Thursday, August 25, 2011

Board of Equalization: Big Brother is Taxing You

Last week, the California Board of Equalization, the Maoist-sounding agency charged with overseeing proper collection of taxes in the Golden State, issued a report that should have surprised no one: Californians are broadly non-compliant with the state's 7.25% "use tax". In order to meet the requirements of the law, you would need receipts on all purchases of durable goods from out-of-state vendors, whether the purchase took place in California or not, and would need to enter the total liability for those purchases on your income tax return. Since this is a complete pain in the a**, and most people consider their sales tax taken care of at the time of purchase, only 0.42% of Californians actually paid any use tax in 2009. And unlike income taxes, use taxes are virtually impossible for the Board to enforce. That is, unless they implement some of the Orwellian measures they're reportedly starting to consider.

On one hand, it shouldn't surprise anyone that California is stretching the bounds of decency to try to collect more use tax. After all, it was willing to wipe out thousands of jobs and bend the Constitution trying to force out-of-state online retailers like Amazon to collect these taxes. Even worse is the BoE's "qualified purchaser program," which attempts to shake down California businesses by "estimating" their use tax liabilities. Yet, with the Board guessing that over $1 billion is being left on the table through lax enforcement, they may be about to get more aggressive. One proposal would require tax preparers like H&R; Block to press clients about use tax liabilities, presumably creating the pretext for state action against the preparers if the Board isn't satisfied with its take. More ominous is a plan to use demographic and market research data to identify Californians "likely" to owe the tax, and send them individual notices of their estimated liability. In other words, if your income tax return says you're a 25-year-old software programmer living in San Francisco, you could get a notice saying you owe use tax on an iPad, whether you own one or not. Generally speaking, it's rarely a good thing when governments create new databases with lots of information about you and your finances, but that's clearly what's being discussed here. Worst of all, the Board is also debating sifting through the shipping records of selected retailers to identify out-of-state purchases. Also generally a bad thing: governments collecting data on your specific interests and purchases.

One would hope that good taste would prevail and these ideas would be politely ignored from now on. If nothing else, they sound like a nightmare to enforce, and it's not clear that the additional revenues would be worth both the backlash and the cost of collection. More troubling, the Board's method for estimating use tax liabilities in the state is a complete black box. As California gets more desperate for tax revenue, it's unclear whether the Board would simply calibrate its estimates of what residents owe to the number Sacramento wants to see.

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