The Columbus Dispatch...
Internet, out-of-state sales face ‘new’ tax
By  Mark Williams
Monday August 8, 2011 

The many Ohio businesses that have long ignored paying the “use tax” to the state are going to find it increasingly difficult to dodge it in the future. 

Since 1936 — dating to a time when some neighboring states didn’t have a sales tax — Ohioans have been required to pay tax on goods bought outside the state that did not carry a sales tax. 

The tax eventually slipped out of sight, only to return to the spotlight with the explosion of business over the Internet. 

Now, the state wants its piece, and it’s targeting businesses first, although individuals also are supposed to pay up. 

The state’s tax preparers, through continuing education programs required by the Ohio Department of Taxation, are being marshaled to take the message to their customers. Ohio also has instituted an amnesty program that allows businesses to get right with the state without being punished. 

Even though the tax has been on the books for 75 years, it’s easy to guess how it will be viewed. 

“In their mind, it’s a brand-new tax,” Justin Mohler, co-owner of the accounting firm Watson & Associates in Bellefontaine, said of how business customers will react. “They have no clue what it is.” 

The state doesn’t know how much it stands to collect from the effort or how many businesses are not in compliance. It just knows that with the rise in Internet and mail-order sales, the numbers probably are substantial. 

“We don’t have an idea,” said Joe Testa, Ohio’s tax commissioner. “Hundreds of thousands of businesses in Ohio may have a use-tax liability.” 

A tax amnesty in 2006 aimed at all type of state taxes collected $59.7 million and identified 1,500 taxpayers who owed anywhere from $500 to $2 million in use taxes. 

“Personally, I think it is a large dollar figure,” said Chris Ferruso, legislative director for the Ohio chapter of the National Federation of Independent Business. “Businesses simply weren’t aware that it was something that needed to be reported.” 

Even if many don’t know about it, the use tax is a big deal for the state, already generating more than 

$1 billion a year. Compliance on the use tax also might spur the Ohio economy as companies make more purchases in the state after losing the tax advantage of buying elsewhere. 

An amnesty program will start Oct. 1, allowing businesses to get right with the state without being punished. But even though it is almost two months away, the effort is catching the attention of the business community. 

Big companies with paid finance staffs know their companies need to report the use tax to the state. 

“Enforcement has historically been on big business,” Mohler said, adding that his small- and medium-size clients “have no clue what it is.” 

The use tax is a complement to the state sales tax. It is meant to create an equal playing field by requiring businesses that buy items out of state, bypassing Ohio sales tax, to pay the use tax instead. 

If a company pays out-of-state sales tax on an item it buys, then no use tax is owed in Ohio if the two rates are the same. 

The Taxation Department cites the example of an Ohio company that wants to buy an executive desk. A company in Columbus and a company in Buffalo, N.Y., both sell the same desk for $2,600. By not paying the use tax, the company that wants the desk can save $149 by buying it from the New York company, even with higher shipping costs, according to a scenario set out by Ohio tax regulators. 

The New York company doesn’t collect Ohio sales tax on the purchase. 

But Ohio state law requires a use tax to be paid unless sales tax already has been paid or unless there is an exemption that applies to the sale. Additionally, many Internet and mail-order companies don’t collect Ohio sales taxes on purchases, the state says, leaving that burden on the buyer to report the purchase. 

The use tax also applies to individual taxpayers, who also are turning more to the Internet for purchases. There is no similar enforcement plan in the works by the state that targets individuals, however. 

Miscommunication between buyers and sellers also results in failure to pay the use tax. A recent audit found that one company owed $1.8 million after it thought a supplier was charging the tax. 

Two years ago, legislators authorized the hiring of 90 auditors with the goal of reviewing the books of more small- and medium-size businesses. Those audits revealed a lack of understanding by many businesses about the use tax, said John Trippier, the department’s audit administrator. 

That led state tax officials to begin putting an education program together for businesses that would advise them about the tax and where it was applicable. 

The main goal was to get businesses registered with the state and to have them comply going forward, Testa said. 

As the General Assembly began to debate the state budget that went into effect July 1, some legislators asked tax regulators to take another look at their program, Testa said 

Mohler said as he and other tax preparers and consultants began to tell clients about the state’s education and amnesty program, those clients began to complain to their legislators. 

The result was a lengthy, more business-friendly amnesty that was folded into the new state budget. 

The amnesty goes into effect Oct. 1 and runs until May 2013. It requires all businesses that voluntarily enter into an amnesty program to remit use taxes going back to Jan. 1, 2009. Any taxes that would have been due before that will be forgiven. 

There will be no penalties or interest. The state can set up payment plans if the liability tops $1,000. 

The amnesty does not apply to all businesses. Businesses that have been assessed use tax before are not eligible. 

As is the case with other forms of taxes that businesses pay, the state will count on honesty when it comes to determining use-tax liabilities. 

Read it at the Columbus Dispatch