Internet Uh-Oh At Tax Time

Emergency personnel move what appears to be a body from the Hudson River as seen from Hoboken, N.J., Sunday, Aug. 9, 2009.
AP Photo/Seth Wenig
Remember all the stuff you bought online last year? Now it's time to declare and pay sales tax on those purchases, at least so say the income tax forms of 20 states.

The latest to outstretch that revenue-seeking hand are New York and California, which this year added a line requiring taxpayers to declare any tax they owe on out-of-state purchases.

Though state revenue agencies similarly sought sales tax on mail-order items before the e-commerce boom of the late 90s, Internet sales have "really shined a spotlight on it and increased the urgency," said Harley Duncan, executive director of the Federation of Tax Administrators.

By law, residents are supposed to pay sales taxes to their states if they order books, clothing, computers and other items by mail or online from businesses based elsewhere.

"Nobody - very few - ever followed that rule," said Anthony Leone, a certified public accountant in Buffalo.

The National Governors Association estimates state and local governments will lose at least $35 billion this year from Internet sales.

The new tax return line, New York state officials say, forces taxpayers to confront their liability or potentially face audits that could uncover credit card statements and mounting tax debt.

But it's unclear whether that threat is enough.

Dan DeVeronica, 21, who owns an Internet cafe in Rochester, says most New Yorkers, including himself, will likely leave "line 56" blank "as sort of a protest."

Though Supreme Court precedents side with the states, DeVeronica said he was outraged New York would try to collect: "The Internet is not a government service. It's privately-owned so it shouldn't be taxable."

It looks like scofflaws need worry little.

Officials from several states said they expect few, if any, tax returns to be audited - even if a taxpayer claims zero liability.

And so the revenues should keep trickling in.

New York tax officials are expecting the new tax line, for which they've added seven pages of instructions and tables, to yield just $2.5 million. Like New York, most states let taxpayers estimate their liability based on household income.

California projects its out-of-state sales line will bring in $13 million this year - out of an estimated $1.2 billion owed by individuals and businesses, said California Equalization Board spokesman Vic Anderson.

"That's always a problem, making people aware of this liability," Anderson said. "It's one of the most misunderstood taxes out there."

New York loses more than $1 billion in sales tax revenues from out-of-state purchases, according to a University of Tennessee study.

In Ohio, when the line was added to tax forms four years ago, 52,000 taxpayers participated. In 2002, the number dropped to 46,000, out of 5.7 million total returns, said Gary Gudmundson, a spokesman for the Ohio tax department. The state raises about $2 million, but projects that about $500 million goes uncollected.

States have tried other tactics, without any more success.

When Maine added the line in 1989, it also created a "default assessment" of 0.04 percent of adjusted gross income if the line was left blank. By 1998, the default was gone because of concerns the system wasn't fair for taxpayers who simply forgot or didn't know the rules, said Eileen Bemis, deputy director of the Maine Sales, Fuel and Special Tax Division.

Without the default, Maine generated $1.3 million from the line last year, but might be missing out on as much as $30 million a year, she said.

"It's pretty much an honor system in that it's very difficult to go back and audit someone's checkbook or credit card statements," Bemis said.

Already, a New York lawmaker has introduced a bill to drop the line.

"We're going to make tax evaders out of law-abiding citizens and policemen out of tax preparers and accountants," said Assemblyman Ronald Tocci, a Democrat in the chamber's majority. Who, he asked, "keeps tabs of what they buy on vacation in the Bahamas or Canada? Or anyplace? It's crazy. It's insane."

Forty-five states require buyers to pay sales taxes on Internet and other out-of-state purchases, though a few, including California and Minnesota, exempt the first few hundred dollars and focus on high-ticket items.

Meanwhile, a number of major retailers including Wal-Mart, Toys "R" Us and Target voluntarily collect state taxes. And some states are working on a "streamlined sales tax project" that would tax online purchases at the point of sale. Congress would have to enact a law, however, to make such a system nationwide.

States with sales tax lines on their tax forms include Alabama, California, Connecticut, Idaho, Indiana, Kentucky, Louisiana, Maine, Massachusetts, Michigan, New Jersey, New York, North Carolina, Ohio, Rhode Island, South Carolina, Utah, Vermont, Virginia and Wisconsin, according to the Federation of Tax Administrators.

Georgia, Hawaii and the District of Columbia have separate forms in their income tax packages.

By Michael Gormley and Ben Dobbin