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Odd Sales Tax Exemptions: Traveler Purchases

author photo of Annette Nellen

By nature, all sales tax exemptions are odd. After all, once the jurisdiction decides to impose sales tax on items we consume, why exempt anything? Certainly, it would be easier to not have exemptions. In the simplest system, anytime a consumer buys something, sales tax would be charged. Businesses would not be charged sales tax on their purchases in order to avoid pyramiding of the tax. This broad base would also allow for a lower rate. Relief for low-income individuals can be provided (and better targeted) through the income tax.

Despite the benefits of not having exemptions, state sales tax laws are full of them. Many have well-intended purposes, such as exempting necessities of life (food and utilities, for example). These lead to oddities as well, namely in the form of inequities and complexity. For example, is soda a food? Also, higher income individuals spend more on food and utilities than do lower income individuals.

There are many exemptions that are just odd in that it is not obvious what policy reason supports them.  The one I'd like to highlight here is a California one at R&T Section 6405. It reads:

"Notwithstanding Section 6246, the storage, use, or other consumption in this state of the first eight hundred dollars ($800) of tangible personal property purchased in a foreign country by an individual from a retailer and personally hand-carried into this state from the foreign country within any 30-day period is exempt from the use tax. This section shall not apply to property sent or shipped to this state." [Also see Regulation 1620.]

This provision started out in 1990 as a $400 exemption. It was increased in 2008 because the federal government changed its duty exemption from $400 to $800.

This provision can potentially exempt up to $9,600 of goods annually!  Yet, if a Californian purchases $20 of clothes from a non-present vendor, California wants the $1.80 of use tax. This is really odd and can build disrespect for the tax system.

Why was the exemption enacted years ago?  It was intended as an administrative convenience to tie to a federal duty exemption. I think it was also an era of low attention on the use tax and the belief that it was just impolite for the BOE to use the information on the federal duty declaration to send a use tax bill.  But, times have changed and California has ramped up its use tax collection efforts. I think it is time for this odd and potentially large sales tax exemption to be repealed. (Note, this exemption is not large in terms of aggregate dollars. It is not measured in the CA Department of Finance's annual tax expenditure report.)

There are policy reasons to support its repeal:

Equity and Fairness -  The exemption results in similarly situated people being taxed differently. For example, someone purchasing $100 of goods from an Internet retailer and not charged sales tax must self-assess and pay use tax. However, someone who buys $100 of goods in Europe and brings them back on the airplane with them owes no use tax.

The consumer purchasing goods outside of the country, such as in the European Union, might be charged VAT on the purchase. Typically though, the consumer can seek a refund of the VAT. Thus, there is no justification for the sales tax exemption due to tax already being paid to a foreign country on the item.

Simplicity - There are administrative structures already in place via the U.S. Customs Office to make tax compliance simple. The declaration includes the dollar amount of the goods. As noted on the BOE website, BOE staff have authority under Rev. & Tax. §7054 to audit the duty declarations. Also, with the use tax "look-up" table, it is easier to comply with use tax obligations. A traveler using the look-up table would only need to keep track of receipts for items that cost $1,000 or more.

Also, there are numerous special rules on application of the federal duty.  It depends on how long your trip was, the purpose of your purchase (business or personal), and the particular item. For example, there may be duty on wine even if below the $800 (U.S. Customs booklet, page 21).  Also, fine art is exempt regardless of the dollar amount (U.S. Customs booklet, page 15). If the purpose of the §6405 exemption was simplicity, it would match exactly the federal rule; it does not (and should not).

Economy in Collection - Repeal of the §6405 exemption should reduce administrative burden for the Board of Equalization in that they would not have to monitor the dollar value or make-up of goods hand carried into California by residents during any 30-day period to ensure that use tax on the amount in excess of $800 or beyond the federal exemption (such as fine art) is paid.

Once an exemption is in place, it is difficult to remove because people become accustomed to it. Also, repeal is a tax increase, which in California, requires a 2/3 vote of the legislature. But, with simplified use tax compliance methods today, it will not be as burdensome for travelers as it might have been in prior years. Use of the look-up table simplifies recordkeeping in computing one's use tax.

What do you think of this exemption?  Does your state have a similar exemption?

Other recent “Sales Tax Policy - Tales & Trends” posts by Annette Nellen, CPA, ESQ:

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