State Tax Fraud

When one hears about tax fraud, it is usually about federal income tax fraud not state tax fraud.

There has been a shift over the last 20 years to imposing governmental burdens on the States rather than the federal government. This is often sold under the rubric of "states rights" or "local control," yet States are often ill equipped to deal with the burdens shifted to them. They lack the high organization, benefits of large scale organization and coordinated resources, regulatory power, and overall funding the feds may bring to bear. And, of course, the fight to lower taxes (or not raise taxes, i.e. not raise revenue) forces federal politicians to shy away from funding programs although they really require a national mandate to be effective. One wonders if those who would benefit from having poor governmental regulation and enforcement are aware of this ... umm ... I digress.

One of the areas where State governments are less equipped is collection of taxes. This is because State revenue offices are often underfunded due to local opposition, and they lack the full multi-jurisdictional coordination of resources necessary to address multi-jurisdictional tax issues.

There are three significant areas of State tax fraud or under-collection:

1. Multi-state corporate income taxation. This is because multi-state corporations apportion their income through a variety of formulas (each state has their own) and can manipulate these formulas to make their state incomes appear small to nonexistent. A few States do not have corporate income taxes, by the way. It is no surprise that many corporations claim such States as their domicile or primary place of business even though actually they conduct little business there. My guess, is that hundreds of millions to many billions of legitimately tax revenue goes untaxed thoughout the United States due to such systems.
2. Personal income taxation through claiming a false legal residence. Not all States have personal income taxation. There are many wealthy individuals who claim they reside in such States because they have purchased property there. But residing for tax purposes means actual living there (usually 183 days a year to make it the dominant residence). Not that many people overall do this. The problem is that those who do are usually ultra wealthy; they're the ones, for instance, who can afford to buy such out-of-state residences primarily as a tax dodge and get fancy tax advice. I suspect (a pull-out-of-my-butt guess) this reduces tax revenues nationwide by more than $100 million.
3. Sales tax fraud. Sales taxes are paid by a purchaser to a seller, who then is should remit the tax collected to the State where the sale occurred. Sales taxes are different than income taxes (which are owed by the seller as it gets the income); again sales tax is paid by the purchaser to the seller and the seller merely remits it to the State. And that's where the fraud happens. State tax offices are limited by the accounting the seller makes of its sales (which also limits a seller's income tax, BTW: its a 2 for 1 fraud). This is why sellers are required to furnish receipts, so their sales can be audited. Is it common for sellers to not make a receipt and not remit the sales tax they collected? Yes. This fraud is actually theft from the purchaser, though the State cannot enforce it against a purchaser for practical reasons (it does have the right to enforce it against the seller if it can catch them). The bottom line is that the tax was paid but never remitted and proper state revenues are down. How much is lost through this? A lot, but I cannot guess. Many, many millions if not billions. A number of States have no sales taxes, avoiding this type of fraud. there is, of course, also a national movement to go to all sales taxes (which, not incidentally, is also regressive).

The remedies for these are either to put more money into our revenue departments for audits and enforcement or change our tax laws.