Massachusetts Taxing Online Cigarette Purchases

The other night on the news, Fox featured a segment of how the state of Massachusetts was sending tax deficiency bills and putting liens on property for individuals who had not paid the state tobacco or sales tax on their on-line purchases of cigarettes. The case they featured was an 83 year old woman who had been assessed $4,500 of unpaid tax and they put a lien on her property. Her argument was that she didn't owe the tax because she bought her smokes on-line and they are not taxed.  There apparently is some statute that requires online sellers of tobacco to keep track of who they sell to and how much they sell and then they must report this to Massachusetts DOR.  And just for the record, the tax is due!!

What MA has implemented for tobacco tax could be the next wave of use tax enforcement against individuals who purchase anything over the Internet.  It's a well known statistic that use tax accrual by individuals is close to 0%.  The estimated lost revenue is multiple billions or dollars each year.  All of this going to state and local government.  I can imagine a new round of legislation that will require all e-tailers to provide each state a listing of the sales made to customers in their state so that the DORs can send out tax bills to individuals.  These bills will also contain interest and penalties just for good measure. 

Be prepared for an onslaught of aggressive tax enforcement efforts by the states against businesses and individuals.  The tough economic times we are in now are shaping the state tax policies that will last for generations.  We are witnessing a paradigm shift in sales taxation policy and enforcement unlike anything I have seen in the past 25 years as a sales tax consultant.

Watch your mailbox!! 

Surprise!!--New York City Raises Sales Tax Rate

Flash!! Surprise--New York City has been given permission to raise it's city sales tax rate to 4.50% from 4.0%.  That is a 12.50% rate increase.  In addition to this change at the city level, the state has now repealed the sales tax exemption on clothes costing over $110 and now subjects the transmission and distribution fees paid for electricity and natural gas to the full New York City Rate.  I apologize for the sarcasm but it comes as no surprise that New York City or any other taxing jurisdiction for that matter will be increasing its tax rate and expanding the tax base to make up the short fall in revenue.  For businesses these costs just get passed on to customers in the form of higher prices.  For consumers, these additional taxes is just lost purchasing power.  I call it "taxflation"-the loss of purchasing power due to increases in transaction based taxes.  In New York City, your purchasing power just decreased by 12.5%.  That's $5.00 on every $1,000 of purchases you make in New York City.  It may not sound like much, but over time and in the aggregate, it amounts to millions of dollars of income that was diverted from actual consumption into taxes. These changes are effective August 1, 2009.

For a business that does not have good tax collection systems in place, this will also make tax assessments 12.5% higher in the future if they fail to collect and remit the proper amount due. 

New York is becoming very aggressive on audits and in their rulings.  As reported last week, New York now has a provision that requires franchisers to report the income of franchisees. This tactic is going to be used to desk audit the sales tax returns of every fast food restaurant in the state without actually having to leave the office.  I'm sure that these audits will be fair and accurate.

Get used to it folks, techniques like these and many others not yet discovered is the new sales tax frontier.  Once these provisions are in place, they are not going away. 

Your thoughts? 

New York Franchisors Beware--New Reporting is required

New York A.B. 157 became effective April 7, 2009 and with it came a new level of reporting for franchisors with franchisees in New York.  Under the new provisions, any franchisor with at least one franchisee in New York who is required to file sales tax returns, MUST, file file an annual information report showing the sales made by each franchisee.  The purpose of these filings is obvious.  The state wants to use franchisor information to verify the sales tax information reported by franchsisees.  This will surely lead to an uptick of sales tax audits against restaurants and service franchisees that are taxable in New York.  It also adds a large amount of compliance on the franchisor.  The reports must include the income from the franchisee and the sales made by the franchisee and reported to the franchisor. 

Just to make sure that franchisors abide by this new rule, the state is imposing some penalties ranging from $500 to $10,000 in extreme cases. 

The first return is due September 30, 2009 which covers period March 1, 2009 to August 31, 2009. The next return is due March 20, 2010 which will cover the period September 1, 2009 to February 28, 2010.  From thereon, returns are due March 20 of each year. 

This type of legislation has huge implications for franchisees and for franchisors.  With this type of information, it will be easy for desk audits to be performed on every fast food restaurant in New York state and I can see the assessment notices flying out of the New York Department of Taxation and Finance. I would also expect more states to add this burden to franchisors. 

Comments?  let me know