Legal question: Avoiding Illinois sales tax

[racer72]

I know a couple folks that have no problem driving to Oregon to make purchases just to avoid paying sales tax. They are also a couple of the biggest whiners whenever a politician mentions raising taxes. And of course, they see no relationship between folks avoiding taxes and the raising of taxes.

[samclem]

@amarinth

Did you check my cite? If the sales people check ID, they’re following the law.

Sorry, I didn’t. I’m wrong about Washington/Oregon. I wonder if there are any other states that do this?

[doreen]

@samclem

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.

If I remember correctly, the issue was precisely that empty boxes were shipped out of state while the merchandise was handed to the customer, because the merchandise did not in fact leave the state.

" A Guide to Sales Tax in New York State", published by the NYS Dept of Taxation says

If you deliver products or perform services outside New York State,
there is no New York State sales tax liability, regardless of where you
made the sale. However, if you are a vendor participating in the sales
tax agreements with Connecticut or New Jersey, you must collect their
applicable state and local sales tax on deliveries made in those states.
In any case, your invoices must clearly show the place of delivery. In
addition, you should keep documentation such as delivery receipts,
parcel post receipts, bills of lading, driver log books, or, for deliveries
outside the U.S., a certified copy of the export declaration from the
foreign freight forwarder.(emphasis added)

[Rand_Rover]

@Billdo

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.

Agreed 100%. I just wanted to add that for larger ticket items that require some kind of paper trail (e.g, a boat or airplane), states are notorious for data mining (i.e., checking coast guard boat registrations) and knocking on the door of those who didn’t pay sales tax.

Also, Kozlowski of Tyco fame was busted for avoiding NY sales tax on some art (and I think they used the classic empty box shipping method while he carried the art himself to his Manhattan apartment).

[Tom_Tildrum]

@BrandonR

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.

That occurred to me after the fact. For a while, I was worried that my payment of use tax would itself be an audit flag, or raise concern that I was somehow laundering money via my Virginia taxes.

[drastic_quench]

Buying high quality cigar and pipe tobacco online is popular because many states have insanely high taxes, like 70% and up, on non-cigarette tobacco.

[WhyNot]

@Markxxx

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.

Well, *one *problem is enforcement. Another might be lack of communicating this law to Chicago residents. I’ve lived in the area for 34 years and the city proper for 3, and this is the first I’ve heard of it. I’m not saying you’re wrong, I’m sure you’re right, but I’ve never paid it because I never knew about it!

Out of curiosity, is the amount due the Chicago sales tax or the difference between the Chicago sales tax and the city of sale’s sales tax? That is, if I buy a $400 dishwasher from abt and pay whatever Glenview’s sales tax is - say 7% or $28 for arguments sake, what do I owe Chicago, when, and how do I pay it?