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California�s Tax System �
Testimony submitted to CA Assembly Revenue & Taxation Committee for 2/28/11 hearing on the California Use Tax Gap
Use Tax Reality, California Progress Report, 3/23/09
The Practitioner�s Role in Use Tax Compliance, AICPA Tax Insider, 8/9/07
California's Use Tax Collection Challenges and Possible Remedies (pdf), California Tax Lawyer, Fall 2007
January 2009 Update
June 2008 Update
See end of report.
after the enactment of a sales tax in 1933,
seller without a physical presence in the state is not obligated to
collect sales tax from buyers located in that state.
A non-present (remote) seller may still register with the taxing state and
collect sales and use tax, but it is not obligated to do so. Remote
sellers have been selling to
buyers likely believe that a purchase from a remote vendor is tax free
because the buyers are not aware of the use tax. Also, little effort has
been made by many states, including
e-commerce business model increases the use tax collection issue because
that model enables businesses to easily sell to buyers in any state
without having a physical presence there. The e-commerce model also
enables a vendor to easily avoid all sales tax compliance by following a
practice (and noting it on their website) that they ship from State X
(where the vendor resides), but do not sell to customers in State X. This
approach enables vendors to avoid collecting tax in State X (they have a
physical presence there, but no sales) and in any other state because they
only have a physical presence in State X. Also, it is easy for online
shoppers to search online to find out-of-state online vendors who do not
collect sales tax.
report provides data on the size of the uncollected use tax problem, what
some other states have done to address the problem and provides
recommendations for improving use tax collection in
Extent of the Problem
use tax: Data on the amount of
use tax that goes uncollected varies from study to study. Listed below are
results of some key studies conducted in this area.
In July 2004, Drs.
Bruce and Fox of the
A 2003 report by
the Direct Marketing Association questioned the data from the
A 2003 report from
the Washington Department of Revenue noted that businesses registered in
the state failed to report about 28% of the use tax owed on purchases from
out of state. The annual use tax loss was over $100 million. The
Department found that use tax noncompliance had increased almost 20% from
1996 to 2003, likely due to the growth of e-commerce use by businesses.
in e-commerce: E-commerce
continues to grow which will cause the use tax collection problem to also
grow. Indications of growth include the following:
Improve Use Tax Compliance
for improving use tax compliance include.
consumers know so little about the use tax, improved enforcement is likely
to be viewed by many as the enactment of a new tax.
challenge is that the current sales and use tax rules are not simple.
Taxpayers will need guidance as to which of their purchases are taxable
and which are not, particularly where handling charges or services are
associated with the purchase of tangible personal property.
to Improve Compliance
Since Internet sales often
generate use tax, the Board of Equalization should post informational ads
on Internet sites to help educate people about the use tax and how to
comply. The Board reports that it did use online advertising in 2005-2006
to educate buyers about the use tax.
In early 2007, the Board also mailed letters to tax practitioners in the
state encouraging them to discuss use tax compliance with their clients.
Greater and more continual effort is needed though.
While the government would
generally prefer to have vendors collect the sales tax rather than having
consumers self-report, it is unlikely that the government can always rely
on vendors. If a vendor is located outside of the
Several states are moving
towards simplification by enacting a uniform sales and use tax law. This
uniform law was created by the Streamlined Sales Tax Project in which many
The hope is that Congress will see that adopting states have simplified
sales tax compliance for vendors by having similar laws.
following chart explains how improved use tax collection would satisfy the
principles of good tax policy. The rating in the last column indicates
whether improved use tax collection would improve the current system.
Comiskey, �States Taking Lead in Online Sales Tax Collection,�
ecommerce-guide.com, 12/20/05; available at http://www.ecommerce-guide.com/news/news/article.php/3572366.
Kristof, �Bought it out of state? You may owe �use tax�,�
Manzi, Minnesota House of Representatives Research Dept., �Use Tax
Collection on Income Tax Returns in Other States,� 12/04; available at http://www.house.leg.state.mn.us/hrd/pubs/usetax.pdf.
McCullagh, �States push to tax Net shopping,� cnetNews.com, 4/12/06;
available at http://news.com.com/2100-1028_3-6060450.html.
June 2008 Update
1. California proposal to allow individuals to use the look-up table approach to determine use tax
AB 1957, introduced February 13, 2008, is primarily a reintroduction of AB 969 which was vetoed by the Governor. These bills aimed to not enable individuals to avoid completing the use tax line on Form 540 (CA Individual Income Tax Return) by allowing them the option to file sales tax forms (see footnote 3 above).
AB 1957 was amended on March 25, 2008 to add the option to allow individuals to use a table to be provided in the Form 540 instructions where they could look up their use tax liability for non-business purchases. For individual non-business items for which use tax is owed that cost $1,000 or more, the actual use tax must be calculated. In addition to making recordkeeping simpler, the sponsor intends that this simplification address one of the reasons for the Governor�s veto � that individuals would not have time to get ready to comply.
Reread in Revenue & Taxation Committee in June 2008.
Find information on AB 1957 (2007-2008) by searching at http://www.leginfo.ca.gov/bilinfo.html.
2. Updated report from Minnesota on use tax reporting
For updated information on
state use tax reporting, see Policy Brief, Research Department,
Minnesota House of Representatives, Use Tax Collection on Income Tax
Returns in Other States, updated November 2007 (http://www.house.leg.state.mn.us/hrd/pubs/usetax.pdf).
