One Month Left to File under Maine’s Use Tax Compliance Program

At the root of debate about whether Internet retailers and other direct marketers should be required to collect state sales and use taxes is the well worn complaint by state revenue departments that consumers (the folks who actually owe the tax under nearly every state’s laws) just do not self-report and pay use tax if left to their own devices. Consequently, the states’ argument goes, states should be entitled to shift the burdens of tax collection onto remote sellers (no matter how onerous), rather than requiring the state to pursue measures to promote reporting, or to boost collection. There are ways, however, for a state to educate consumers about their obligations to pay the use tax.

For example, now through November 30, taxpayers who have unreported use tax liability due to the State of Maine may remit tax under the 2012 Maine Use Tax Compliance Program. The Program, enacted by the State’s Legislature last spring, seeks to “encourage payment of previously unreported use tax and to improve compliance with the State’s use tax laws.”

The Program covers periods from January 1, 2006 through December 31, 2011. Taxpayers must report all taxable purchases for which tax has not been remitted for the entire six year period. But, taxpayers only must remit tax for the three years with the greatest amount of unreported tax due. No tax is due for the three years with the lowest amount of tax reported and all interest and penalties are waived for the entire six year period. Taxpayers who timely file returns under the Program are “absolved from further liability for unreported and unassessed use tax incurred prior to January 1, 2012, and [are] also absolved from liability for criminal prosecution and civil penalties related to those taxes for those years.”

For those individual taxpayers who lack records to support detailed reporting for the past six years, Maine Revenue Services allows filers to estimate their use tax obligations, if no single purchase in a given year exceeded $1,000. Businesses must report their actual purchases for the past six years. The estimate for individuals is based on Maine adjusted gross income and is calculated using a table provided by the State. For instance, an individual filer with $50,000 of Maine Adjusted Gross Income in 2007 is assumed to have made $1,000 of taxable purchases in that year. Obviously, for someone who makes few purchases subject to the use tax, the estimate may be on the high side.

Furthermore, taxpayers who choose to itemize should be careful in reviewing their purchases to make sure they do not over report their use tax liability. For example, out-of-state purchases sent to out-of-state recipients (a Christmas gift bought on Amazon.com and mailed directly to someone outside of Maine) and purchases from out-of-state vendors who charged Maine sales tax would not be subject to the Maine use tax and should not be reported on the form. Taxpayers should also note that if they have no unreported use tax liability, they need not file any returns or make payment under the program.

Because the reporting form only appears to permit individual filing, married taxpayers who file jointly and taxpayers whose filing status changed during the six year lookback period should consult with Maine Revenue Services or their personal tax advisors for guidance on filling out the form. Also, while the form is due November 30, taxpayers may enter into a payment plan with Maine Revenue Services to make payment, plus interest, by May 31, 2013.

Finally, while this can be a great opportunity for taxpayers to wipe the slate clean, it is a narrow one. Taxpayers who owe taxes other than the use tax might consider a broader voluntary disclosure agreement instead. Our readers would do well to contact their tax advisors and carefully weigh their options before jumping into any amnesty program, especially as many, including this one, require taxpayers to waive any right to seek a refund for monies paid under the program.

Is Amnesty Really Amnesty?

States frequently announce amnesty programs. In return for settlement of back taxes, taxpayers obtain waiver of penalties and sometimes a reduction of interest. It has now become increasingly common, however, that states provide a stick to go along with the carrot of penalty waiver. Thus, Pennsylvania completed an amnesty period on June 18 in which it provided for waiver of penalties for payment of back taxes. The Governor of the Commonwealth, Ed Rendell, has announced that in the future, an additional 5% penalty will apply to all tax delinquencies that remained after June 18. In addition, he pointed out that the DOR will begin to seek to hold corporate officers personally accountable for taxes businesses owe and take other aggressive means to enforce the taxes.

Back in 2005, California announced a similar program, by which it increased the accuracy penalty from 20% to 40% and assessed an additional 50% “interest penalty” for all those taxpayers who did not apply for amnesty. Other states have followed a similar approach.

Is an offer of relief from liability coupled with a penalty for failure to take the offer really amnesty? Webster’s defines amnesty as a pardon from an authority. The consideration by the taxpayer for such pardon is the payment of back taxes. The sort of punitive measures, however, that some states impose for failure to acknowledge liability is not a pardon. Serious questions of taxpayer fairness are raised. Why should there be an additional penalty and in some cases threat of personal liability when a taxpayer has a legitimate dispute and chooses not to seek “amnesty”? The Due Process Clause of the U.S. Constitution is designed to provide every citizen their “day in court.” Imposing a penalty for the exercise of this due process right seems to be inconsistent with the basic principle of fair dealing that should be the very foundation of our tax system.