Californians Not Falling for the "Use" Tax

The State of California thinks it has a right to collect sales tax on internet purchases from companies that do not have a physical presence in the state.  Californians disagree:

Californians who buy products online from out-of-state merchants pay virtually none of the tax, according to a new analysis by the staff of the State Board of Equalization.

California consumers are paying an average of 1.4% of the total use tax on purchases made from out-of-state retailers that do not collect the taxes for the state, according to the analysis published in the board’s May Economic Perspective newsletter.

(While the use tax applies to any purchase made from an out-of-state company, about 60% of these purchases are made online, so that is the focus of the staff analysis.)

The analysis reports that consumers with annual household incomes of $60,000 to $100,000 are the least likely to pay the tax with 99.6% not paying. Consumers with incomes over $100,000 are the most likely to pay it, but still, 96% don’t pay.

The U.S. Supreme Court has ruled that states cannot compel companies that have no physical presence inside their borders to collect such taxes.

So the board has been on a campaign to get consumers to pay the tax on their out-of-state purchases voluntarily. It regularly issues notices that consumers owe the tax, and there’s a line on the state income tax return where consumers are supposed to declare their out-of-state purchases and pay the use tax with their state income tax.

The analysis indicates how pervasive avoidance of this tax is. Jeffrey L. McGuire, deputy director of the board’s sales and use tax department estimated that California consumers owe $795 million in use tax but in 2010 they reported and paid only $10.2 million through their state income tax returns.

I would bet that most Californians don't even keep track of online purchases. Once they click "Buy" they pretty much forget it. And as long as they can make purchases cheaper online (even with shipping costs) they're going to do it - especially in this economy. All the ad campaigns the state wants to run will not change that.