Sales Tax
Sales Tax: Evasion Consequences and Streamlined Analysis John P. Gray [FNa]
Attorney disciplinary action, criminal prosecution and complex multi-
jurisdictional issues may be implicated by sales tax evasion. A former Minnesota
attorney was convicted for failure to pay sales tax and was disbarred in July, 2006.[FN1]
Mr. Dennis Kozlowski, former chairman and chief executive officer of Tyco
International, was indicted on sales tax evasion charges on personal purchases totaling
over $1 million.[FN2] With the dramatic growth of Internet sales, several complex
multi-jurisdictional issues have arisen involving the collection of sales tax. This brief
article addresses sales tax evasion and application of the Streamlined Sales and Use Tax
Agreement to simplify multi-jurisdictional sales tax issues..
Former attorney Brian J. Peterson of Excelsior, Minnesota was found guilty of
sales tax evasion. Peterson used a spend-down plan to attempt to qualify a client, Ms.
Mildred Johnson, for medical assistance. Peterson purchased an Acura automobile from
Ms. Johnson for $27,300 on May 13, 2003. “On January 10, 2005, Peterson was
convicted of violating Minn. Stat. § 297B.10(a) (2004) (evasion of sales tax on motor
vehicles) in connection with his purchase of the Acura from Johnson.”[FN3] Peterson
had been suspended from the practice of law in Minnesota in 2000 and was reinstated,
though placed on probation on May 2, 2003.[FN4] He was disbarred on July 27, 2006.
Although several violations of the Minnesota Rules of Professional Conduct were
involved in the Peterson case, the criminal sales tax violation was significant.
Former Tyco International executive Dennis Kozlowski was indicted on sales tax
evasion charges involving his purchase of $1 million in art objects.[FN5] Mr.
Kozlowski, and other executives at Tyco, were investigated and various secret
compensation schemes and illegal stock sales transactions were uncovered.[FN6] Focus
came to Kozlowski as the result of a video tape of a week-long birthday celebration for
his wife, Karen, on the island of Sardinia.[FN7] The celebration cost about $2
million.[FN8] Corporate excesses of the 1990s involved many now well known business
scandals. Sales tax violations were probably not considered by those involved in more
financially significant ethical and legal violations.
While Kozlowski was convicted of sales tax evasion involving goods, the
imposition of sales or use tax by most states is not limited to such transactions. At
present, 45 states impose a sales tax on at least some goods and/or services.[FN9] For
example, New Mexico and Hawaii impose sales tax on professional services provided by
dentists, physicians, and optometrists.[FN10] Some states impose a tax on groceries.
Sales taxation of amusement activities, newspapers, and prescription drugs varies.
Internet purchases often escape sales taxation depending on the location of the buyer.
The Streamlined Sales and Use Tax Agreement is intended to level the playing
field for in-state merchants with regard to out-of-state merchants and Internet sellers.
Streamlined Sales Tax requires taxation at the point of a transaction's destination. In this
way, a purchaser must pay the same rate of sales tax when buying an item locally as
when buying one at home via the Internet from a seller located far away. Often these
sellers are in a jurisdiction with either no, or low, sales tax.
The Streamlined Sales and Use Tax Agreement is a voluntary agreement among
some states. In 1967, in the National Bellas Hess case, the United States Supreme Court
considered whether remote vendors could be compelled to collect a use tax, which
generally involved an amount equal to the sales tax of the state where the
buyer was located.[FN11] Since there were over 2,300 different use tax/sales tax
jurisdictions in 1967, and computer programs to compute tax due at different locations
did not exist, the burden on remote businesses, to monitor developments in
2,300 taxing jurisdictions resulted in too great a burden for sellers. However, the
situation changed by 1992, when Quill came to the United States Supreme Court.[FN12]
Although over 6,000 different sales taxing jurisdictions existed in the United States by
1992[FN13], computer programs were then available to compute the amount of sales tax.
National Bellas Hess and Quill involve two basic clauses in the United States
Constitution: The Due Process Clause[FN14] and the Commerce Clause.[FN15]
National Bellas Hess utilized both a Due Process Clause and a Commerce Clause
rationale to excuse out-of-state sellers from requirements to collect other states' sales
taxes. Quill effectively removed the Due Process argument, but the Commerce
Clause argument remains. Although the United States Supreme Court might rule on a
case that would require out-of-state sellers to collect sales taxes for the various states
where they have buyers, this is not likely. The United States Supreme Court reviews
very few sales taxation cases. Congress could act, under the Commerce Clause, by
passing a federal law to require out-of-state sellers to collect sales taxes for states where
the sellers have no physical presence, however, they have not. Instead, many of the states
have adopted the Streamlined Sales and Use Tax Agreement.
