SPRINGFIELD, Ill. (WLS/AP) - Many Illinois taxpayers are dodging state and local sales taxes by buying Christmas gifts online, but the state hopes to get them to eventually pay those taxes in 2011.
The state will offer a sales tax amnesty from Jan. 1 through Oct. 15. Under legislation passed last year and signed by Gov. Pat Quinn, people who bought goods online, through the mail or over the phone and didn't pay sales tax on them between June 20, 2004 and the end of 2010 can pay what they owe without penalty during that period.
The state also plans to offer a more detailed line and worksheet on state income tax return forms designed to get taxpayers to pay the sales tax they owe on catalog, telephone or online items in which the retailer did not assess sales taxes, said Department of Revenue spokeswoman Sue Hofer.
Under a 1992 U.S. Supreme Court decision, a state cannot require retailers without a physical presence in the state to assess sales taxes on purchases. Congress has also declined to pass laws requiring that the taxes be collected.
The absence of such laws raises two concerns among retailers and state and local governments:
- Governments believe they are losing out on tax revenue.
- Retailers with brick-and-mortar stores believe they are at a competitive disadvantage with catalog, online and telephone retailers.
"It's a disadvantage, certainly," said Doug Foster, president and co-owner of Sundown One Home and Automotive Electronics in Springfield, adding that customers still choose his business because they need help setting up equipment. "I'm sure we're hurt by it."
"It's the single biggest competitive issue in the marketplace," said David Vite, president of the Illinois Retail Merchants Association. "Given the number of search engines out there that will search for the lowest price, the number and types of items being purchased is growing every single day. Businesses shouldn't be able to compete based on tax policy.
In Illinois, a Department of Revenue study released last year concluded that the state could be losing out on as much as $150 million a year in sales tax revenue. Other estimates have ranged as high as $800 million. Nationwide, studies put the cost of uncollected sales tax revenue to states as high as $23 billion by 2012. Whatever the number is, the additional revenue would come in handy when the state budget faces a $13 billion deficit.
Illinoisans are supposed to pay the sales tax on online, catalog and telephone purchases when they file their income taxes, but few do. The state collects about $1 billion in sales tax revenue, but only $10.7 million came from people voluntarily paying sales taxes on their income tax forms or in response to mailings sent by the state, Hofer said.
Hofer said the 2010 tax form will ask taxpayers to declare the value of online purchases in which they did not pay sales tax. It will also allow them to use their adjusted gross income to make an estimate of how much they spent if they don't know.
"It will cause people to think about it. We know that most people, if they know they're required to pay taxes, will, in fact, pay what they owe if they see it on their tax return," Hofer said. "Are we going to collect all of it? No."
Vite said the Department of Revenue's new policies are "innovative," but wasn't convinced they will increase compliance drastically.
"It'll raise some revenue," Vite said. "Not much, but it'll raise some."
Vite believes Illinois ought to try to make its sales tax comply with a protocol developed by 44 states, local governments and businesses to make it easier to collect sales taxes across the country.
Mike Klemens, spokesman for the Illinois Department of Revenue, tells WLS the penalty would only apply to "major items."
"It would have to be a major item. There's a 20 percent penalty for failure to file and unfailure to pay. And if we came across a major item, we would bill them and we would impose the penalty," Klemens said.
Klemens says it's not likely enforcement of the tax would be a criminal situation.
"Criminal, I think people have to know they're evading something before we would do it criminally. So you and Overstock are not in a criminal situation. Most of our tax enforcement is civil and we have significant civil penalties and we have significant collection authority. We've got lots of ways to get money," Klemens said.
The amnesty tax payback also brings awareness to people in Illinois of the use-tax, which is 6.25 percent.
"It was sponsored by Sen. Don Harmon. And I believe his intention was to increase the visibility of use-tax to make more people, people like yourself, aware that they have a use-tax obligation in the belief that if we gave them a simple way to meet that obligation, they would attempt to do that," Klemens said.
The Streamlined Sales Tax Governing Board hopes that if enough states smooth out their collection procedures, Congress or the U.S. Supreme Court will allow them to require online, catalog and telephone retailers to collect sales taxes. Twenty-three states have adopted the guidelines so far, including Iowa, Indiana, Michigan and Kentucky.
The guidelines call for states to adopt uniform definitions for items to be taxed, simpler exemptions, state-level administration of all sales tax, state funding of the administrative cost of tax collection and uniform definitions of where the sale is taxable.
For example, in 2009, the legislature adopted guidelines for candy. Because so many states define candy differently, it was decided that if it has flour in it, it's food, not candy, and is taxed at the same rate as food. If it does not have flour, it's candy and is taxed at the full sales tax rate.
"One change that is controversial is the requirement that the sales tax on shipped items be credited to the delivery point," according to a report by Comptroller Dan Hynes' office. "Under existing law, the sales tax on shipped items is credited to the location where the sales take place.
"Adoption of the requirement will have an impact on both Illinois retailers and local taxing districts. Retailers who make deliveries will no longer charge a single tax rate at each sales site; instead they will have to vary the tax rate depending upon the delivery point of the item sold."
Uniform standards needed
But Vite said it's essential to adopt more uniform standards. He believes Congress will act when the problem gets bad enough.
"Sooner or later, sales taxes are not going to be a reliable source of revenue for state and local governments. Clearly there's going to be a hue and cry from elected officials," Vite said. "Unfortunately, the Illinois tax structure has so many problems with it, it's going to be difficult for Illinois to get into the streamlined sales tax project unless or until the federal government enacts legislation requiring collection if you (the states) do certain things."
Scott Peterson, executive director of the Nashville, Tenn.-based Streamlined Sales Tax Governing Board, believes the state will collect more even with the tax form changes.
"Education is key," Peterson said. "There are people who didn't pay because it's never occurred to them."
Goosing government revenue isn't necessarily the purpose of the project, Peterson said.
"When we started this thing, we did so because we wanted to make our sales tax better," he said. "The state of Illinois has the most generous vendor compensation in the country (for collecting the tax). They pay that money today to retailers, acknowledging there is an expense retailers incur in collecting sales tax. They may have less of an expense if they could find a way to make their sales tax less complicated.
"This is a budget issue for the state on both ends."
Hofer noted that adopting the guidelines does not mean Illinois could suddenly make Amazon.com and other online retailers collect sales taxes.
"Illinois is in a relatively good position compared to a number of states, because so many of the largest companies, the companies do most online business, also have businesses in Illinois," she said. "Retailers who pay property taxes and hire Illinois people to work in their store have a right to be concerned, and that's why the General Assembly enacted legislation to change the way we collect this to put this on the tax form itself."
WLS-AM's Monica DeSantis and The Associated Press contributed to this report.