Arizonans will find it harder to ignore their obligation to pay sales taxes when they buy merchandise online or outside the state.
A new state law will put a line on individual income tax returns for taxpayers to annually declare how much they owe in so-called “use tax” that’s not collected by a retailer.
It’s a type of sales tax obligation that already exists for Arizonans who buy things from out-of-state that are not intended for resale by a business. However, the obligation is often ignored because most online retailers elsewhere don’t collect sales tax from Arizonans.
The Republican-led Legislature included the new reporting requirement in a tax bill on another subject during the regular session that ended in April. Gov. Jan Brewer signed the bill into law, and it takes effect on July 20, putting the requirement into play for 2011 tax returns that most Arizonans will file in early 2012.
The passage of the new reporting requirement was reported previously by The Arizona Republic.
Though a University of Tennessee study concluded that Arizona loses hundreds of millions of dollars annually in potential sales tax revenue due to e-commerce, the Legislature’s budget staff produced a much smaller estimate of how much additional revenue the new reporting requirement will produce.
Citing other states’ experiences with similar requirements, the budget staff calculated that the state could get an additional $520,400 of revenue annually by adding a line on income tax forms to report the amount of use tax owed.
However, the amount Arizona will take in could be at least several times larger because the calculation was based on a provision that forgave a person’s use-tax obligation if it’s less than $50. That provision was later removed.
Most of the money collected will go to the general fund, and the rest will go to a special state fund for K-12 schools.
State reports said Arizona collected nearly $271.8 million in use tax during the 2009-2010 fiscal year. Most of that was paid by businesses, while individuals rarely pay it because they’re either unaware or unwilling, the legislative budget staff said in one report.
According to a Minnesota legislative research report prepared in 2010, at least 23 states’ income tax returns provide for taxpayers to report use-tax obligations.
Many of those states provide taxpayers with the option of adding up exactly what they owe, or using a table to pay a standardized amount based on their income. But an Arizona Department of Revenue official said the state has no plan to do that.
Ernest Powell, a Revenue Department manager for tax research and analysis, said the law doesn’t authorize the department to provide a table. Besides, he said, while many Arizonans make lots of purchases online, many others don’t make any at all, he said.
That means Arizonans will have to keep precise track of their online purchases to pay what they owe.
Citing confidentiality of audit practices, Powell declined to discuss how the department may enforce the reporting requirement.
An Arizona tax consultant said the new requirement poses challenges for both taxpayers and tax enforcers.
Jack Wood, a Prescott tax practitioner and former president of a statewide group of tax professionals, said audited taxpayers could be required to produce credit- and debit-card records for a year’s worth of purchases, but even those records often won’t clearly indicate when tax was paid and when it wasn’t.
The reporting requirement was championed during the legislative session by Rep. Matt Heinz, D-Tucson.
Heinz sponsored a bill that was first rejected but then approved in a modified form by a House committee. That bill died, but Heinz got another lawmaker to add the proposal to another tax measure pending in the Senate.
Heinz said in February that his proposal would remind taxpayers of their obligations.
“This is not a new tax and should not be treated as such,” he said. “This is a step in the right direction to making people aware.”
Another Tucson Democrat, Rep. Steve Farley, voiced concern about the proposal, saying it could result in online shoppers being surprised by hefty unpaid tax obligations.
A Revenue Department lobbyist told lawmakers in February that taxpayers who unknowingly haven’t paid their use-tax obligations would likely be subject to interest and penalties on the amount owed.