I have been going through my receipts for the last couple of days, getting everything together for when I file my tax returns. I pay someone to do my taxes. My business expenses make things trickier and I figure someone who does taxes for a living would do a better job ensuring I pay as little income tax as legally possible.
As my faithful readers know, I am very thrifty and have an eye for value. As a result, I do a lot of shopping online. Pricing is better than at most brick-and-mortar stores, and I don’t have to pay sales tax when I buy from Amazon and Newegg.
Well, the State of Illinois has decided to make more of an effort to collect its Use Tax. This is a 6.25% tax on items you purchase outside of Illinois or online. As it is illegal for Illinois to charge a tax on out-of-state commerce, the state charges you a tax for using a product within the state’s boundaries. Basically, it’s a game of semantics. Everyone knows the Use Tax is a proxy for a sales tax. Methinks a savvy attorney could challenge the Use Tax law and get it taken off the books. Why isn’t a Use Tax charged on items bought within the state? They are being used, aren’t they?
The 2010 Illinois income tax return form (PDF) has a line asking if you owe any Use Tax on internet, mail order, or out-of-state purchases.
The instructions (PDF) have a worksheet where you can take the total cost of all the stuff you bought online and figure out the Use Tax you owe. You owe 6.25% on general merchandise and 1% on food, non-prescription drugs, and medical appliances. However, if you made no major purchases (whatever those are) and you do not have receipts, you can use a table to figure out your Use Tax obligation.
As you can see, these amounts are really quite reasonable. I have no problem paying this, even though I think the Use Tax is a bunch of bull. My adjusted gross income (AGI) would result in me paying $21 or $27 to the state in Use Tax. Their assumption is that I spent $336 to $432 online.
So here’s my quandary. I have records of all my online purchases going back to 2004. I could determine the exact amount of Use Tax I owe the state. There is also a Use Tax amnesty in effect. I can use form ST-44 (PDF) to report the Use Tax I owe from July 1, 2004 to December 31, 2010.
Would I do better to feign forgetfulness and poor record keeping, and just pay the $21-$27 listed in the table, or actually add up all my transactions from 2010?
I spent six hours (!) during the last two days visiting all the online retailers I patronize, saving all my receipts to PDF, and printing them out. I also entered everything into a spreadsheet to make it easier to calculate the Use Tax I would owe under the amnesty program. I should mention that the State of Illinois owes me $180 for my time and doing the Department of Revenue’s job for them. (I bill at $30/hr for my consulting work.)
In the end, I had 82 online transactions without state sales tax going back to August 2004. Here’s what the printed receipts and invoices looked like.
So would I fare better using the Use Tax table or using my actual receipts? Because I bought computer parts online last year, I would do better being forgetful and paying a Use Tax based on my AGI.
I had 28 online untaxed transactions last year. I keep good records because I itemize some business expenses in my taxes. However, this Use Tax requires that I keep records of personal items too. From computer games to 99-cent Amazon.com music downloads. I feel like there is a bit of an invasion of privacy here. I added everything up and put it into a nice spreadsheet for my tax preparer, listing the store, the date of purchase, the purchase price, and the shipping charge. Now suppose I just threw my receipts at my tax preparer. He would see everything I bought. What if I had bought a sex toy or Nazi literature online?
It looks like I will owe a few hundred dollars in Illinois Use Tax on the items I have bought since 2004. I am torn about paying this. I think it’s a dumb tax that I shouldn’t have to pay, shouldn’t have to calculate, and shouldn’t have to self-report. It is a good idea to participate in the Use Tax amnesty, though, because I’d rather pay the tax I supposedly owe than pay that tax plus a bunch of penalties.
But one has to ask, how will the state enforce this Use Tax? How do they know if I’m lying about not having receipts when I choose to pay $21 instead of $42? Retailers will fight the state over releasing transaction data for all their Illinois customers. It is an additional burden on the retailers.
How will the increased prominence of the Use Tax affect my online shopping? I’ll have to figure in the 6.25% Use Tax when I do price comparisons. I’ll also have to print my receipts to PDF when I’m not charged sales tax so I can report the Use Tax. On the bright side, I’ll still be getting out of county and city sales taxes. I looked at a receipt for some computer parts I bought in a local shop, and I paid 8% sales tax total. In the town where I live, the sales tax rate is 9.25%, so I would save 3% sales tax even if I do pay the Use Tax.
To those who believe I am hurting local retailers by buying online, there were some things not sold within an hour drive of my house. Like my computer monitor, my netbook, and my Bluetooth GPS receiver. It wasn’t a matter of bad pricing and high taxes at the local shops, it was a matter of product availability that made me buy online. I always include local stores in my price comparisons. I am always looking for the best price, no matter where it is, and being able to pick up an item locally and use it right away is a bonus.
In summary, I think I will be taking advantage of the Use Tax amnesty program. I’ll admit to finding out about the Use Tax a couple of years ago (definitely didn’t know about it in 2004) and not paying it. It was a pain in the butt. Now that there is a place on the tax return to pay it, I am more willing to pay. However, I think it’s silly that I am forced to keep track of every 99-cent song I buy on Amazon. The state should give you the option of paying 6.25% or paying a flat charge based on your income. People are more willing to pay taxes if they are easy to calculate and easy to pay.
Notice: This post and subsequent comments shall not be considered advice for filing your tax return. Please consult your tax professional or the Department of Revenue if you have questions. Because of liability issues, I will not approve comments that can be interpreted as tax advice.