There seems to be as many ways to cheat on your taxes as there are taxes. State sales and use taxes are no different. Some may not realize it but sales and use taxes are two different taxes. Sales tax is usually collected by the seller at the time you buy an item and most of us have seen this on everything from car purchases to restaurant bills (even residents of the five states without a sales tax have likely left their little tax havens and paid sales tax somewhere else). Use tax is the backstop when sales tax was not charged. Bought a new mixer online and had it shipped to your house without a sales tax being collected; congratulations, you probably owe your state use tax. Has anyone ever actually filed a use tax return declaring their legally owed taxes? You are probably not surprised to learn the answer is very very few.
We focus primarily on Federal taxes with submissions to the IRS Whistleblower Office, but there are some possibilities of a whistleblower getting paid for rooting out state tax issues. Currently, Florida and New York have programs that we work with to report state tax issues. Florida’s program is similar to the IRS program in that you report the information and they take it from there. Florida pays a 10% award. New York amended its False Claims Act in 2010 to add taxes to the list. There you actually sue the taxpayer on behalf of New York. It is a lot of work, and a wild ride but the end “Relator Share” that you receive could be up to 30%.
We have dealt with several state tax issues (and even received awards!) but the circumstances must be right to make them worth pursuing. First and foremost, you need a lot of avoided tax. While the top Federal income tax rate is 39.6%, Florida has a sales and use tax rate of 6% and New York 4% (8.875% for sales and use in New York City). It takes some pretty big ticket items to add up to a worthwhile award in a use tax case. For example, to get a million dollar award from Florida, they would need to find an underreporting of around $170 million dollars’ worth of stuff (170,000,000 x .06 x .1 = 1,020,000 for those playing along at home). That’s a lot of blenders.
From where does that level of use tax violation come? Usually it comes from things that don’t need license plates or captains, like art and jewelry (cars, planes, and boats are almost always registered making avoiding sales and use tax slightly more complicated). I was reminded of this in today’s Wall Street Journal. Daniel Grant wrote an interesting piece entitled, “Art Collectors, Pay Your Taxes.” The article discusses states, particularly California and New York, cracking down on sales or use taxes. Often, purveyors of art are more than happy to accommodate requests of buyers that help them avoid sales tax, tacitly knowing the use tax will never be paid. Insiders with quality information about large-scale art or jewelry purchases may do well to consult with a tax whistleblower lawyer to see if their information is actionable.