Experiment in tax compliance

I was surprised by my email from Amazon saying I owed S.C. use taxes for $340 worth of purchases I made last year from the online behemoth.

Not surprised to receive the email: I knew that a new state law required the company to send out the notices, and I remembered a small purchase I made late last year through Amazon, of an item I couldn't find locally.

But I had forgotten all about the faucet. Which I purchased while I was renovating my kitchen (the sort of experience you'd think would be hard to forget). And even used in a starring role in a column I wrote about the debate over whether to grant Amazon a special tax break in return for opening a distribution center in Lexington County.

I realize that I am in a decided minority: I am fully aware of the use tax, which we all are required to pay on taxable items that we don't pay a sales tax on, usually because they're purchased online, and I have every intention of paying it via my state income tax return.

Still, I rarely order online, and when I do it's usually from companies with a physical presence in South Carolina - which is to say companies that, with the exception of Amazon, charge me the state sales tax - so the use tax isn't something that's top of mind in my personal life.

But it's a growing problem for our state. Between the few like me who know about the law but forget about their purchases, and the huge number of people who either have never heard of the tax or know about it but have no intention of paying it, because they figure (correctly) that their odds of getting caught are minuscule, the state lost out on an estimated $111 million in use taxes last year - including $2.5 million due on products purchased through Amazon.com.

Now, $111 million is not a lot of money in a $6 billion state budget, but internet sales are the fastest-growing part of the consumer economy - the state's loss is projected to rise by 13 percent, to $125 million, this year - and our tax system is increasingly dependent upon consumer spending, because lawmakers keep reducing property and income taxes and relying more and more on the volatile, loophole-pocked sales tax.

What makes the $111 million in unpaid use taxes even more worrisome is that the total amount due was estimated at $112 million - which means we had a 99 percent noncompliance rate.

Compliance is quite high for the sales tax, because retailers are required to collect it, and it's easy for the state to keep track of whether they do, and punish them if they don't.

But federal law bars states from forcing businesses to collect taxes on sales made in states where they have no physical presence; instead, states must rely on individuals to self-report their purchases, and pay the use tax.

What the Legislature agreed to do last year, under threat of losing the distribution center, was allow Amazon to keep not collecting sales taxes on S.C. purchases through the end of 2015, even though it does now have a physical presence in our state.

But critics of the deal were able to force Amazon to send customers a notice by Feb. 1 with their total purchases for the previous year, a reminder that they may have to report them and pay the sales tax when filing their income tax returns, and a link to the state Revenue Department, where they can calculate the tax. Which it did last week.

And thus begins an interesting little experiment in voluntary tax compliance.

Voluntary compliance is a term you'll hear pretty quickly if you ever get into a conversation with a state or federal tax official.

It refers to two aspects of our income tax system.

One is the idea that people can arrange their income and investments in such a way as to change their tax exposure.

The one at play here is the fact that the Internal Revenue Service and state tax agencies rely on individuals to report their income and pay taxes on it.

Of course, for salaried workers, there's not a lot of volunteerism involved, since their employers also report that income to tax officials. As do banks and brokerages and other entities that distribute investment income. Employers even withhold taxes from paychecks, unless you tell them not to, which to me has always seemed like asking for an audit. Sort of like writing a column about untaxed purchases you made and then not reporting them.

But there still are a few holes in the double-reporting system, a few items that people "voluntarily" decide whether to report and pay the taxes they owe. Like state use taxes.

The question being tested in our little experiment is how many people will comply with a tax law once they are made undeniably aware of it, even though enforcement is practically non-existent.

Of course most of those people who have made a deliberate decision not to pay the tax aren't going to suddenly become honest just because they can no longer pretend not to know about it; but a few will, if only because they're paranoid and don't really believe that Amazon isn't turning its information over to the state Revenue Department, as the Legislature should have required it to do.

But I suspect we'll pick up a fair bit of tax compliance from people who honestly didn't know about the law, but now do.

And it seems reasonable to assume that in some cases, that will carry over to purchases they made from other online retailers.

When The Post and Courier did an online survey last week asking people if they planned to pay the use tax, now that they had just read about the Amazon notices, just 19 percent of the 226 participants said yes.

These surveys are completely unscientific, but the results were interesting nonetheless. That 19 percent looks pretty dismal - until you compare it to the 1 percent of South Carolinians who currently pay the tax.

I never thought it made sense to punch more holes in our tax system and lower the bar on future incentives for the Amazon jobs.

But if those annual notices result in a significant and permanent increase in the number of people who obey the law and pay the use tax, then all of that just might turn out to have been a small price to pay.

- Cindi Ross Scoppe is an associate editor with The State newspaper in Columbia