‘Use tax’ query on form gone

The annual income-tax filing ritual, always a challenge, could become more bizarre next year because of a twist affecting Arizona “use” taxes.

The obligation by some Arizonans to pay these taxes remains, but the friendly reminder to pay them has disappeared.

Use taxes apply when Arizona sales taxes, for various reasons, haven’t been collected at all or in a sufficient amount. For example, if you bought a car, computer

or jewelry in a no-tax state or in a lower-tax jurisdiction, you are required to pay the difference, up to Arizona’s 6.6 percent rate. Use taxes have been around in Arizona since Dwight Eisenhower was president, but the taxes aren’t well understood, with compliance and enforcement spotty.

Internet sales have complicated matters because taxes aren’t always collected on these transactions, yet use taxes often are owed here, too.

Last year, the Legislature raised awareness of use-tax obligations by inserting a line on Arizona’s 140 tax forms requiring people to calculate their obligation. More than two dozen other states had taken similar steps in an era of tight budgets.

“We had some clients who put down quite a lot of money,” said Ellen Campbell, a Phoenix enrolled-agent taxreturn preparer. “But probably 50 percent of them left it blank because they had no idea what we were asking.”

Still, the effort succeeded beyond expectations. Arizona collected $6 million for 2011 in use taxes, said Anthony Forschino, assistant director of the Arizona Department of Revenue. That was almost 13 times the $473,000 in additional revenue that was anticipated when the Legislature drafted the original bill to insert a line item on Form 140.

“It’s $6 million they didn’t have before, and it came in the first year of the program,” said Carol Kokinis-Graves, a senior state-tax analyst at researcher CCH. Compliance and tax revenues likely would have risen, as more Arizonans grew more familiar with the tax, she said.

But then the Legislature did a 180-degree reversal. Lawmakers voted to remove the line item from the new 2012 state-tax forms that Arizonans will file early next year, with Gov. Jan Brewer signing the measure in May. But lawmakers didn’t alter the underlying obligation to pay use taxes.

“For 2012, taxpayers are no longer required to declare their non-business use-tax liability on the individual income-tax return,” the Department of Revenue reports in its tax-form instructions. “However, individuals are still required by law to report and pay any use tax for goods purchased from an out-ofstate vendor that did not collect the use tax.”

So we’re back to the ways things stood a couple of years ago.

Ed Zollars, a Phoenix CPA, said he presumes state officials are aware that residents rarely reported such obligations in the past. “I would assume we will likely go back to individuals not making such reports yet again,” he said.

More states have included use-tax line items to raise awareness and encourage people to pay their obligations. In April, CCH counted 27 such states plus the District of Columbia that had the line-item requirement, including Arizona. CCH plans an update next month.

Kokinis-Graves said she was surprised by Arizona’s decision to remove the line item. “States continue to try to make consumers more aware of their use-tax obligation and get them to voluntarily comply,” she said. “I think it’s very curious Arizona did that.”

People often react with surprise and anger when learning that they might be subject to use taxes. But compared with most other taxes, this one typically doesn’t involve big dollars, for the simple reason that sales taxes already have been collected on the vast majority of transactions. The $6 million raised wasn’t a huge number, equating to less than $1 on average per state resident.

For people owing use taxes, wrapping it into the regular state income-tax return made payment more convenient. Now consumers who owe these taxes are supposed to send their payment separately.

Specifically, you should add up the dollar value of your purchases on which sales tax wasn’t collected, then multiply that by Arizona’s use-tax rate of 6.6 percent. Include a check for that amount, along with a copy of relevant invoices and your taxpayer-identification information. Send all this to the Arizona Department of Revenue, Use Tax Unit, Room 620, 1600 W. Monroe St., Phoenix AZ 85007.

The department’s website, azdor.gov, includes a “use tax factsheet” under the FAQs section. USE-TAX BASICS » Arizona’s use tax applies on purchases on which sales tax either wasn’t collected or was collected below Arizona’s 6.6 percent rate (the difference would be taxable). In particular, transactions made outside the state or over the Internet could be subject to the tax. » Use tax complements the regular sales tax, so no tax would apply on items that aren’t subject to sales tax, such as most groceries and prescription drugs. » “Casual” sales between individuals aren’t subject to use tax. This includes purchases from non-merchants, including those who make “isolated or occasional sales and who are not engaged in the business of selling tangible personal property at retail,” according to the Department of Revenue. For example, no tax applies on a privateparty sale of a used car. » On an out-of-state purchase of a new vehicle, you would need to pay any applicable use tax when you register it in Arizona. » No Arizona tax applies on items you buy for use in another state, such as appliances for your beach condo in California. » Failure to pay a use-tax obligation could subject you to audits, penalties and interest.