The only difference this year, is the use tax is a line on the return,” said Folse. “This is a law that’s been around for a long time.”
Folse didn’t speculate how much money the state might expect to garner from adding the provision to tax returns in 2012. The legislature’s budget staff estimated the state could get an additional $520,400 annually by adding the line to income tax forms, based on data from other states with similar revenues. California officials estimate there is more than $1 billion in uncollected sales tax that slips through the state’s fingers annually.
Folse points out that 23 other states have passed similar provisions to the one signed by Governor Brewer this year.
At this time, there isn’t clear direction to taxpayers regarding how to calculate their owed sales tax or what specific requirements will be.
“In the long run, I think this will cost the state more than it will collect, and in the meantime, the state is creating an imposition on taxpayers that makes it more difficult and more costly to file taxes,” concluded Folse.