States are motivated to adopt Streamlined Sales Tax because it imposes similar
sales tax collection requirements upon in-state and out-of-state businesses. Without
Streamlined Sales Tax, in-state businesses, which are required to collect sales tax, are
losing revenue to out-of-state retailers, such as some catalog operations, that do not
charge sales tax. Streamlined Sales Tax is essentially destination based. Sales tax is due
based on the location of the buyer. Although companies are not required to join the
streamlining agreement, over 1,000 out-of-state Internet and mail order sellers have
agreed to collect and remit sales tax on their sales to any customers in a state that has
joined the Streamlined Sales and Use Tax Agreement.[FN16] So, the trend is to collect
sales tax based on the buyers' locations.
The Streamlined Sales and Use Tax Agreement does not simplify every
transaction. For example, there are special rules for florists. Suppose a buyer enters a
Lawrence, Kansas florist shop and orders flowers to be wired to a person in Kansas City,
Kansas. The sales tax is collected based on the location of the florist who received the
wire order, Lawrence, Kansas. However, if the same purchaser goes to a computer store
in Lawrence, StateKansas and buys a computer to be delivered to her daughter who is in
college in Kansas City, Kansas, the sales tax that applies is the sales tax rate in Kansas
City. So, the taxing jurisdiction may vary based on the nature of the item shipped.[FN17]
Although sales tax is often overlooked, it is significant in many ways. Attorney
disciplinary actions, criminal tax prosecutions and complex multi-jurisdictional issues
may arise. Perhaps voluntary adoption of the Streamlined Sales and Use Tax Agreement
will facilitate greater uniformity of the application of sales tax.
______________________
[FNa] John P. Gray, LL.M. (tax) University of Alabama School of Law, J.D. Thomas Goode Jones School of Law, M.B.A., Samford University, M.A. in Religion, Lipscomb University, B.A., Heritage Christian University, B.S., University of North Alabama.
[FN1] Martin Cole, Year in Review: Opinions, Rules and Statistics, 63-Dec Bench & B. Minn. 10 (December 2006) .
[FN2] Mark Maremont & Jerry Markon, Former Tyco Executives Are Charged, Wall St. J., Sept. 13, 2002. at A3.
[FN3] In re Petition for Disciplinary Action against Brian J. Peterson, a Minnesota Attorney, Registration No. 85625, A05-646, Filed July 27, 2006. For a listing of attorney discipline related to this attorney see: http://www.mncourts.gov/lprb/lawyersearchdetails.aspx?mars=0085625" http://www.mncourts.gov/lprb/lawyersearchdetails.aspx?mars=0085625
[FN4] See Minnesota Bar Discipline cases: CX-00-2049 and CX-03-221 (both May 2, 2003). Reinstatement/Probation.
[FN5] Mark Maremont & Jerry Markon, Former Tyco Executives Are Charged, Wall St. J., Sept. 13, 2002. at A3.
[FN6] See, Harvard Law Review, May 2004, 117 Harv. L. Rev. 2169.
[FN7] Mark Maremont & Jerry Markon, Former Tyco Executives Are Charged, Wall St. J., Sept. 13, 2002. at A3.
[FN8] Mark Maremont & James Bandler, Now Playing: Corporate American's Funniest Home Video, Wall St. J., Oct. 29, 2003, at A1.
[FN9] The country-regionU.S. states of Alaska, Delaware, Montana, New Hampshire and Oregon do not impose a general sales tax.
[FN10] New Mexico and Hawaii impose what constitutes a sales tax on dentist and physician services. New Mexico Statutes Annotated § 7-1-3 and § 7-9-77.1. The Code of Hawaii § 237-13 calls this tax a privilege tax, but it is based on all non-excluded service business receipts. Dentist, optometrist and physician services are not excluded from the tax.
[FN11] National Bellas Hess v. Department of Revenue of Ill., 87 S.Ct. 1389, (1967).
[FN12] Quill Corp. v. North Dakota By and Through Heitkamp, 504 U.S. 298, (1992).
[FN13] See, Quill, supra, FN 6.
[FN14] United States Constitution, Amendment XIV.
[FN15] United States Constitution, Art. 1 § 8 cl. 3.
[FN16] Washington State Department of Revenue Streamlined Sales Tax Bulletin, May, 2007, p. 1.
[FN17] Kansas Department of Revenue Sales Tax Sourcing Rules, www.ksrevenue.org/sourcingrules.htm. Last accessed on September 24, 2007.