Whether it's a retailer on the Web or a brick and mortar business across the state line, if the product or service you buy from them is considered a taxable good in the Commonwealth, chances are you could be breaking the law by not paying state taxes on these purchases.
Massachusetts, like 44 other states, has a tax on the sales price or rental charge of tangible property. The tax is due whether you purchase the property at a traditional retail store, over the phone or Internet or by mail order.
The big difference is that in-state retailers and vendors generally collect the 6.25% tax from you at the time of purchase and then submit it to the Commonwealth.
But if the remote seller you buy from doesn't collect the full MA sales tax on any covered item, and you use the product in Massachusetts, the law says you are responsbile for paying the tax directly to the state.
Last tax year, more than 58,000 Massachusetts taxpayers reported $5.5 million in use taxes. That's a slight increase over the previous tax year, but it's still a very low compliance rate when compared with the $192 million in Internet sales taxes that the Department of Revenue estimates the state will forgo this fiscal year alone.
How do you get taxpayers to pay what they owe? Tax collection in the United States is based on the honor system. The IRS and DOR expect taxpayers to do the right thing and for the most part they do. The nation's voluntary compliance rate–the amount of tax liability that is paid on time–has remained steady at 83% the last time the IRS measured the tax gap in 2006. When you figure in enforcement and late payments, more than 85% of taxpayers comply with federal tax laws.
As you might expect, compliance in paying a tax is highest when the IRS or DOR has more third-party information to compare to what taxpayers are reporting.
With data mining, new statistical methodology and modeling growing increasingly popular in tax collection, it is not unreasonable to expect that third-party information about remote seller transactions will be developed in the future giving renewed credence to an old DOR slogan "Find Us Before We Find You."
Since 2002, Massachusetts taxpayers have had a line on the state income tax return to report use tax on items they may have purchased from out-of-state, online, mail or phone order sellers who did not collect sales taxes.
If you couldn't be bothered tracking down receipts on your purchases, DOR has created a "safe harbor" amount of use tax you can report that's based on your Massachusetts adjusted gross income. DOR's online filing system, WebFile for Income, will even calculate it for you (as will most tax preparation software). That means no matter how many purchases you made (under $1,000 per item), DOR can't assess you more after an audit than the amount of use tax you paid under the safe harbor schedule. For example, if your adjusted gross income was between $40,001 and $60,000 you would pay $31 to satisfy your use tax liability for the year.
Not a lot to pay for peace of mind.