Are You Paying “Use Taxes?”

28 01 2010

Alright, every state is looking for ways to generate more money and ways to shave off superfluous expenses this year. Thus, it’s not surprising to hear that state governments are cracking the whip at resident businesses for not paying certain taxes. In particular, Washington state is after businesses that have not paid “use taxes,” and it’s trying a new approach – a gentle nudge toward voluntary compliance.

What are use taxes? A use tax is a state tax on goods purchased in another state (i.e., Oregon, where there’s no sales tax) for use in the taxing state (i.e., Washington), to make up for (in lieu) local sales tax. More specifically,

“States and municipalities impose use taxes on purchases or rentals that are made outside the taxing jurisdiction but would have been taxable had they taken place within it. Such transactions escape the normal sales tax collection because retailers outside the state or municipality are not required to collect the sales tax. The use tax protects retailers located in the state or municipality because it removes the incentive for consumers to shop outside that locality in order to avoid paying the sales tax.”

Basically, it’s a business tax that’s a complement to sales tax. Washington particularly relies heavily on sales and use taxes as the state does not impose an income tax. One study stated that one of the main reasons for noncompliance with the use tax is ignorance; it’s commonly misunderstood. So the Washington Department of Revenue’s Taxpayer Services Division has tried a new approach to informing businesses about use taxes, and encouraging payment thereafter. Starting in 2003, they sent letters.

The department knew that businesses getting these compliance letters would say, “It’s a lot of work to go through my records and see what I owe.” So, it looked at what the average company in each recipient’s industry owed, and told them that if they didn’t want to go through all their purchases, they could use this table that shows annual gross business income and average their annual use tax reported. For example, a company with $250,000 gross income tends to report $563 in use tax. Thus, companies could use this table to get current rather than go through their records.

Overall, collections attributed to this program have been in excess of $17 million over the past five fiscal years. And, for every $1 spent — mainly staff time, printing and postage — the department received $300 in return. Voluntary compliance as a result of sending “information” to taxpayers, instead of an “assessment,” is at the heart of the program. The letters mainly initiate the opportunity to catch up on past taxes without paying a penalty.

Have you received one of these letters?

Photo courtesy of FedStats.gov.

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