The next time you order goods from
Amazon.com, you may be committing
tax fraud. There’s a little-known “use tax” that could cause big headaches for
consumers purchasing goods from out of
state.
“Georgia law requires that dealers who
import tangible personal property from
other states for use, consumption or storage in Georgia must register as a dealer and
self-report the tax they owe for consuming these products,” says Christopher
Compton, an associate with Gambrell &
Stolz LLP in Atlanta.
Smart Business spoke to Compton to
find out more about state use tax.
How did this tax originate?
The U.S. Constitution puts limits on how
a particular state can tax transactions in
inter-state commerce. Normally, when you
buy something in a sales transaction, the
retailer collects the retail tax and you, as a
consumer, never think anything about it.
But because the U.S. Supreme Court has
said you cannot require the retailer to collect sales tax in inter-state commerce, the
tax couldn’t be imposed. So, in answer to
that, states came up with this idea of a use
tax for actually using or consuming a product. Once the product purchased in interstate commerce comes to rest in its final
destination that state can then tax the sale.
Who’s affected by this tax?
Obviously, with the rise of mail order and
the Internet, these inter-state transactions
have ballooned and businesses are ordering a lot of goods and supplies over the
phone and Internet. The state says that a
dealer must self-report the tax they owe for
consuming these products. Now you might
think: well, what’s a dealer? A dealer,
among other things, is every person who
imports or causes to be imported any tangible personal property from any state for
sale, retail or use. So effectively, any time
you buy something, and you haven’t paid
sales tax, then you have to pay a use tax on
it.
What are the penalties for failure to comply?
Absent the self-recognition, a tax payer
may be committing tax fraud just by doing
nothing, under the theory of a fraudulent
failure to file a return. In Georgia, tax fraud
will hit you with a 50 percent penalty, plus
interest, plus the amount of the tax. As of
2006, there is a new criminal provision that
makes it a misdemeanor with a $5,000
penalty to file a false or fraudulent return,
graduating to a felony and a $10,000 fine on
the second offense. So you could order
something pretty small and face a $5,000
fine and a criminal misdemeanor.
How can penalties be avoided?
For individuals in Georgia there is a line
item on the income tax return that allows
you to report your use tax obligation, so
you’re relieved from registering and filing
tax use returns. I would bet most people
never put a number in there. But for a business, on the corporate forms in Georgia,
there is no line item like that. If you’re a
business entity, you have to go that one
step further. To comply, you basically have
to take three affirmative steps: recognize,register and report. This means you have
to, step one, determine that you owe this
tax and then, step two, register in the state
and then, step three, actually make the
returns to pay the tax. Use tax returns are
due either quarterly or monthly, depending
on the volume of purchasing you’re doing.
There isn’t an exception from filing the tax
for smaller amounts of goods, but you can
file it less frequently. If you file under a certain amount, then it’s quarterly.
How worried should business owners be?
I think the department of revenue is
going to be practical. If you’re importing
small amounts, they’re probably not going
to come after you with a fraud charge. But
there are businesses that order a significant amount of their supplies online.
A lot of people think if the business gets
hit with tax liability, it’s just the cost of
doing business. But under Georgia law,
officers and members of LLCs and responsible persons can be held personally liable.
You can’t hide behind a corporate shield.
What can someone do to avoid fines?
Arguably, you can buy from in-state suppliers, and then the retailer would be
required to collect the sales tax on it. If
you’re going to order online, or through
inter-state commerce over the phone, you
would have to register with the department
of revenue and report your use tax as often
as you’re making payment.
I think you have to do a certain cost-benefit analysis. If you’re making maybe $1,000
a year in inter-state purchases, you probably don’t have a big problem. But if a significant amount of money is exchanged, or
there’s one big out-of-state vendor that’s
sending in a lot of supplies and they’re not
paying tax on it, I certainly think it’s something you should investigate with your
accountant. The tax is one thing, but
nobody wants to be convicted of fraud.
CHRISTOPHER COMPTON is an associate with Gambrell &
Stolz LLP. Reach him at (404) 223-2219 or [email protected].