A hypothetical case: Illinois buyer purchases jewelry in Chicago. Has it shipped to a friend of a friend’s place in a neighboring state to avoid taxes. Terribly illegal? Standard practice?
I am not soliciting advice about a specific real life case, etc. Just looking to know about relevant laws possibly being broken, if any.
Thanks…
Most states (all?) require their residents to declare out-of-state purchases and pay “use tax” on it. So buying things in one state and shipping it to another or buying online doesn’t get around this technicality. It looks like a law is being broken in your hypothetical scenario.
But states typically don’t enforce “use tax” for consumers so it doesn’t stop millions of people from shopping on the internet to avoid sales tax. Most people don’t realize that it’s illegal. That’s one of the reasons why states want to switch from voluntary compliance of its residents to mandatory sales tax collection by the online companies for out-of-state purchases.
Well, I’d like to see this go up before SCOTUS. They knocked down CA’s sales tax on interstate purchases as it was a tax on interstate activity, something the States can’t do. Does changing the name make it constitutional?
But Ruminator is correct, it’s hardly ever enforced on normal consumer goods.
New York has forced Amazon to collect New York sales tax using the pretext that Amazon has New York “affiliates”, which are basically websites that feed Amazon. This has survived the New York Supreme Court (link here). Expect this to be a popular policy if it does not get struck down.
Note that Amazon has the option of separating from its NY affiliates.
I note that certain folks selling through Barnes and Noble’s 3rd-party marketplace have now EXCLUDED shipments to NY state. Dunno why.
Yes and yes.
Any way you slice it, it is state tax fraud, just like cheating on your state income or property taxes. You’re fraudulently structuring a transaction to avoid paying state taxes.
That being said, it is fairly common practice (maybe not standard) for local luxury goods retailers to ship goods to out-of-state addresses to avoid having to collect state sales tax (and sometimes retailers wishing to sail clearly beyond the line will send an empty box to the out-of-state address and allow the purchaser to walk out with the purchase).
This tax evasion can work because of a loophole in sales and use tax reporting, not a loophole in the law. As others have mentioned, most states have both a sales tax and a “compensating” use tax. The sales tax requires retailers selling products in state (or which have branches in state) to collect sales tax on sales of goods. Because states don’t have jurisdiction over businesses that don’t have branches in their states, they can’t require those businesses to collect sales tax for them, or even report purchases shipped to those states. As mentioned above, what constitues a branch for these purposes is the subject of dipute and litigation.
The use tax requires individuals (and businesses) who have purchased items out of state, but bring them into the state, to pay a tax on the goods they bring in equal to the amount of the sales tax they would have paid were the goods brought within the state. Where the individual has already paid an out-of-state sales tax on the purchase, the amount paid may be credited against the use tax owed (i.e. if you buy something in a state with a 3% tax and bring it into a state with a 5% tax, you only have to pay the 2% difference).
The problem with the use tax is that nobody keeps track of how most goods move across the states. An exception is things that need to be registered, like motor vehicles. If you try to re-register your car in another state, you can be sure the Motor Vehicle Department will be sure you’ve paid the appropriate sales/use tax on it before they issue a new registration. Otherwise, it is a bit of a free-for-all.
What this means is that if a retailer is asked to sell something to an out-of-state purchaser (who doesn’t live in a state where the retailer has a branch), the retailer can send it without collecting sales tax or reporting the sale to any state’s sales tax bureau. Assuming the retailer does this in good faith and without knowledge that the sale is being structured to avoid taxes (often a big assuming), the retailer has committed no tax violation. However, this pushes the tax compliance burden onto the purchaser (or recipient), who is required to pay use tax in the state where the goods are shipped, and if they are returned to the original state, use tax there.
So, if the Illinois purchaser who buys goods in Chicago but has them shipped to, say, Wisconsin, is committing Illinois sales tax fraud, Wisconsin use tax fraud, and Illinois sales tax fraud. If the retailer is complicit in this, the retailer is committing tax fraud as well. The friend who receives the goods is likely also criminally liable for fraud, or at least for accessory or conspiracy to commit fraud. Although fraud prosecutions are rare, particularly for the individuals involved (though they’ll make you pay the tax and perhaps interest and civil penalties if they catch you), you’ll sometimes hear about retailers getting busted for this type of sales tax fraud.
Cite?
I confess that I self-reported and paid use tax to Virginia when I bought about $1500 of computer parts online.
