Sales tax evasion is the illegal evasion of the payment, reporting or assessment of state or local sales tax. Unlike most taxes, sales tax is set by each state individually. Local governments may also set a sales tax.
In New York City for example, there is an 8.875 percent sales tax. Four percent is levied by the state and all counties have a default three percent tax rate. In New York City, the sales tax is an additional 1.875 percent, with 0.375 percent going to the MTA. Because the sales tax is a state and local tax, the prosecution on charged of sales tax evasion is usually handled by the state. Although sales tax evasion is a fairly simple crime to commit, it is still taken seriously by state governments.
Types of Sales Tax Evasion
Usually, you’ll find sales tax evasion activities coming from a retailer or seller. They accomplish this by skimming proceeds from sales or underreporting the sales. Sellers might also make sales off out-of-state transactions so they can avoid reporting the proceeds from these sales.
Sometimes, the purchaser can also commit sales tax evasion. The most common examples of this is when you purchase items out-of-state or through the Internet.
Currently, most states require taxpayers to report any payments for goods purchased out of state. Unlike in most cases of sales tax evasion, the burden is on the buyer to report what they owe.
Buyers are also required to report sales tax on items purchased abroad. These purchases are much harder to falsify since records from the U.S. customs declarations are shared with state tax departments.
Sales tax evasion has become a growing issue with the advent of internet shopping. As of now, online retailers are not required to charge sales tax to customers. Instead, the onus is on the buyer to report their purchases to their individual state. As a result, much of these purchases go unreported. States lose an estimated $20 billion to online sales tax evasion.
While sales tax evasion may seem easy to get away with, the risks are still great. Both buyers and sellers risk state charges related to tax fraud if they commit sales tax evasion. State tax evasion convictions often include heavy fines and even imprisonment.