NYSUSETX

REPRINTED FROM THE NEW YORK TIMES

That Out-of-State Shopping Trip May Buy a Higher Tax Bill

February 15, 2004

That Out-of-State Shopping Trip May Buy a Higher Tax Bill

By VIVIAN MARINO

LIKE many other New Yorkers, Monica Schaffer, an executive at a marketing

company, would sometimes venture across the Hudson River to shop for

bargains. In suburban malls and outlet stores in New Jersey, she found

deals on a Dolce & Gabbana coat, Anne Klein suits and Manolo Blahnik

shoes. "For all the rent I pay, it makes a lot of sense to save a little

money where I can," said Ms. Schaffer, 32, who lives in Manhattan.

Did she voluntarily report these purchases to the New York State

Department of Tax and Finance? "Was I supposed to?" she asked.

New York, in fact, is one of many states requiring residents to pay a

"compensating use tax" on out-of-state purchases that would have been

subject to sales tax at home, whether the purchases are made in person, by

mail order or over the Internet. (A $300 pair of Manolo Blahnik pumps from

New Jersey, which has no sales tax on clothing and footwear, would have

been taxed at about $26 in Manhattan.)

"The government should do a better job of letting us know" about the use

tax, Ms. Schaffer said.

New York is doing so. It has added a separate line about the tax to its

2003 income tax return (along with five pages of instructions). California

and Oklahoma added similar line items to their 2003 returns, joining more

than a dozen other states, according to John Logan, a state tax analyst at

CCH, a tax research firm in Riverwoods, Ill.

These new rules, cumbersome as they may seem to taxpayers, are part of a

growing effort by states to devise ways to replenish their dwindling

coffers without significantly reducing services.

Even as the federal government has been cutting taxes, many states have

been increasing some of theirs, for businesses and individuals, or adding

assortments of fees and surcharges. Some are going after scofflaws, too. A

growing number are distancing, or "decoupling," their tax rules from the

federal tax system, which means that many taxpayers who receive new

federal tax breaks on inherited estates or capital gains, among other

things, will not get similar breaks on their state taxes.

"Some of these little nuances have larger implications than they would

appear," Mr. Logan said.

Although the economy has been improving in recent months, many states

remain mired in fiscal problems. They enlarged their budgets in the

booming 1990's to meet rising social needs, and often lowered taxes, only

to have revenue plunge early in the new decade as the stock market

tumbled, the economy weakened and jobs were cut. Even states' "rainy-
day"

funds have evaporated.

"They thought they were kids in a candy store, but spending grew faster

than was sustainable under the current trends," said Stephen Slivinski, a

senior economist for the Tax Foundation, a tax research group in

Washington.

Unlike the federal government, state governments cannot print their own

money when they run out, and most are also bound by their constitutions to

balance their budgets. The Center on Budget Policy Priorities, a research

group in Washington, says that in fiscal 2004, which for most states began

last July, the states collectively closed almost $80 billion in budget

gaps, as spending declined by 0.2 percent from fiscal 2003. Over the last

three years, cumulative budget deficits totaled $200 billion, according to

the National Conference of State Legislatures.

At least 21 states expect shortfalls for fiscal 2005, totaling around $40

billion, according to the Center on Budget and Policy Priorities.

California alone is projected to have a budget deficit of $17.6 billion,

or about a quarter of its general fund, the center said.

Some 36 states enacted various tax and fee increases for fiscal 2004,

totaling $9.6 billion, according to the National Association of State

Budget Officers.

Here is a closer look at what some states are doing, and the effects on

taxpayers.

FOCUSING ON THE WEALTHY Raising income taxes outright has never
been

popular, and few states did so during 2003. Arkansas added a 3 percent,

three-year surcharge on state income taxes. Pennsylvania increased

personal income tax rates across the board, Mr. Logan said.

A more palatable solution, at least to legislators in other states, he

said, has been to increase only the top tax brackets, as New York and

Connecticut did. "It affects relatively few people, but can raise a

significant amount of money," he said.