This standard was confirmed by the U.S. Supreme Court in Quill Corporation v. North
Dakota, 504 U.S.
298 (1992) and National Bella
Hess .v Department of Revenue of
The line was added to the individual and corporate income returns
(Forms 540 and 100) to cover purchases of tangible personal property
made on or after 1/1/03 through 12/31/09 (SB 1009, Chapter 718, 2003).
Sellers registered for sales tax may not use this reporting approach.
Use of the income tax reporting approach constitutes an irrevocable
election to use that technique rather than the regular reporting
method for sales and use tax. Per the Assembly analysis of AB 969
(2007); 5/23/07 (http://www.leginfo.ca.gov/bilinfo.html), use tax
reported on income tax forms for 2004 was $2.8 million, $4.6 million
in 2005 and $5.5 million in 2006. Taxpayers who prepared their own
return were 8 times more likely to complete the use tax line than were
taxpayers who used paid preparers. The sponsor of AB 969 believes this
is due to the elective nature of reporting use tax on the income tax
form, which makes it look voluntary. (It is elective only
because taxpayers could instead file sales/use tax forms in the same
year in which they incurred the use tax liability rather than the
subsequent year when their income tax form is due. AB 969 proposes to
make reporting of use tax on the income tax form mandatory to increase
awareness and compliance.)
Ernst & Young, The Sky is
GAO, Sales Taxes � Electronic
Commerce Growth Presents Challenges; Revenue Losses Are Uncertain,
GAO/GGD/OCE-00-165, June 2000.
 GAO, Sales Taxes � Electronic Commerce Growth Presents Challenges; Revenue Losses Are Uncertain, GAO/GGD/OCE-00-165, June 2000, Table V.1 and Table V.2.
BOE, 2004-5 Annual Report, Sales and Use Taxes, pp 34 � 35;
available at http://www.boe.ca.gov/annual/pdf/2005/4-sales05.pdf.
BOE, Staff Legislative Bill Analysis, SB 1009, 6/18/03; available at http://www.boe.ca.gov/legdiv/sutleg/pdf/sb1009-3bm.pdf.
The BOE also estimated that having a use tax line on the personal
income tax form would lead to about 1% of the unpaid use tax being
reported with the same 1% result for businesses.
GAO, Electronic Commerce Growth
Presents Challenges; Revenue Losses Are Uncertain, GAO/GGD/OCE-00-165,
June 2000, pages 34 - 35.
Some states, including
Dr. Donald Bruce and Dr. William F. Fox, �State and Local Sales Tax
Revenue Losses from E-Commerce: Estimates as of July 2004,� July
2004, available at http://www.ncsl.org/print/press/Ecommerceupdates.pdf.
Bruce and Fox, �State and Local Sales Tax Revenue Losses from
E-Commerce: Updated Estimates,� 9/01, available at http://cber.bus.utk.edu/ecomm/ecom0901.pdf.
Also see additional reports at http://cber.bus.utk.edu/ecomm.htm.
Dr. Peter A. Johnson, Direct Marketing Association, �A Current
Calculation of Uncollected of Uncollected Sales Tax Arising from
Internet Growth,� March 2003; available at http://www.the-dma.org/taxation/CurrentCalculationofUncollectedSalesTax.pdf.
Minnesota Department of Revenue, �Minnesota Sales Tax Gap study;�
available at http://www.mndor.state.mn.us/legal_policy/research_reports/content/tax_gap_study.shtml.
U.S. Census Bureau News, 5/16/07; available at http://www.census.gov/mrts/www/data/html/07Q1.html.
 Pia Sarkar, �Fashion purchases outpace tech buys online,� San Francisco Chronicle, 5/15/07, pg C1.
Board of Equalization, 2006-2006 Annual Report, p. 63; available at http://www.boe.ca.gov/annual/pdf/2006/7-needs06.pdf.
New York Department of Revenue, Purchaser�s Obligations to Pay
Sales and Use Taxes Directly to the Tax Department Questions and
Answers, Publication 774 (3/07), pp 13 � 15; available at http://www.tax.state.ny.us/pdf/publications/sales/pub774_307.pdf.
 Various bills have been introduced over the past few years, including S. 34 (110th Congress), the Sales Tax Fairness and Simplification Act, which would allow states that have simplified their sales tax, such as by adopting the SSUTA, to collect tax from remote vendors.
This analysis uses a document prepared by the American Institute of
Certified Public Accountants (AICPA) Tax Division and altered to the
above format by Joint Venture: Silicon Valley Network. The AICPA
document, Guiding Principles of Good Tax Policy: A Framework for Evaluating Tax
Proposals (2001) is
available at http://ftp.aicpa.org/public/download/members/div/tax/3-01.pdf.
The Joint Venture workbook is available at http://www.jointventure.org/PDF/taxworkbook.pdf.
The principles laid out in these documents are frequently used
tax policy analyses ones. For more information see Nellen, Policy
Approach to Analyzing Tax Systems; available at http://www.cob.sjsu.edu/facstaff/nellen_a/Policy%20Approach%20to%20Analyzing%20Tax%20Systems.pdf.
Note: The author of this report (Annette Nellen) was the lead author
for both the AICPA and Joint Venture documents noted here.
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This page last revised on January 23, 2009. Contact Annette Nellen
The views and opinions expressed in this page are strictly those of Professor Annette Nellen. The contents of this page have not been reviewed or approved by San Jos� State University.Last Modified: Aug 14, 2018