You knew this was coming........North Carolina seeking taxes from online purchases
Copyright © 1999 Nando Media
Copyright © 1999 Nando Times
From Time to Time: Nando's in-depth look at the 20th century
By CARLENE HEMPEL
(December 19, 1999 9:27 a.m. EST nandotimes.com) - Internet sales may be booming this holiday season,
but North Carolina's Department of Revenue is set to deliver a lump of coal into the stockings of the state's
taxpayers.
Shortly after the new year, the 1999 Individual Income Tax Form will arrive in mailboxes with a new line, No. 16,
for residents to fill in. Titled "Consumer Use Tax," it will require consumers to calculate how much they spent for
goods online and pay taxes on it.
It's the state's first attempt to dip into the e-commerce bonanza of cyberspace and grab what could be millions
of dollars for itself.
"We will be collecting additional funds that we don't have today," said Charles Collins, director of the Sales and
Use Tax Division of the state Revenue department. "There are a lot of different ways we can collect some of this
money; this is just one of them."
The topic of Internet taxes is everywhere these days. Congress is consumed by it, and the presidential
candidates are being dogged by it. Local merchants are concerned that Internet sites are stealing their sales;
local city and town officials are worrying that the loss of sales-tax revenue from items bought online will start to
dent their budgets.
This year alone, North Carolina state and local governments lost somewhere between $110 million and $140
million in revenue on nontaxed goods bought from out-of-state Internet sites and catalog companies, Collins
said.
And if the predictions were correct -- that online retail sales would go from tens of billions of dollars to hundreds
of billions within the next couple of years -- something had to be done, Collins said.
So the General Assembly voted in July to add a line to the income-tax form that requires consumers to calculate
6 percent on all goods from out-of-state sources, including shipping costs, and pay up at tax time.
The end result is the same as the North Carolina sales tax, which is also 6 percent, except the burden is on the
consumer to keep receipts and make a report, rather than on the business to charge at the time of purchase.
Collins said the use tax will help the state make up for revenue lost in the off-line marketplace. But the few
people who have actually heard about the new system had a different response.
"This is silly," said James F. Smith, an expert on the North Carolina economy and a professor of finance for the
Kenan-Flagler Business School at the University of North Carolina at Chapel Hill.
"That will never happen," he said. "Nobody is going to know that they should have been saving (receipts) all
year," he said. "I suppose a lot of people who try to be honest will say, 'Gosh, I don't know, I can't remember
what I bought so what the heck, it's only $20, so I'll just pay that.' " Even if it's too much, he guessed.
Betty Mangum, a Wake County commissioner who is concerned about what the e-business boom will do to
municipal budgets -- and who also does most of her shopping online and by catalogs -- said there has to be a
better way.
"I think that's a joke," she said, "because who's going to put it down? I'm not."
But Andrew Curl, an accountant in Durham who learned of the requirement last week, said the average taxpayer
has a guilt complex and will probably, eventually, try to comply. "You would be surprised at the amount of
revenue they will collect because of conscience," he said. "And every bit they collect will be more than they had
before."
The consumer use tax is not new. Most states have one. In fact, it's been on the books in North Carolina for
more than 60 years.
It's never been aggressively enforced on individual consumers, Collins said, because it's difficult to chase down
who bought what. The Internet has changed that, though, making most purchases as easy to track as scanning
a credit card bill. And by adding a mention on the tax form, the state can penalize consumers who refuse to
'fess up.
The point of the tax is to collect on items purchased in other states. In two cases, the Supreme Court ruled that it
would be too burdensome for vendors to keep track of all the nation's sales-tax rates, add those to the price of
an item and then send that money to the appropriate towns, cities and states at tax time.
The exception to that is if the vendor has a physical presence in the state, which can mean anything from a store
to a warehouse.
That's why the mail-in order sheet for catalog shoppers will say something like "Please add applicable tax for
shipments to CA, CT, FL, IL" and so on. Those companies have a physical presence in those states.
North Carolina residents ordering from an Eddie Bauer catalog, for example, might notice they're supposed to
figure in a tax; that's because there's a store at Raleigh's Crabtree Valley Mall. Conversely, the mail-in order
sheet for L.L. Bean doesn't require a tax to be figured in because the company has no physical presence here.
That money is still owed, it's just that hardly anyone coughs it up at tax time.
The same rules apply to Internet ordering.
"The issue here has always been: How are governmental units going to secure public revenues that are
necessary to provide essential public services," said Ellis Hankins, executive director of the 519-member North
Carolina League of Municipalities. He means: How are counties going to pay for things like school budgets,
and roads and the arts, if sales-tax returns -- which account for about one-third of those programs -- continue to
drop?
"If some transactions that ought to be subjected to sales tax escape taxation, what happens?" Hankins asked.
"It's real simple. Property (tax) rates go up."
That's one option. Many others are floating around, including proposals to have no taxes at all on Internet
purchases and imposing a uniform rate across all states.
But there probably won't be a federal decision on the matter until at least 2001, when a three-year ban on new
Internet taxes imposed by Congress runs out.
In the meantime, the states are on their own. Here's how it will work in North Carolina:
--If residents have records for out-of-state purchases, they're asked on the income-tax worksheet to total the
receipts (including shipping and handling) and multiply by 6 percent. That's what they owe.
--Lost your receipts for all those Amazon.com purchases? Don't worry. The state has created a scale of what
you owe by assuming the rule of what's become known as the "digital divide": People with more money will buy
more online, from catalogs and so on. For example, the state suggests that a resident with $46,000 of taxable
income pay $28 in use tax on items costing less than $1,000. A resident with only $10,000 taxable income
would be expected to pay only $6.
But you're not necessarily done yet. Big-ticket items, those purchases made for more than $1,000, say
computer or stereo equipment, would require an additional 6 percent of that item.
Of course if residents haven't purchased anything from out of state, they owe no use taxes and can write zero on
Line 16.
"This is a very arbitrary type of assessment: If you don't know, just pick a number," said Curl. "I dread the
conversations I'm going to have this tax season. They are going to be time-consuming, and I work on the clock,
and I bill on the clock," he said.
He also suspects there will be vastly different levels of compliance in the first couple of years. "Very
conscientious taxpayers will overpay, and people who try to bend every rule to their advantage will underpay."
But if they lie and they're audited, Collins said, the proof will be in their credit card statements because, for the
most part, Internet and catalog purchases are made with plastic. And they're easy to track.
"At the end of that form, you have to make an affirmation that what you put on that form is correct," Collins said.
"If you put zero down there, and you know that you did make purchases, you're lying."
Carlene Hempel of the News & Observer of Raleigh can be reached at chempel@nando.com.
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