Tuesday, February 01, 2011



You may think that the UK is a past master at finding new things to tax but, if so, you don’t realise how lucky you are. I’ve just received an e-mail about the Illinois use tax. This is probably the oddest tax that I have ever come across. It has been in existence since 1955 but has apparently been in the nature of a voluntary tax up to now. Presumably because of these straitened times, the Illinois tax authorities have now decided to get tough. They have introduced an amnesty on interest and penalties from 1 July 2004 – which I assume must be as far back as they can go in collecting the tax. If a taxpayer pays the tax due for those past years, the Illinois Department of Revenue will not seek interest and penalties (unless someone who uses the amnesty is found to have under declared the tax due). Incidentally, Illinois has also raised the rate of State income tax by a massive 66% from 3% to 5% which perhaps demonstrates how desperate it is for tax revenues. For 2010 onwards the Illinois General Assembly has made it easier for individuals to pay their use tax by putting an line on the Illinois income tax return for taxpayers to show the tax due. This reads “Use tax on internet, mail order or other out-of-State purchases from UT Worksheet or UT Table in the instructions. Do not leave blank”.

Yes, that’s right. Use tax is a tax on all out-of-State purchases. It is the difference between the US State tax actually paid on the purchase in the State of purchase and the Illinois sales tax rate of 6.25% (1% on food and medicines). For example when I go to Chicago I often visit an Outlet Mall in Wisconsin where the sales tax is 5% and there is no tax on food. If I were a Chicago resident I would have to pay Illinois use tax of 1.25% on the items I purchase in Wisconsin and take back to Chicago. If I buy goods in Michigan or Iowa, both of which have a 6% sales tax, I would have to pay Illinois use tax of 0.25%. If I were to visit London I would pay Illinois use tax at 6.25% on the items I buy here and take back to Chicago as the VAT I pay here is not a US tax.

So how does the Illinois Department of Revenue know how much use tax a person owes? Well Illinois residents are supposed to keep their invoices and till receipts! I suspect most don’t. So, it appears, does the Department of Revenue as if a person does not know the amount of all of his purchases he can account for use tax on an estimated amount. This depends on income. A person with income of up to $10,000 is deemed to have spent $48 and to owe use tax of $3. A person with $100,000 of income is deemed to have spent $832 and to owe use tax of $52. Over $100,000 the estimated use tax is 0.0625% of income, i.e. the person is assumed to spend a hundredth of his income outside Illinois.

These estimated figures look very low. So what do the tax authorities do to check that the actual tax figure due is not significantly greater than the estimate? I do not know, but they have just said, that “Illinois is focusing upon collecting this tax”, so if I visit Wisconsin when I go to Chicago this year, I will be on the look out for tax police when I cross the Illinois State border!

They have also pointed out that, “The Illinois Department of Revenue can assess use tax owed by taxpayers who do not pay voluntarily. For taxpayers who do not have records to document their use tax liability, the department will estimate liability. Taxpayers have the right to refute the department’s estimates”.

Of course we already have a sort of use tax in the UK insofar as we charge VAT on goods brought into the UK for private use in excess of £390 other than on purchases from within the EU where there is no limit on the amount of purchases that can be brought in. A use tax on that exempt amount on the goodies that we bring back from our holidays outside the EU would raise a lot of money. I hope that George Osborne does not work that out.



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