My ‘Use Tax’ Case Resolved, Tax Remains a Problem

The good news is that the Colorado Department of Revenue is no longer threatening to seize my property over “use tax” allegedly due. An agent told me over the phone today that the Department would accept the original payment of $436.93 from my wife and me as payment in full for the past seven years of use taxes.

This, then, concludes my case, which I discussed in an article last monthand in a June 15 follow-up.

But the problems I had with the tax only underscore its broader problems — problems the legislature should address.

To back up, what is the “use tax?” If you buy something from out of state without paying state sales tax on it, you’re supposed to track such sales and cut the state a check for an equivalent amount.

Of course, hardly anyone actually pays this tax, and most people I’ve talked with have never even heard of it. But this exposes most Coloradans to potential criminal charges, property seizure, and arbitrary enforcement. That’s wrong.

So you can imagine why, after my wife and I actually paid the tax, we were frustrated to suffer further harassment and intimidation at the hands of the Department of Revenue. Specifically, the Department sent us three letters, all of which claimed we still owed the entire use tax for last year. Two of the letters also claimed we owed an additional amount for 2009. The final letter threatened to seize our property if we didn’t pay the 2009 amount. That’s more than a little irritating, given that we had already paid the entire 2010 tax, plus the 2009 tax with an 18 percent penalty.

But apparently the Department of Revenue’s idea of generating tax revenue is to relentlessly harass and threaten people who actually pay the damned tax, and totally ignore everyone else who doesn’t pay it. (I’m talking about consumers; I’ve heard anecdotally that the state makes some effort to enforce the “use tax” among businesses.)

The other major problem with the tax, beyond the problem of enforcement, is that it’s an extreme hassle to pay. Seriously, we’re supposed to track all our out-of-state purchases and then calculate the tax ourselves? That’s obviously ludicrous, which is why few do it.

Just to calculate and pay the initial tax, my wife and I spent 6.5 hours combined. Then we spent around two more hours responding to the Department of Revenue’s first two erroneous letters. We spent an additional 98 minutes (combined) on June 15 responding to the Department’s third letter. Yesterday I spent an additional 14 minutes further reviewing the matter. (I also had trouble sleeping and spent most of the day worrying about it.) Today I spent just over an hour on the phone with the Department of Revenue. Combined, my wife and I spent about 11.4 hours dealing with the tax, which transfered to the state $436.93. In addition, the Department of Revenue devoted who knows how much more time to the matter. In sum, a huge portion of the value of the tax was eaten up in the paying of the tax. And that hardly accounts for our emotional distress.

(This is aside from the obvious point that we are out the $436.93, which I am quite confident I could have spent better than the state’s bureaucrats will manage.)

Thankfully, the Department’s agent I reached today by phone was quite helpful and friendly, and she resolved the matter within a few hours.

What happened in our case, she explained, was that the Department’s “system actually calculated penalty, interest, and penalty-interest, which is double interest.” The agent said she waived all penalty and interest beyond the 18 percent we already paid, so now “there is nothing due.” (I still have no idea how a person is actually supposed to calculate all the penalties and interest according to the formal rules, but apparently just paying the extra 18 percent does not necessarily cut it.)

So why did the Department claim we owed the entire 2010 tax? The agent further explained that the Department had reallocated the portion of our payment intended for that year to the additional penalties for previous years.

I do want to state publicly that I sincerely appreciate the Department’s agent for working quickly to resolve the issue. (I only wish her efforts had not been necessary.)

So how should the tax be legislatively modified? At minimum, the legislature should clarify an easy-to-calculate penalty for late payments, adjusted for the degree of lateness. In my experience the existing rules are impenetrable.

However, I believe the legislature should go far beyond that and repeal the “use tax” altogether. It is a nuisance tax, inherently difficult to pay and enforce, and so it turns vast numbers of Coloradans into scofflaws, typically without their knowledge.

But, local retailers would complain, that would unfairly advantage out-of-state sellers. Therefore, as my dad and I argued last year, the legislature should simply abolish all sales and use taxes, even if done in a revenue-neutral way by increasing the income tax rate. (This would require voter approval.) Obviously that would eliminate all the problems associated with paying and enforcing sales and use taxes (including the state’s malicious campaign against Amazon and other online retailers).

The fewer the types of taxes, the better.