Smith: Fairness is fundamental to effective tax collection

Source: VTDigger, September 17, 2017

Editor’s note: Mike Smith is a regular columnist for VTDigger. He hosts the radio program “Open Mike with Mike Smith” on WDEV 550 AM and 96.1, 96.5, 98.3 and 101.9 FM and is a political analyst for WCAX-TV and WVMT radio. He was the secretary of administration and secretary of human services under former Gov. Jim Douglas. Paying taxes is not an activity most Vermonters enjoy. In fact, department officials responsible for collecting taxes will readily admit they wouldn’t win a popularity contest.
Still, it’s fair to say that state officials didn’t expect a backlash for enforcement of a tax on online and out-of-state purchases that has been on the books for some time.

Although most can agree the reason for enforcing this tax provision is laudable, the way the Department of Taxes is going about it defies logic. One could argue the department’s approach is unfair and arbitrary. It is ultimately a public relations nightmare for a department that most Vermonters already love to hate.

Here’s the deal: Vermont law requires taxpayers to pay a use tax on items that are purchased online or out-of-state when no Vermont sales tax is collected and the item is used in this state. That means you are supposed to voluntarily remit taxes to the Vermont Department of Taxes for Internet purchases, or taxable items purchased in neighboring New Hampshire, for example, where no sales tax exists. Vermonters are obliged to report these tax-free purchases on their income tax form and pay the 6 percent Vermont sales tax.

Between 80 percent and 85 percent of Vermonters don’t pay the tax, according to the department.

In an effort to increase compliance and fill a state budget hole, the tax department sent “informational letters” to 20,000 Vermonters.

That number represents only a small percentage of the estimated 200,000 taxpayers that may owe the tax, according to state tax officials. But rather than viewing these letters as “informational,” many Vermonters saw the letters as threatening and designed to shake down targeted taxpayers in order to capture more of their money to balance the state budget.

No doubt the letters will catch the attention of the 20,000 recipients. The letter warns the tax must be paid, that these taxpayers have a three-year history of not declaring any use tax, and that penalties and interest will be assessed if they don’t pay after a pre-determined amnesty period.

But if the tax department is responsible for administering our tax laws fairly then why not send letters to the 180,000 other taxpayers who haven’t paid the tax?

According to Kaj Samsom, the commissioner of the Vermont Department of Taxes, the 20,000 taxpayers were selected on three criteria: demographics, geography and a history of not paying the tax. But when pressed, he said that income was a factor, too, in addition to age and the ability to pay. From these comments it’s safe to assume the tax warning bull’s-eye was painted on those Vermonters that were most able, and likely, to pay up. And from a purely technical perspective it’s good reasoning. Why send out letters to 200,000 Vermonters and cause an even greater uproar when you can get the needed $1.8 million to fill the budget gap by singling out only 20,000 taxpayers who might be more willing to pay?

But what might appear to be technically efficient, and in some respects more politically viable, sends a troubling message to many Vermonters. Paying the use tax is the obligation of every taxpayer. While the tax is applied universally, enforcement is highly selective.

Tax policy enforced selectively and not administered fairly undermines the credibility of the tax department.

The use tax is collected so that there is some equity in tax policy between in-state businesses who must collect the tax and those out of state firms that don’t have to collect the Vermont sales tax. Unless Vermont is going to eliminate the sales tax—which is unlikely given the significant revenue it generates for the state — then it’s fair to find ways to level the playing field in our tax system for those Vermont businesses.

The tax policy itself is sound. But even if the public agrees with the fairness of the tax policy, issues of selective enforcement will cause Vermonters to lose confidence in the tax department’s ability to apply that same tax policy in a fair and impartial manner. The end result: compliance will likely wane. And eventually, it will take more resources, not less, to enforce tax compliance.

When confronted with the fairness issue, Samsom said his department may send out more letters. But is sending out more letters that will certainly infuriate even more Vermonters the right approach?

Surely, the $1.8 million in this fiscal year that state officials had hoped to capture as a result of these letters can be found in savings elsewhere in a multi-billon dollar state budget. From my experience this shouldn’t be difficult.

By Mike Smith

For the full article as published on VT Digger please click here.