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@example.com.