JACKSON — If you buy a single copy of The Wall Street Journal via the Internet, it’s subject to tax. If you buy a subscription to the WSJ, you don’t. Sound petty and confusing? It is. But it’s important to know the rules of Internet purchases so you don’t get a call from the State Tax Commission.
“If you buy a single magazine or periodical, it’s subject to tax, but if you have a subscription, it is exempt,” said Meg Barnes, director of the sales and use tax bureau of the Mississippi State Tax Commission.
According to the Mississippi State Tax Commission, use tax is assessed under state law on items purchased where sales tax was not charged at the time of the purchase. The most common situations of use tax liability occur when goods are purchased via mail or Internet from companies outside Mississippi.
“It also applies to business property brought into the state from another state with a lower tax rate,” Barnes said. “For instance, if you paid 4% tax on business equipment in another state and you bring it here for use, you would owe 3% based on our 7% tax rate.”
There are, however, a few exceptions, Barnes said.
“Exemptions for use tax are basically the same as for sales tax,” she said. “There are additional exemptions for a few items, like religious materials, which if purchased in-state are taxed under the sales tax but not if brought in.”
Many people aren’t paying attention to it. Some are unaware. But the penalties apply just the same.
“Who remembers what they bought online eight months ago?” said James Eads of Ernst & Young in McLean, Va., and an e-commerce tax policy specialist.
But the state tax commission, facing a budget shortfall, has been actively auditing businesses for the adherence of sales and use tax laws.
For the fiscal year ended June 30, 2000, the Mississippi State Tax Commission reported $5.149 billion in total receipts.
Of that total, the state collected $2.09 billion in sales tax, $1.25 billion in individual income tax and only $206.4 million in use tax.
“I would love to say we’ve beefed up auditing, but we’re $800,000 short of making payroll, so we maintain 66 vacant positions,” said Ed Buelow, chairman of the Mississippi State Tax Commission. “However, the auditors choose their own audits. I don’t direct them in that. The only thing that might make it seem like we’re auditing those taxes more often is because of restrictions in travel money. Because of that, many auditors are staying and working in the state more than they normally do.”
In a recent newsletter, Smith, Turner & Reeves, a Jackson-based accounting firm, warned its clients, “The Mississippi Tax Commission has been active in audits of adherence to sales and use tax laws. We encourage our clients to contact us if you have any questions or concerns in this area.”
“In May and June, we had several clients who had sales tax audits that were hit on use tax,” said Betty Lou Reeves, a partner of Smith Turner & Reeves. “It’s a tax that people don’t generally think about.
“Auditors are trained to know where to look for failure to report so we just want people to know and be aware that they should keep the use tax in mind when reporting.”
Several factors have contributed to the attention that use tax has recently received. In 1967 and 1992, the U.S. Supreme Court made two important rulings concerning the collection of use tax. The rulings directed businesses to collect and remit a state’s sales and use taxes only if that business is physically located in that state.
States in which the companies have a physical presence are referred to as “nexus” states. The legal ruling gave companies with locations in only a few states a competitive advantage over others, particularly retailers, which might have locations in 50 states.
“If we’re selling the same model computer as a Web retailer for what appears to be 6% more because of the sales tax, then we’re clearly not going to be able to compete,” said Ron Parrish, vice president of industry and government affairs for Radio Shack. “We’ve got…an uneven playing field.”
A 1998 federal law nixed new taxes on online retail transactions, which accounted for $7 billion in the first quarter of 2001. In June, congressional leaders struck a deal to extend the current ban on new taxes on the Internet until 2006. The situation has resulted in a heated debate over which of the 7,600 different state and local jurisdictions in the U.S. should levy the taxes.
“If we don’t make changes in a rational way now and just continue to let the states operate with an antiquated system, it will be a detriment to the entire corporate world,” said Ben Isaacson, executive director of the Association for Interactive Media (AIM), an interactive media industry trade organization.
Filing frequencies of sales and use tax returns depend on the annual amount of taxes remitted to the state tax commission. If the annual remittance is less than $300, returns are filed annually. If it is between $300 and $599, semi-annual returns are required. For an annual remittance of $600 to $3,599, quarterly returns are necessary. If the annual remittance is more than $3,599, monthly returns must be filed.
“As a practical matter, use tax is not always enforced on individuals,” Reeves said. “Businesses with a use tax liability must register for a use tax number on state registration forms, but if you register all at one time for your tax numbers, you can usually get the same number.”
Use tax forms can be downloaded online at www.mstc.ms.us/regist.htm or by calling the Mississippi State Tax Commission at (601) 923-7000.
Contact MBJ contributing writer Lynne Wilbanks Jeter at email@example.com or (601) 853-3967.