State tax officials are targeting people – doctors, dentists and chiropractors are high on the list – who buy goods from out-of-state vendors and who, unlike retailers, aren’t registered with the state. The goal is to collect at least part of the annual $2 billion in sales and use taxes that slips through the crack – a goal intensified by the state’s budget problems.
“Doctors, chiropractors, dentists, lawyers, too – and anyone else who makes these purchases. They’re not retailers, they don’t sell things, but they buy things. X-ray equipment or a massage tables or salon chairs or computers. And if they buy them outside the state, they have to pay the tax,” said Anita Gore, a spokeswoman for the state Board of Equalization.
Of the estimated $2 billion worth of sales and use taxes that go uncollected, about $1.1 billion represents use taxes – California taxes on out-of-state purchases. The remaining $900 million reflects uncollected sales taxes from within the state.
According to the board, California businesses owe an average of $400 annually in unpaid use taxes, while individual consumers owe $45. Of the $1.1 billion in unpaid use taxes, some $409 million is pegged to consumers, while $682 million comes from business.
Although “sales” and “use” taxes are similar, there are differences: The sales tax is collected by the retailer at point of sale and sent to the state. The use tax is not collected by the out-of-state seller – unless that seller has a bricks-and-mortar presence in California – and it is up to the buyer to pay it. The amounts of the two taxes are the same. The law requiring use-tax payment has been on the books since 1935, although the explosion of online purchasing has dramatically increased the dollars at stake.
The hunt for money is the latest in a series of moves by the state as it faces a $40 billion shortage over the next 18 months as well as an immediate cash shortage.
Just who isn’t paying the taxes is a matter of dispute. But as a first step, the state Board of Equalization said it wants the purchasers to register voluntarily with the state, and said it is prepared to launch audits against those who don’t.
To help identify the businesses, the BoE is using a cross-checking program through a database at the Employment Development Department to track service-industry businesses that the board believes are likely to owe use taxes.
The board also has launched out-reach and education programs, which are apparently starting to have an impact.
The number of returns reporting use tax is up 64 percent from last year and the dollar amount is up 75 percent, according to figures from the board. About two-thirds of all use tax reported by individuals was on professionally prepared returns.
Despite those increases, the number of people who report their use tax on the income tax form is still small: Out of 18.5 million returns processed in 2008 by the Franchise Tax Board, only about 44,000 reported use taxes, which totaled about $8.9 million.
The voluntary sign-up program allows “taxpayers to report and pay their use tax liability subject to a three-year statute of limitations,” the board said. Those who don’t voluntarily sign up could be subjected to audits that can go back eight tax years, according to the board. In some instances, a 10-year statute of limitations may apply; in fraud cases, there is no limitation. The voluntary program does not apply to the purchase of vehicles, vessels or aircraft.
“Businesses that have been identified by industry group and other factors as likely to have incurred a use tax liability are being contacted by letter and asked to report any use tax due for the past three years,” the board said Thursday in a written statement.
The state Board of Equalization, a publicly elected tax board, collects some $53 billion annually in taxes and fees supporting state and local government services. It hears business tax appeals, acts as the appellate body for franchise and personal income tax appeals and sets values on utility property.