Can't Wait for Cyber Monday? Watch out for Use Tax!
In about three weeks, Black Friday 2011 will officially be underway. For decades this has been the busiest shopping day of the year. But there is another day that many of you are looking forward to: Cyber Monday.
Cyber Monday is the e-based alternative to Black Friday. It falls on the Monday after Thanksgiving and is the biggest online shopping day of the year. Hundreds of online retailers participate. Experts say that in many cases you get a better deal making your purchase on Cyber Monday than on Black Friday.
What does all of this have to do with taxes? Well, if you plan to scoop up some of those deals on Cyber Monday, chances are good that it will be from a retailer that is not required to charge you sales tax. And that is a hot topic right now.
Does this mean that you are off the hook for paying the sales tax if weren’t charged for it? No. According to Missouri law, you are supposed to declare that purchase on a use tax return that is due April 15th and voluntarily remit the tax that you would have paid if you had bought the item from a local retailer. That is “use” tax – another name for sales tax. The only difference between use and sales tax is who sends it to the state (the seller or purchaser).
Is this a new tax? No. It’s been around since the 1959 in Missouri yet many people don’t realize it exists and so it rarely gets paid. Others may know about the tax but are willing to gamble that the state will not audit their online purchases and so they never pay the tax.
But those odds are starting to change. States are becoming more aggressive about collecting use taxes. Why? As shopping trends shift from brick and mortar stores to e-commerce, a tremendous amount of government revenue is at stake. States are in financial trouble and are looking for ways to raise revenue. One area where they can do this is by enforcing compliance with the use tax .
How does a state know I made an online purchase and didn’t pay sales tax?
Information sharing agreements between use tax auditors. Virginia, for example, routinely sends use-tax bills to residents who buy furniture in North Carolina and have it shipped home. How does Virginia know? North Carolina audits the furniture sellers and gets a list of tax-free sales to Virginia residents, which it shares with Virginia tax authorities. Such interstate tax sharing agreements are now common.
In 2010, Colorado became the first state to require online retailers to either collect sales tax or send notices to the purchaser of their use tax reporting obligation. If a seller decides to send the notices instead of collecting sales tax, the seller must send three notices. Guess who the third notice goes to: the state of Colorado which essentially provides an audit roadmap that the state can use to find persons who have intentionally or unintentionally avoided sale or use taxes.
So when you are trying to figure out which website offers the better deal on Cyber Monday, you might want to leave sales tax out of the equation. You may find that you’re better off paying the sales/use tax rather than facing a later tax bill with interest and penalties.
What do I do to be in compliance?
If you made some online purchases in 2011 or plan to on Cyber Monday, here is how you go about complying with the law: (these rules apply to individuals only)
1. Make a list of purchases you made in the year for which a sales tax was not paid. You can find this information on receipts, invoices, bills, credit card statements or cancelled checks.
a. Purchases which may be subject to use tax:
· Catalog purchases
· Magazine subscriptions
· Cross-border purchases of goods
· TV marketing purchases
· Computer software and hardware purchases
· Mail-order supply purchases
· Furniture and equipment purchases from out-of-state sellers
· Purchases of goods bought over the Internet
· Purchases of goods bought over the telephone
2. Determine if you have a use tax liability.
a. If your purchases in step 1 are less than $2,000, you do not owe use tax and do not need to file.
b. If your purchases are $2,001 or more, then you must file a use tax return.
3. Calculate the tax using Form 4340
b. Make sure you use the correct use tax rate. The use tax rate for Greene and Christian counties is 4.225. You can check the rates here since they vary by county and are subject to change.
4. File your use tax return
a. File Form 4340 by April 15th of the following year to be considered timely filed.
b. Mail your use tax return and payment to:
Department of Revenue
P.O. Box 840,
Jefferson City, MO
65105-0840
What if I’m not in compliance...or don’t want to be?
Individuals
As noted above, Missouri has a de minimis (minimal amount) of $2,000. That means a certain amount of tax free purchases are allowed. If you exceed that amount in any given year, it is doubtful that states will bother to pursue small purchases even if the information is available to them.
But it could happen. States are cross sharing their information so this ups the odds of it happening. And if it does, the tax bill may come three years later when you least expect it and will have interest and penalties tacked onto it.
Business owners
If you are a business owner, you absolutely need to be in compliance. It’s not a matter of if but when you get audited. Statute of limitations for a use tax audit is 3 years if you have filed use tax returns. If no use tax returns have been filed, there is no statute of limitations. The state can go back as far as they want to.
States are going after businesses because they are easier to audit and result in a bigger collection. Your business records can easily be checked and the tax which was previously overlooked can now be collected. It’s a great way to raise revenues without creating a new tax.
If you are a business owner and have not filed use tax returns or think you might have some exposure in this area, you need to speak with a CPA familiar with use tax law. I have had to guide a few clients through sales tax audits this year alone. Call me to set up an appointment if the IRS questions your compliance; my contact information is on my website.
