Wednesday, July 22, 2009

The Four Loopholes (Loophole Number 1)

There are four loopholes which created the need for use tax. Over a short period of time after inventing sales tax, the states started discovering that there were some situations where they weren't able to get the sales tax revenue they were expecting. We'll use this series of posts to discuss each one.

Purchases in another state
Say the rate where you are, in Vancouver, Washington is about 9%. But if you cross the bridge and go to a mall in Portland, Oregon (a 15 minute drive), you'll pay zero % sales tax. Where are you going to buy your big screen TV? Something tells me that, per capita, there are a lot fewer appliance stores in Vancouver than there are in Portland. Just a guess.

There's not a whole lot Washington can do about your buying that TV in Oregon. It's not like they can post border guards. You might leave a trail however. A woman in Washington bought a TV with a store account in Oregon, took the set home, and three months later, got a letter from Washington demanding the use tax.

She left a trail. The store filed a lien on the TV in Washington, where those records are computerized. So all the Washington revenuers have to do is scan the liens looking for one filed by an Oregon seller. Bingo. Revenue!

Pay cash though, and all that exists is the paperwork in the seller's offices. Unless they get audited..... Not that I'm suggesting this method of avoiding your proper Washington taxes, though. I'm just sayin'.

And I know of no state that routinely audits individuals for use tax. First of all, individuals don't keep sufficient records of all their purchases and receipts (except for the more anal among you). So there isn't anything to audit. Plus it's politically unwise to audit taxpayers (and voters) for a tax they didn't realize they owed. Most people who go to Oregon to buy their stuff don't know about use tax. They just think they're avoiding sales tax legitimately.

But if you're a business, oh, yeah. They'll find you. It's called "being audited."

The problem for the states is that they can't charge you sales tax since the sale occurred in another state and they can't reach that transaction. But they can impose use tax. You did, after all use that TV once you unloaded it in your driveway.

So if you buy something in one state where the rate is lower than the one where you will eventually use it, the state will impose use tax on your use of it in that state.

Use tax therefore plugs the loophole of your buying stuff in another state.

Sales Tax Guy

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Picture note: the picture above is of the Columbia River, just east of Portland, Oregon and is hosted on Flickr. If you'd like to see a larger version, click here, then click on the "all sizes" button above the picture.

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