States Are Aggressively Pursuing Use Tax

States are losing a significant amount of tax revenue because many businesses and individuals do not realize they may owe use tax on their out-of-state purchases.   The use tax generally applies to purchases made out-of-state for property to be used in the purchaser’s state.  Due to large state budget deficits, many states are increasing collection efforts that may catch taxpayers by surprise.  Penalties and interest may be charged when this tax is not paid by purchasers in a timely manner.

Some consumers mistakenly believe that purchases made on the internet are not subject to tax because of the Internet Tax Freedom Act enacted in 1998.  This law placed a moratorium on charging taxes on internet access fees.  However, it does not provide an exemption from tax for purchases made on the internet.  These purchases are subject to tax just like any other purchase.

Some steps being taken by state governments to improve use tax compliance include sending tax specialists to visit businesses in the state to ensure they are properly registered and reporting correctly; pursuing service industry businesses for unpaid use tax by identifying businesses that are likely to have incurred a use tax and sending contact letters reminding them of the reporting requirement; identifying property subject to unpaid use tax being shipped into the state via personnel in the Food and Agriculture and Highway Patrol inspection stations; and receiving information from the U.S. Department of Customs to identify items purchased outside the country which are subject to use tax.

 Several states have simplified reporting by adding a line for use tax to the state income tax return.  If you feel you may have a compliance problem in this area, contact your tax professional right away.

Repeal of Certain Bothersome 1099 Requirements

A tax law that Congress passed in April eliminated two recently enacted laws which had expanded 1099 reporting requirements.  One was scheduled to take effect in 2012 (2012 bill) and the other was scheduled to become effective in 2011 (2011 bill).

Some payments totaling $600 or more for goods and services that are made in the course of a taxpayer’s trade or business are required to be reported to the IRS on Form 1099-MISC.

Prior to the repeal of the 2012 bill, it would have been required to issue Form 1099-MISC to all vendors and service providers, including corporations, to whom payments of $600 or more were paid during the tax year.

Prior to the repeal of the 2011 bill, owners of real estate used as rental property would have been required to report payments of $600 or more made to all vendors or service providers for expenses associated with their rental properties (including plumbers, electricians, cleaning, maintenance, etc.). 

The repeal of these provisions returns the Form 1099-MISC requirements to their prior states as if neither law had been enacted.  So landlords, your record keeping and accounting burdens are now substantially reduced!