Unpaid taxes shortchange state $200M

By J.C. LEXOW Staff writer

Palmetto State residents are stiffing their own education system by about $200 million a year, according to South Carolina Department of Revenue officials.

Thousands of consumers living here who buy goods from out-of-state suppliers via the Internet, catalogs, television shopping networks, and even in person, fail to pay a use tax owed to South Carolina. A 2001 study conducted by the University of Tennessee concluded the state lost $153 million that year in uncollected tax, according to SCDOR spokesperson Danny Brazell. The estimated amount in 2004 is $200 million.

In South Carolina, all state sales tax and use tax revenue goes to the state Department of Education. Last year, though the SCDOE could theoretically have benefited from close to $200 million in use tax revenue alone, in fact only $1.6 million was actually collected from individuals who paid voluntarily, or after being audited.

"It is the most unreported tax we administer," Brazell said.

The use tax has been in place in South Carolina since the 1950s, as long as the state sales tax. It's meant to level the playing field between in-state vendors, who must charge sales tax, and out-of-state vendors who don't collect sales tax on the purchase of goods brought into the Palmetto State.

That means, for example, if an Aiken County resident orders olives from a distributor in San Francisco, and the price paid does not include a charge for the California sales tax, the buyer is obligated to remit 6 percent of the purchase price to the SCDOR – 5 percent for the state, and 1 percent to cover the County sales tax.

Likewise, if someone in Aiken County buys a mackerel – or anything else – from Alaska, the South Carolina use tax must be paid on that purchase because Alaska – and Oregon, Montana, New Hampshire and Delaware – have no state sales tax at all.

Even if a state sales tax is charged, if it is less than 6 percent, the Aiken County buyer still owes the difference to the SCDOR. So when the order of Dreamland ribs arrives in Aiken County from Tuscaloosa, and the receipt shows the price paid includes the 4 percent Alabama sales tax, 2 percent on the sale still must be remitted to South Carolina.

Of course, the use tax obligation doesn't just extend to the purchase of goods delivered from another state. It also applies to articles a resident may buy while visiting another state, which are then brought back for use, or storage, in South Carolina.

So when an Aiken County resident buys a souvenir grass skirt during a Hawaiian getaway, the SCDOR is due 2 percent of the purchase price – the difference between sales taxes in the Aloha State and Aiken County – when the buyer returns home.

The advent of the World Wide Web and growth of Internet commerce have dramatically increased the amount of use tax owed not just to South Carolina, but to all states that levy a sales tax. Every state that assesses the one has the other, too.

Internet commerce is a huge and unique animal the states and federal governments haven't quite figured out how to put on the tax revenue leash. A vast number of suppliers don't tax online sales at all, and very few have been convinced to collect the tax on behalf of states beyond their own borders.

That, says the SCDOR's Brazell, is something the department is trying to change.

"We're getting better at exchanging information with other states," he said.

"And we're trying to get the major retailers to collect the tax for us. We are having some success with them."

The state has also resorted to mailing out letters to random taxpayers, reminding them of the obligation they may have. A distribution of 300 such letters has yielded a couple thousand dollars for the state, according to Brazell.

South Carolina Department of Revenue form UT–3, available online at http://www.sctax.org/, may be submitted with a use tax payment at any time.

Or the amount may be reported during income tax season on Line 23 of the SC1040 long form, or Line 12 of the SC1040A short form. The use tax obligation would then be added to the amount of income tax owed to the state, or subtracted from the taxpayer's refund.

Either way, the revenue and education departments, and the state's schoolchildren, pretty much rely on the "honesty and sense of fair play," as Brazell puts it, of each taxpayer, however ineffective a course that may be.

"We're sort of on the honor system," he said.

Contact J.C. Lexow at jlexow@aikenstandard.com

Copyright © 2003, The Aiken Standard