State Reporting of Use Tax Liability
Many states have taken steps to make the use tax more visible. Thirty-eight states impose both a sales and use tax and a broad-based individual income tax. Seven of those 38 states (including Minnesota) provide information about the use tax in the income tax instruction booklet.10 Twenty-five of the 38 states provide for use tax reporting on individual income tax returns. In 1974, Vermont added a line for use tax reporting to its income tax return, followed by a number of states, including Wisconsin, in the early 1980s. Illinois and Nebraska, which added the use tax reporting line on their 2010 returns, are the states that most recently provided for reporting on the personal income tax return. The map shows the states that impose both an income tax and a sales tax broken into three categories: those that provide neither information about the use tax nor use tax reporting (six states), those that provide information in their income tax booklet (seven states), and those that provide for use tax reporting on the income tax return (25 states).
States with Use Tax Reporting on Individual Income Tax Return
The map shows that most of the states that have an income tax and a sales tax are taking steps to make individual taxpayers aware of use tax obligations, either by providing for payment through the income tax or by providing information on how to file an individual use tax return.
The information in this section is based on tax year 2009 data obtained from 22 of the 25 states that collect use tax on the income tax return.11 Table 1 shows 2009 use tax collections.
Use Tax Collected on Income Tax Returns, Tax Year 2009
The amount of use tax collected in the states with use tax reporting varied depending on the participation rate and the size of the state. New York and California had the largest collections, at $34.6 and $10.2 million respectively, and New York also had a relatively high participation rate, with 5.0 percent of all income tax returns reporting use tax liability. Maine had the highest participation rate, perhaps stemming from a 2006 compliance campaign and also from an earlier practice, not long maintained, of assessing use tax liability for taxpayers who left the use tax line blank.
Some states that placed a use tax line on the income tax return reported significant increases in collections. Collections in Louisiana, Massachusetts, and Michigan all increased substantially in the year following implementation of use tax reporting on the income tax return; Louisiana and Michigan had previously included information on the use tax in their income tax booklets, while Massachusetts did not. Michigan collections increased from $240,000 in 1998 to $2.9 million in 1999 and have increased since then, reaching $5.0 million in 2009. Louisiana’s collections via individual filings increased from about $20,000 per year prior to 2000, to over $500,000 reported on the income tax form in 2000, and nearly $640,000 for tax year 2004, and over $800,000 in 2009.
In Massachusetts, addition of a use tax line to the income tax return resulted in a sharp increase in the number of individuals reporting use tax, from 200 in 2001 to over 11,000 in 2002, the first year of reporting, and further increased to almost 40,000 in 2005. Revenues have increased sharply since the reporting line was first added, from about $1 million in 2001 to over $3 million per year since 2005.
Other states that have recently added use tax lines do not have data available on personal use tax collections for prior years.
The states that collect use tax on the income tax form use different techniques to try to maximize voluntary reporting by taxpayers. Some specifically require taxpayers to write in “zero” if they have no use tax liability. Others have combined use tax reporting with compliance initiatives, and several states provide tables in which taxpayers can “look up” their use tax liability based on their income.
Eleven states require taxpayers to clearly indicate if no use tax liability is owed.12 States with the requirement and states without it collect use tax revenue from a slightly larger share of income tax returns (1.7 percent of returns compared to 1.4 percent of returns), but the states that do require the indication collect more use tax revenue per taxpayer: $1.22 compared to $0.74 per return for all income tax returns, and $73 compared to $52 for returns reporting use tax liability.
A small number of states combine reporting on the income tax return with compliance initiatives or education efforts. Two states have sent information about the use tax to a random sample of taxpayers, resulting in higher collections in following years (Indiana13 and Rhode Island14), and one state saw use tax collections peak in 1995 in conjunction with an individual compliance program (Kentucky). More recently, Massachusetts and Maine have experimented with compliance programs. Massachusetts sent letters to some taxpayers that resulted in unusually high use tax collections for tax year 2005, possibly due to a few taxpayers reporting large purchases. Maine legislators approved a compliance program that took place from July to December of 2006. The program included television commercials, letters sent to individuals and business owners, and interest-free payment of past unreported use tax liabilities.
Nine states with use tax reporting on the personal income tax return provide taxpayers with lookup tables for estimating their use tax liability.15 Lookup tables provide estimates of use tax liability by taxpayer income. The tables typically consist of two columns. Taxpayers find their income in the left column and read across to the right column to find their estimated use tax liability. Use tax liability is assumed to represent a percentage of income. The percentage is intended to represent average use tax liability of taxpayers. The first states to use look up tables did not have records of how the percentages they use were determined. The states that have subsequently provided lookup tables appear to have modeled their tables on those used in other states. The tables make compliance with the tax more convenient for taxpayers who know they have made untaxed purchases, either while traveling, through catalogs, or over the Internet, but have not maintained records of those purchases. Taxpayers with large purchases must report those separately from the use tax calculated using the lookup table, and those who did not make any purchases subject to use tax are not required to use the lookup table and may report liability equal to $0. Only one state (Kansas) allows taxpayers with purchases over $1,000 to use the lookup table to estimate liability.
As an example of how the lookup tables work, Michigan’s lookup table gives estimated use tax liability by income ranges up to $100,000. Estimated liability equals 0.08 percent of the taxpayer’s Michigan adjusted gross income. Taxpayers with incomes over $100,000 are instructed to multiply their income by 0.0008 to obtain an estimate of use tax liability.