This comes up a lot in Chicago.
Chicago has a big items use tax. In other words if I buy a washer or dryer in a suburb, say Northbrook and bring it to my flat in Chicago, I am supposed to pay tax on it. This is the same tax I’d pay as if I bought it in Chicago.
Every so often the alderman try to figure out a way to enforce it. They were trying to make it so delivery companies had the responsibility but that didn’t work.
The problem is the enforcement.
Thanks for the replies, gang. A special thanks to Billdo for his pithy comments.
Please note that the above linked New York case (decision here) is not the highest court in the state. In New York, the supreme court is essentially the lowest/trial court, and the highest court is the Court of Appeals.
There is a handy diagram here.
It was probably just cheaper for Amazon to dump the partners than remove it to federal court, but it’s likely that any case before the federal courts will run into the constitutional problems of states regulating interstate commerce.
No, changing the name doesn’t make it constitutional. But my understanding is the problems were not due to the fact of an interstate purchase (after all, Sears collected NY sales tax on my phone orders years ago because they had stores in NY,even though no one in NY had anything to do with my order ), but rather than State A (the taxing state) didn’t have jurisdiction to require a seller in State B to collect the tax unless the seller had enough of a business presence in State A. The use tax doesn’t just change the name- it changes the whole law. The use tax does not require a seller in State B with little or no presence in State A to collect a tax on behalf of State A. It requires the buyer who is receiving or otherwise bringing the property into State A to pay the tax to State A.
Please provide a specific cite if you have one. I couldn’t find a California case, but the most recent I could find was Quill Corporation v. North Dakota, decided in 1997
which says
I couldn’t find a single case that even addressed the issue of whether a consumer in State A could be required to pay a use tax to State A for goods purchased in State B and then brought to State A. My guess is that no such case has been brought to the Supreme Court- a person would have to be criminally charged with tax evasion to be worth doing so
Don’t know about Illinois, but in California, if I reading your post right, there would be tax paid.
I go to a jeweler in LA and buy something, regardless of where I have it shipped, the transaction took place in California and would be subject to tax.*
Furthermore if I buy something from say REI and it ships in from Washington state, I still pay tax because REI has brick and mortar stores in California.
The only way to avoid tax is to order on line from a company that does not have brick and mortar stores in the state.
*Interesting wrinkle, in California different cities and counties have different tax rates. When buying a car the sales tax is based on your home county, regardless of where you bought the car. If you bought the car in a county with a low tax rate, and actually live in a higher tax rate county, if the dealer didn’t catch it, the DMV sends you a bill.
I recall reading a few years ago that New York City (or state?) was going after rich folks who hadn’t paid sales tax on fancy paintings and such.
I’ve read the thread, and perhaps missed some answers, but to echo anyone who offered—I’m of the opinion that there are virtually no states(which have a sales tax) where you can walk in and purchase an item without paying sales tax. Having it shipped out of state has nothing to do with the collection of sales tax as it is charged at the point of sale(assuming you’re standing there buying it).
Well…
I’ve been able to buy things without sales tax charged specifically because they were being shipped out of state. It didn’t matter that I was standing right there next to the cash register paying with a credit-card. What did matter was that I was a prior customer: I made several previous purchases by phone from out-of-state so the salesman just treated it as another “phone” sale.
To your point, my situation was not “normal” nor “tax code compliant” but it can happen among “friends.”
Living in a state with a high sales tax right next-door to a state with no sales tax, I’ve seen people go into a store say “I’m from Oregon,” prove it (with appropriate ID), and not pay tax. (also cite)
I believe you, but it’s totally illegal. The store personnel could be charged, fined, etc. Just incredible.
Again, I believe you. The sales people in that store could be charged with a crime and fined big time. Possibly these are not big sales and the state just can’t get to everyone.
I’m reminded of a case in New York City back in 1985. Cartier was doing something similar, even going so far as to ship empty boxes out of state, but handing the merchandise to the customer at the point of sale. Totally illegal.
Result—Cartier paid, a year later, $2.2 million in sales taxes, fines, etc. Of course it was much more worth New York’s time to hit on such a store.
New York also busted Bulgari, some other jewelers and some furriers at that time.
I wonder if the Virginia Dept. of Taxation was flabbergasted that someone had actually paid use tax, and if they had to look up the procedure of how to deal with it. 
Did you check my cite? If the sales people check ID, they’re following the law.