California Businesses Feel Used by Use Taxes

If you want to know how mindlessly counterproductive California's government can be, we really can't think of a better example than the state's use tax. For our readers outside of the Golden State, Californians are required by law to pay a 7.25% tax on purchases from out-of-state retailers. In other words, if you buy DVDs from Amazon, or you buy paintings for your home on a trip to Santa Fe, you're supposed to remit an excise tax back to California. Because the tax is virtually impossible to enforce, most everyone here ignores it on their tax returns. We've always thought of it as another one of the gimmicks Sacramento uses to balance its budgets (sort of) every year: a ten-figure revenue estimate that no one really believes will materialize.

Unfortunately, with the state's finances looking so grim, it's trying to step up enforcement of the use tax these days. And for businesses large and small, that is not a good thing. The most obvious example, of course, is the Amazon Tax, by which Jerry Brown and the Legislature are hoping to force out-of-state online retailers to collect these taxes. As you may have heard, the effort isn't going well, and may be struck down by voters later this year.

Much worse, however, is the so-called "qualified purchaser program", which has been in effect since last year. This program requires the state to contact businesses with more than $100,000 in gross revenue, and to register these businesses into a new program that details their use-tax liabilities. Last year, this hit some 500,000 businesses in California, many of them quite small. From the beginning, the program has been a mess. One member of the state Board of Equalization, which oversees its implementation, claims there wasn't time to properly plan its roll-out: "We've learned a lot. We're working to streamline the program so it doesn't become a burden to taxpayers." Another Board member, George Runner, is more blunt: "Quite frankly, I'd like to see the program go away, but that would require action from the Legislature, which I'm not optimistic about." Its problems are myriad. For one, it's an administrative nightmare: according to the BoE, it brought in $56 million in revenues last year, but cost $23 million to administer. For another, many of the small businesses affected by it are so small that they don't have an accounting department to handle compliance; as such, the costs of complying with the tax often exceed their actual liabilities. Finally, what about small businesses who buy all their products in California? The state is still going to try to shake them down, even though they've paid everything required of them through sales tax.

Cal Watchdog's take on the program is here.