Table 2 summarizes the characteristics of the various state lookup tables. Note that in four states, the percentages implicit in the tables vary with income. In Maine, New Jersey, and New York, the percentage decreases as income increases, while in Vermont it increases with income.
Characteristics of State Use Tax Lookup Tables
States that provide lookup tables for estimating liability have higher participation rates. About 1.6 percent of taxpayers report use tax across all states with use tax reporting on income tax returns. The participation rate is 3.1 percent for states with lookup tables and only 0.6 percent for those without. Seven states16 have higher than average participation rates, led by Maine at 9.8 percent and Vermont at 7.9 percent. All of the states with higher participation rates provide taxpayers with the option of estimating use tax liability using a lookup table. Maine’s exceptionally high participation rate in this and earlier years may be the result of its previous practice (through 1999) of assuming liability equal to 4 percent of income if none was reported. Maine has had a higher participation rate than other states since then. Maine’s aggressive 2006 publicity program for the use tax may have also contributed to the high participation rate.
States with lookup tables collect slightly less use tax per return than do states without lookup tables.17 Individuals who report use tax liability pay $72 on average across all states with use tax reporting on the income tax return. The amount collected per return reporting use tax is lower in states that provide a lookup table than in those that do not: $59 compared with $124. In past years it was also the case that states with lookup tables collected less per return, but from more returns, than did states without lookup tables.
Alabama, which does not provide a lookup table, collected $12 on average from returns reporting use tax, the lowest per return of any state. Vermont collected the lowest on average of states with lookup tables, at $34 per return. States with high per-return collections are led by California, with $202 per return, New Jersey, with $149 per return, and Idaho, with $101 per return.18
Ten states collect local as well as state use tax on the income tax return (California, Kansas, Louisiana, New York, North Carolina, Ohio, Oklahoma, South Carolina, Utah, and Wisconsin). Most of these either provide listings of local rates or a table of combined state and local rates. Kansas and Oklahoma direct taxpayers to a web page showing local rates for various jurisdictions. Louisiana instructs taxpayers to multiply taxable purchases by 8 percent, of which4 percent represents state use tax liability, and the remaining 4 percent is in lieu of the actual local rate, which varies.
Most states that collect local use tax on the income tax return distribute a portion of collections to the local jurisdictions. California, New York, North Carolina, Ohio, and Wisconsin distribute amounts collected to counties and other jurisdictions based on taxpayers’ county of residence as reported on the income tax return.19 Kansas distributes 50 percent of local use tax to cities and counties based on their proportional share of population, and 50 percent based on their share of property tax levies. Louisiana distributes the local share of use tax collections to all 64 parishes, including the one parish that does not impose a sales/use tax, on a per-capita basis. The parish tax collectors then distribute their share of use tax collections to tax-levying authorities within the parish, based on the previous year’s pro-rata share of actual sales tax collections. Oklahoma distributes use tax collected on the income tax return to counties based on each county’s proportionate share of sales tax collections. The local portion of South Carolina’s use tax that is collected on the income tax is directed to a local option supplemental revenue fund, used to provide a minimum amount to all counties with local sales and use taxes. Utah distributes 50 percent of collections based on the taxpayer’s place of residence, and 50 percent on the share of population in each local taxing jurisdiction relative to the state population.
This and any related posts have been adopted from the Minnesota House of Representatives Research Department’s Information Brief, Use Tax Collection on Income Tax Returns in Other States, written by legislative analyst Nina Manzi.
10 The states that note use tax requirements in the income tax booklet but do not provide a reporting line are Arizona, Colorado, Iowa, Minnesota, Missouri, North Dakota, and Pennsylvania.
11 Illinois and Nebraska added the use tax line to their income tax returns in tax year 2010 and data are not yet available. Data from Connecticut were removed from the analysis. Connecticut reported large amounts of collections relative to the number of returns reporting collections not likely to be representative of a typical year’s collections. Department of Revenue Services staff in Connecticut think it reasonably likely that a small number of returns had reported large purchases (such as artwork) or as a result of audit activity.
12 States that require taxpayers to indicate when they have no use tax liability are: California, Connecticut, Kansas, Louisiana, Massachusetts, Michigan, New Jersey, New York, Ohio, Oklahoma, and Utah.
13 In 1993, Indiana identified taxpayers who had not reported use tax and had incomes above a certain level and sent educational letters explaining the use tax to a random sample of taxpayers identified, with the purpose of improving compliance.
14 In 1995, Rhode Island sent letters explaining the use tax to about 15,000 taxpayers who had not reported use tax liability in 1994. This action was in response to low compliance with the use tax after the use tax line first appeared on the income tax return. The mailings resulted in negative publicity and have not been repeated.
15 Kansas, Maine, Massachusetts, Michigan, New Jersey, New York, North Carolina, Oklahoma, and Vermont provide lookup tables for estimating use tax liability.
16 Kansas, Maine, Michigan, New York, North Carolina, Oklahoma, and Vermont all have participation rates above the 1.6 percent average for all states.
17 While states with lookup tables tend to have a higher share of returns reporting use tax and a lower average amount reported, the average amount reported will vary depending on the combined state and local sales/use tax rate and the state’s sales/use tax base.
18 It’s impossible to determine to what extent average amounts per return are skewed upward because of a small number of returns reporting very large liability, such as for purchases of artwork. In the case of Connecticut, which was omitted from the analysis, agency staff shared that their understanding was that reporting of a few bigticket items resulted in high average results. Something similar may have occurred in California, New Jersey, and Idaho.
19 Amounts for which North Carolina is unable to determine the taxpayer’s county of residence are distributed to counties based on each county’s proportionate share of sales tax collections.