States pursue online taxes

The 86 million people who bought Christmas presents online are getting thrown a piece of coal by their state governments.

Though few online retailers and mail-order companies charge sales tax, state governments want their cut. And they're starting to get serious about collecting.

"Use" tax laws require shoppers to pay taxes to their home states on all out-of-state purchases where no, or partial, sales tax was charged.

All states with a sales tax also have a use tax. These taxes, many of which have been on the books for decades, were designed as a way to keep local retailers competitive with mail-order companies, but the laws have really never been enforced until now.

With states seeing their budgets dwindle, they're turning to enforcement of the use tax, a tax many consumers are unaware of.

"What we are trying to do is educate (residents) on their responsibility," said Charles Willey, a spokesman for the Georgia Department of Revenue. "People just aren't aware that there is a tax."

Georgia and South Carolina are making attempts to see that more residents start paying.

Georgia sent letters earlier this year to various business people, such as dentists and optometrists, reminding them they should be paying taxes on equipment purchased from out-of-state distributors.

And South Carolina started listing the use tax as a line item on its individual income tax return form about four years ago. The state has seen its use-tax collections increase each year, coming in at $689,000 for 2003.

"That's about $689,000 more than we collected five or six years ago," said Danny Brazell, a spokesman for the South Carolina Department of Revenue.

Consumers in Georgia and South Carolina are required to pay use taxes when:

 •  They mail-order an item and don't pay sales tax.

 •  They make a physical purchase in one of the five states without sales tax.

 •  They make a purchase in a state with a lower tax rate than their home state.

Georgia residents are supposed to report their untaxed purchases on the supplemental Sales and Use Tax Report Form (Form ST-3), while South Carolinians are expected to list their untaxed purchases in line 23 of their individual income tax return.

The laws are designed to keep local retailers competitive with out-of-state retailers, Mr. Brazell said.

"South Carolina retailers have to collect a 5 percent (state) sales tax," Mr. Brazell said. "If you mail order it, (out-of-state retailers) have a 5 percent advantage over South Carolina retailers."

A University of Tennessee study estimates that e-commerce costs states $10.3 billion in sales tax revenue in 2003.

Georgia and South Carolina are among the many states nationally that have stepped up use-tax law enforcement in recent years as more shoppers have turned to online retailers.

Still, enforcement is not an easy task.

"We have no way of knowing unless you report it," Mr. Willey said.

Both Mr. Willey and Mr. Brazell said the use tax probably is the most underreported tax. Neither state keeps official statistics on underreported taxes.

Individuals and businesses that are audited are more likely to be cited for failing to pay use taxes, but it is unlikely an individual would be investigated solely for use taxes, Mr. Willey and Mr. Brazell said.

Michael Salazar, a certified public accountant in Martinez, said that so far, none of his clients, from both Georgia and South Carolina, have reported untaxed purchases.

"I think there's a lot of out-of-state purchases people make to avoid sales taxes," Mr. Salazar said.

Reach James Gallagher at (706) 823-3227 or james.gallagher@augustachronicle.com.

Taxable spending

Because sales tax rates differ in Georgia and South Carolina, residents in both states owe use taxes on purchases made across state lines to make up for those differences.

 •  Residents of Georgia, which has a 4 percent state sales tax and a 3 percent local sales tax, would owe a 1 percent to 2 percent use tax to their local government for purchases made in South Carolina.

 •  Residents of South Carolina, which has a 5 percent state sales tax and a 1 percent to 2 percent local sales tax, would owe a 1 percent use tax to the state government for purchases made in Georgia.

Sources: Georgia Department of Revenue and South Carolina Department of Revenue