Laws on State Sales Tax Crimes
Perhaps you have traveled out of state to buy a car. Or maybe you have simply cursed the fee added to the purchase price of your groceries. If so, you are responding to a state sales tax. A state sales tax is an add-on to the purchase price and is to be collected by the merchant. When a merchant fails to collect the tax, or fails to report taxes collected, that merchant has committed tax evasion, which is a crime. Sales tax crimes may be either misdemeanors or felonies, often depending on the dollar amount in question. Sales tax is governed by state law and not every state has a sales tax.
What is a Sales Tax?
Certain states impose a sales tax at the point of purchase of goods or services within the state. The seller both collects the tax (at the time that the consumer pays for the good or service) and reports the tax to the state. The amount of the tax is a percentage of the purchase price (for example, California’s state sales tax rate is 7.25 per cent of the sales price).
Public Purpose of Sales Tax
Sales taxes support a wide array of public services. These include the upkeep of public parks, libraries, prisons, and the like. Sales taxes may also fund police and fire departments, courts, health care, and roads.
Retailers who properly collect and remit sales taxes support all of these public services. Retailers who don’t comply with sales tax laws not only fail to support these essential services, they also have an unfair advantage over their competitors who do obey the law as we discuss below.
How is Sales Tax Collected and Reported?
You have probably noticed the sales tax on receipts at the supermarket and elsewhere. It appears under the purchase price and is a percentage of the sales price. This is part of the merchant’s record of collecting the sales tax from you for the purchase. By law, the merchant must then report the sales tax collected and turn over that amount to the state. But, this does not relieve you, the consumer, from all responsibility for the sales tax.
By law, where a merchant fails to collect the state sales tax, it is up to the consumer to report the tax due on his or her state income tax return and pay the tax to the state. Consumers in states with sales tax often avoid being hit with these taxes (either at the point of sale or when they file their own returns) by traveling out of their home states to states without sales taxes for major purchases, such as automobiles. The reason consumers do this is because a state imposes sales tax for sales by retailers within the state. A retailer in a state without a sales tax who sells a good or service to a consumer who happens to reside in a state with a sales tax, but who has traveled to the retailer’s state, is not required to pay the tax to the consumer’s state.
Sales Tax Evasion
Some merchants, as mentioned above, simply do not collect the sales tax. This can occur in more informal settings, such as street fairs, or flea markets. But, a large retailer may also ignore the tax in order to undercut competitors thanks to the lower bottom-line price to the consumer. As a result, not only is the public deprived of the taxes needed to fund important services, the cheating merchant’s competitors suffer the loss of sales due to the unfairly low prices of the cheater.
Another way that some merchants evade sales taxes is by collecting the tax but not reporting it to the state and thus pocketing the tax. This is, of course, stealing from both the state and the consumer, who naturally assumes that the sales tax he or she pays will find its way to the public services for which it was intended.
Like most taxes, state sales taxes operate on the honor system. That is, it is up to the party responsible for the tax (here, the merchant) to report and pay it; there is no state enforcement officer standing beside the cashier to wrest the tax from the merchant. States discover sales tax evasion through a number of means. Random or targeted audits (based on other evidence that evasion may be occurring) conducted by the state will often turn up cheats. And, consumers and other members of the public (such as retail employees) may report suspected evasion to state authorities.
Signs of Sales Tax Evasion
Among the signs that a merchant may be evading state sales tax are:
- failure to issue sales receipts,
- failure to ring up purchases on a cash register,
- failure to report sales taxes collected (employees may notice this), or
- very low prices.
Most state tax agencies have a reporting hot-line for the public to report suspected sales tax evasion.
In some cases of sales tax evasion, the IRS may become involved in the investigation and may even conduct its own audit.
Internet Sales: State Tax Laws Are Evolving
Since the rise in popularity of internet sales, states have struggled with whether and how to make out-of-state retailers pay sales tax for in-state, online purchases by state residents. Unpaid taxes for internet sales amount to an estimated loss to the states of $23 billion. Amazon, Overstock.com, Zappos, and other online retailers have long argued that they should not be subject to sales tax in states where the companies have no physical presence (such as warehouses or factories). The states (and many brick-and-mortar retailers like Best Buy and Target) argued that these companies have such a significant virtual presence (and so many sales) within the states that it is only fair for them to pay the sales tax that the brick-and-mortar competitors have to pay. The online retailers also argue that a state-by-state sales tax structure imposed an unfair burden on them, as they have to learn and comply with tens of different sales tax laws.
New York and California Take the Lead in Internet Sales Tax Laws
In 2008, New York passed a law requiring online retailers to collect and pay sales tax for sales done through New York-based websites (called “affiliates”). Amazon, which conducts a lot of sales through local affiliates, challenged the law but lost when New York’s highest court upheld the tax.
In 2011, California passed a similar law. Amazon objected and ceased doing business with California affiliates but then reached a compromise, agreeing to build warehouses and create jobs in the state in exchange for a year’s reprieve in collecting sales taxes there. Amazon has reached similar compromises in New Jersey and a few other states, as well.
Amazon and other companies (both online and brick-and-mortar) have since taken up a campaign urging the U.S. Congress to pass a national law to standardize the online sales tax country-wide.
The Senate responded in May 2013, when it passed a bill allowing states to compel internet retailers to collect state sales tax from in-state consumers. This bill, which has yet to be considered by the House of Representatives, says that states should be allowed to force online retailers with no physical presence in the states to collect sales tax for sales within the states when the retailer annually makes more than one million dollars in sales. For the convenience of the retailers, the bill also requires states to provide affected online businesses with free sales tax software to assist in calculating amounts.
It remains to be seen whether the full Congress will pass a federal law on sales taxes; we will update this article to discuss legal developments. Check back on this site.
Penalties for Sales Tax Evasion
In general, tax evasion is a misdemeanor unless the amount of unpaid taxes exceeds a specified amount. Most states increase the penalty from misdemeanor to felony where the unpaid amount is over $10,000. A misdemeanor charge of sales tax evasion usually carries a penalty of a fine; where the charge is increased to a felony, the penalty also increases in the form of a larger fine and possible jail time.
Consult A Lawyer
If you or your business have been audited or are under investigation for sales tax evasion or any other crime, a criminal defense lawyer with experience in the laws of your state is an invaluable resource. Consulting an attorney early in the process may enable you to negotiate a settlement that avoids jail time and/or increased fines, and may limit the harm to your business and finances.