SACRAMENTO — Over the last six months, California tax officials have quietly mailed thousands of official letters to doctors, beauty salons, insurance agents and other service providers looking for some badly needed state tax revenue.
The letters asked these service businesses to check records on their out-of-state purchases for the last three years and pay any back taxes they owe. Failure to do so could lead to an audit of the taxpayer's books going back eight years, the letter warned.
Californians know all too well about sales taxes they pay almost every day on purchases. But less known is the "use tax" that the state requires consumers to pay on goods bought out of state.
California consumers, both individuals and businesses, must pay a use tax if they buy something in another state and if the seller does not collect a sales tax on the purchase. The use tax -- the same amount as the sales tax -- ranges from 7.25% to 9.25% depending on where the buyer lives.
For example, someone who buys books, records, an expensive camera or furniture from Internet retailer Amazon.com would be required to send the state a check covering the specific use-tax obligation. If that's too much trouble, the buyer instead is expected to keep a record of out-of-state purchases and report a year's worth of use-tax obligations on a designated line on the state income tax form.
Compliance with the use-tax obligation is spotty at best, say officials at the California Board of Equalization, the agency charged with collecting sales and use taxes, among others.
To critics of the use tax, the state's new letters on official letterhead are heavy-handed. But supporters say it's a matter of tax fairness.
There's nothing "scary" about the letters, other than they come from a government tax agency, said Board of Equalization Chairwoman Betty Yee. "Much as it feels like a fishing expedition, it is the law. Honestly, a lot of these businesses may not be aware of what the law is" and that it's been on the books since 1935.
Maximizing revenue from existing taxes is crucial at a time when the state government faces a projected $41-billion budget gap over the next 18 months, officials say.
California, 44 other states and the District of Columbia are eager to collect taxes on out-of-state purchases. But it's highly complicated. Out-of-state businesses must collect sales tax if they have stores, warehouses or any physical presence in the taxing state.
If not, the California buyers are supposed to pay use taxes instead. But many local businesses and individuals ignore it.
Enforcing the use-tax law has proved to be time-consuming and costly. Appeals from taxpayers involving out-of-state sales of big-ticket items, such as airplanes and magnetic resonance imaging machines used in medical diagnoses, have led to complex legal wrangling that has been difficult to resolve.
That's why California tax authorities now are focusing their efforts on a more manageable target: service businesses.
The board's collection effort is part of a so-called tax gap program aimed at collecting an estimated $1.1 billion in unpaid use taxes, based on U.S. census and other data.
Businesses owe about $682 million and individuals, $409 million, the state says. The average business owes $340 in back taxes and households owe $436, the Board of Equalization says.
Board of Equalization officials say the stepped-up collection program primarily is an "educational" campaign.
Six thousand letters have been sent since July, netting $2.6 million in back-tax payments, and 25,000 letters are expected to go out in the fiscal year that ends June 30.
Collecting the tax, officials say, is a matter of fairness to ensure that businesses pay required taxes whether the goods come from inside or outside California. But recipients of the state letters don't necessarily see it that way.
"This isn't education. This is punitive," said a San Francisco businessman who received the letter and asked that he not be identified for fear of closer scrutiny by tax authorities.
Small-business owners should be aware that they have a legal obligation to pay use taxes on future out-of-state purchases, such as computer equipment or office supplies, he said. But they should not be forced to go through years' worth of old receipts to calculate back taxes that are filed under the threat of being punished for perjury or fraud.
The letter on state of California stationery, complete with a case reference number, has a tone that could be considered intimidating by a small-business owner.
"Industry studies indicate there is a likelihood that your business has purchased fixtures, equipment, machinery, furnishings, consumable supplies or other items from retailers outside California for use in California," reads one communication to a San Francisco company dated Dec. 11.