Private investment firm Comvest Partners acquires the financially troubled e-retailer, which filed for Chapter 11 bankruptcy protection in March.
While hoping for federal legislation to mandate collection of sales tax on all Internet retail transactions, about 20 states are including a line in their personal tax return forms for taxpayers to enter an estimated amount of what they owe in tax on transactions where tax was uncollected by retailers. New York, for example, has recouped $17 million over each of the last two years.
Sometimes all you have to do is ask. For years, states have been grappling with how to recoup sales taxes from consumers who buy things tax-free online or through mail-order catalogs, but about 20 states are getting at least some of that revenue by simply including a line in tax-return forms asking taxpayers to estimate what they owe for interstate purchases for which the seller did not collect a sales tax.
New York, for example, has recouped $17 million in each of the first two tax years that it included the tax-use reporting line, 2003 and 2004, a spokesman says. “That’s revenue we would not have otherwise collected,” he says.
Retailers with interstate sales are not required to collect sales tax when they have no physical presence in their customer’s state, and many promote on their web sites that consumers in certain states can purchase things tax-free.
But what many consumers in such situations don’t realize, says John Logan, senior tax analyst for CCH Inc., is that they are still required by law to pay any due sales or “use” tax to their home state.
Few consumers bother to pay sales tax on their own, figuring the chance of getting audited is extremely slight, experts say. But consumers may not be as free as they think, Logan says.
If a consumer buys from a large online out-of-state retailer, and that retailer gets audited by its home state, the consumer’s personal information could be included in the audited records, Logan says. “It’s common practice for states to share information with other states, so in this case the purchaser could get on his home state’s radar screen,” he says, adding that the risk of being audited goes up with the amount of the untaxed purchase.
Still, some states figure that it’s unreasonable to require consumers to maintain records of all untaxed interstate purchases. That’s why New York includes a table in its tax-return worksheet that suggests how much a taxpayer should pay for uncollected sales taxes based on his or her income. The formula ranges from $5 in tax due for income of up to $15,000, to the smaller amount of either $200 or .0355% of income on income of $200,001 or more.
“We feel that’s very generous to the taxpayer,” the spokesman says, noting that taxpayers can use the table for all purchases of under $1,000 each.
States’ big hope: SST
While some states are collecting revenue otherwise lost to uncollected sales taxes on web and catalog purchases, the big hope for states is through the Streamlined Sales Tax Project, says Larry Wilkie, director of the Minnesota Department of Revenue’s corporate and sales tax division.
“Getting the SST underway is a much better way to get sales tax compliance than asking consumers to figure and pay what they owe on untaxed purchases,” Wilkie says, noting that fewer than 10% of consumers bother to pay what they owe in sales tax on web and catalog purchases.
Under the SST Project, states are working to simplify the interstate collection of sales tax in hopes of getting federal legislation to mandate sales tax participation by all retailers, whether or not they have a physical presence, or “nexus,” in a customer’s home state.
But the project is still working out bugs in its attempt to win federal legislation. One of the hottest remaining issues, says Scott Peterson, executive director of the project’s Governing Board, pertains to objections by Ohio and Texas to the SST’s proposal that sales tax always be figured at the buyer’s state’s rate when a retailer has no nexus. There’s also sharp disagreement between retailers and states regarding how to define digital products for taxation.
On a more positive note, the Governing Board is close to certifying four software vendors as providers of tax collection software that will be free to retailers, Peterson says.