GOING AFTER NONRESIDENTS AND BUSINESS Some companies that
operate in many

states, Mr. Logan says, structure their transactions so that certain

items, like interest and royalty income, are assigned to states that tax

them lightly or not at all. But an increasing number of states are

following the lead of New Jersey by passing, or at least considering,

legislation to "add back" a portion of this income to their jurisdictions,

he said. He also noted that some states were requiring withholding for

nonresident business partners who do not participate in the group tax

return.

RAISING SALES AND "SIN" TAXES About two-thirds of the revenue
raised

through tax increases has come from higher sales taxes and excise taxes on

products like cigarettes and alcohol, the Center on Budget and Policy

Priorities says. Raising such so-called sin taxes can bring in significant

revenue and usually generates little opposition from the public. For

fiscal 2004, some 15 states have enacted increases in cigarette and

tobacco taxes, and four have raised taxes on alcoholic beverages,

according to the National Association of State Budget Officers.

ADDING OR RAISING FEES To avoid tax increases, some states, including

Florida, which has no personal income tax, have raised fees for various

services or professional licenses. Massachusetts, for example, began

imposing a $10 fee for a certificate of blindness so blind or legally

blind residents can gain access to state services.

FORGIVING SCOFFLAWS More than a dozen states, including
Massachusetts,

Michigan, Virginia, Illinois and New York, instituted tax amnesty programs

over the last two years, waiving penalties and interest for those who pay

their back taxes. The program in Illinois, for example, reaped more than

$500 million.

The programs have been successful, said Nicholas Johnson, director of the

state fiscal project for the Center on Budget and Policy Priorities, but

he warned, "If you have them too often, people will not comply because

they won't take them too seriously; it's a tricky business."

RECOUPING LOST SALES TAX The use-tax line is one remedy, though it's

hardly a panacea for compliance. Taxpayers "have to let their conscience

be their guide," said Alan E. Weiner, a partner at Holtz Rubenstein &

Company, an accounting firm in Melville, N.Y.

Ms. Schaffer, for one, says she intends to keep close track of her

out-of-state purchases from now on. "I'll certainly be as careful as I

need to be in the eyes of the law," she said.

New York taxpayers who lose track of their purchases can refer to a chart

in their returns that estimates the use tax based on adjusted gross

income, but only if total purchases are less than $1,000. (Someone earning

$80,000 would pay $43.) Purchases totaling more than $1,000 are calculated

separately.

New York is looking especially at residents and businesses that make big

purchases. (Remember L. Dennis Kozlowski, the former chief executive of

Tyco International, and his 2002 indictment on charges of evading more

than $1 million in New York State sales tax on artwork? Mr. Kozlowski has

pleaded not guilty.) States are spending more time poring over United

States Customs data, checking on big purchases from outside the country.

At least 38 states, meanwhile, have joined a group created by the National

Governors Association, called the Streamlined Sales Tax Project, to unify

their sales and use tax laws, and to share information with one another.

The states are pushing for Congress to pass legislation that would

authorize them to collect sales taxes when residents buy goods over the

Internet. That tax loss has been estimated at more than $13 billion for

2001 alone, according to the Institute for State Studies, a research group

in Salt Lake City.

DECOUPLING To keep tax administration consistent and simple, most state

tax codes had routinely conformed to the Internal Revenue Code. But after

the 2001 tax-cut law was enacted, many states started to break from the

federal model and adopt their own rules. In Idaho, for example, a teacher

who deducts up to $250 in out-of-pocket expenses for classroom supplies
on

her federal tax return has to add it back to her state return.

Several states, including New Jersey, Wisconsin and Rhode Island, rewrote

their laws concerning estate taxes after the federal law began a phase-out

of estate taxes in 2002, Mr. Logan noted. In 2002 and again in 2003,

federal law also offered businesses the opportunity to take "bonus"

depreciation on qualifying equipment they placed into service between

certain dates. Of the 46 states with a corporate income tax, only 12

completely follow the federal rule on bonus depreciation; the remaining

34, plus the District of Columbia, either do not conform at all or modify

it.

Nor do this year's cuts in federal taxation of capital gains and dividends

directly translate into state tax cuts; no states have changed their laws

to follow the federal cuts on these categories of income.

"The trend was for federal and state taxes to be more similar," Mr. Logan

said. "Now, different rules apply. One consequence is that taxes become

more difficult for the average person to understand."

Could that be possible?

| Corrections | Help | Back to Top