Millions of Tax Cheats

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In this column, which originally appeared in the March 3, 2004, edition of San Jose, California's The Mercury News, editorial writer Miguel Helft explains how calls for "no new Internet taxes" are "nothing more than an attempt to rob states and local governments of billions from an old tax they count on to provide essential services."

You Didn't Pay Sales Tax on That Amazon Book, Did You?

By Miguel Helft

You're probably a tax cheat.

(Don't worry. No one is likely to come after you.)

If you bought a copy of Dude, Where's My Country? from, a Prada handbag on eBay or a pair of Bean Boots from L.L. Bean this year, chances are you've broken the law. Unless, that is, you add up all those purchases and pay 8.25 percent of the total (the sales tax rate in Santa Clara County) to the state.

You might even be a serial cheater if you've been buying from catalogs or on the Web for some time. But this year the state tax collectors will be in your face, figuratively speaking. They've drawn a line, literally, right on the state income tax forms where you're supposed to report the little known use tax.

The use tax, which has been on the books since 1935, is to out-of-state purchases what the sales tax is to in-state purchases. Pretty much every state that has a sales tax also has a use tax. But states, California included, have never done much about collecting the use tax. It's just too hard to enforce.

Tax collectors don't expect Californians will rush to pay the tax any time soon.

So why did it suddenly appear on the state income tax forms? It seems it's nothing more than a symbolic gesture, designed to change the debate over taxing e-commerce.

Every time the subject of sales taxes on e-commerce comes up, politicians backed by a coalition of anti-tax crusaders and online businesses raise the "no new taxes on the Internet'' flag. That amounts to hijacking the Internet taxation debate.

The intent behind the original no-Net-tax law was to give a fledgling cyberspace time to grow without the disincentives of new fees or taxes. That meant prohibiting taxes on Internet access or digital downloads, for example.

The use tax, which predated the Web by about six decades, doesn't fall under that umbrella. "This is a starting effort to educate people that this tax exists,'' says Annette Nellen, a professor in the accounting and tax department at San Jose State University. (Incidentally, Nellen is one of the diligent 4,400 or so Californians who have been paying the use tax regularly.)

A little education will help bring to light the real, but rarely talked about, issue around taxing e-commerce: it's a dispute over who ought to collect the tax.

When you shop on Main Street, the retailer must collect the tax and send it to the state. But the U.S. Supreme Court has ruled that a state like California cannot force a retailer with no physical presence here -- think Seattle's Amazon -- to collect the sales tax on its behalf. So when you buy from an out-of-state online or catalog retailer, the obligation to pay the tax to the state is, yes, entirely yours.

When you frame the issue in these terms, it becomes clear that the "no new Internet taxes'' argument is nothing more than an attempt to rob states and local governments of billions from an old tax they count on to provide essential services.

It should also be apparent that the tax-free Web retailers aren't doing you a favor. "If someone else collects the sales tax, you don't have to think about it,'' says state Sen. Dede Alpert, whose legislation added the new line for the use tax on state income tax forms.

Today, a Web site that doesn't collect the tax looks like it's giving you a price break; tomorrow, it might look like it's imposing a tax-reporting burden on you.

The number of out-of-state retailers that collect the tax voluntarily has doubled to about 500 over the past two years, according to the state Board of Equalization. They include TV shopping channel QVC; Segway, of human transporter fame; and They collect the tax "as a courtesy to their California customers,'' according to the Board of Equalization's Web site.

An honest debate over e-commerce taxes is long overdue. Online shopping has introduced a world of new options for consumers and businesses. But from a tax perspective, it has put Main Street retailers, who collect taxes, at an unfair disadvantage. Worse, it has shifted an increasing part of the economy underground and turned millions of shoppers into unsuspecting tax cheats.

Miguel Helft is a Mercury News editorial writer. His column on technology policy appears on the first and third Wednesdays of each month.

Copyright © 2004 San Jose Mercury News. All rights reserved. Reproduced with permission.