Friday, November 13, 2009


In my reprint of a September 2001 post on the benefits of a national sales tax I mentioned that – “States like New Jersey have had much more success raising revenue from sales tax audits than from audits of income tax returns.”

A while back then Director of the NJ Division of Taxation Robert Thompson – who left office after being charged with “making discretionary decisions while under undisclosed conflicts of interest caused by their receipt of meals, entertainment, golf outings and other gifts” from OSI, the outside collection agency hired by the NJDOT to collect outstanding NJ taxes – told the NJ chapter of the National Association of Tax Professionals about NJ’s special sales tax audit initiative.

The program would target NJ businesses where pretty much 100% of gross receipts are subject to sales tax – like pizza parlors, liquor stores and taverns. NJDOT would get purchase information from vendors who supplied the business selected for audit with “cost of goods sold” items (i.e. wholesale pizza dough and liquor purchases), get a price list or menu from the business being audited, verify inventory numbers, and, using industry standards for spoilage and theft, “back into” what the business should have reported in gross sales subject to sales tax. If this was more than what was actually reported on quarterly sales tax reports the business would receive a bill.

It was not the goal of the program to put the pizza parlors, liquor stores or taverns being audited out of business. The sole purpose was to collect more tax. No criminal or other action was brought against the business by the State and the bill was not overloaded with penalties.

This program was very successful.

Bob Thompson told of the audit of one pizza parlor, which happened to be located around the corner from the NJDOT headquarters in Trenton. The Division asked the parlor to submit a menu, which was reviewed by the auditors. One auditor then visited the parlor and asked the owner, “How come if the menu you sent us says you charge $2.00 for a slice of pizza, when I come in here for lunch you charge me $2.75?” Apparently the owner was not too bright!

My favorite story concerns the state's attempt to collect “use tax” on out of state purchases.

A sales tax is a “consumption” tax assessed and paid at the “point of purchase”. The State of NJ current charges a 7% sales tax on the purchase of qualifying items made within the state. You go to a local McDonalds in Jersey City and buy a Big Mac and you pay NJ state sales tax on the purchase. The sale takes place in NJ and you “take possession” of the Big Mac in NJ – so it is subject to NJ sales tax.

If a New Jersey resident purchases a taxable item in New York and will walk out of the store with that item in hand he/she will pay New York state sales tax on the item, even though the item will ultimately be used in New Jersey, and will not owe any tax to NJ.

But if a NJ resident purchases an item from a New York vendor and has the item shipped to a New Jersey address he/she does not pay New York state sales tax at the point of purchase. That person then must pay a use tax on the purchase to the State of New Jersey.

NJ use tax is paid by any individual who “stores, uses, or consumes” within the borders of the state of New Jersey tangible personal property subject to NJ sales tax that was purchased from an out-of-state seller and no local sales tax was paid at the “point of purchase” to the out-of-state seller. Got that?

So if you order a bracelet from a New York jeweler and have it shipped to your New Jersey address you would not pay sales tax to New York, but you would be liable for New Jersey use tax on the purchase.

Individuals pay any NJ use tax liability as part of the filing of the NJ-1040 state income tax return. Most state tax returns will have a line where the taxpayer can enter an amount for use tax due. Many of these states, NJ included, require that if a resident is not declaring a use tax liability he/she must enter “0” on the appropriate line – so that the taxpayer is “going on record” that he/she does not owe any use tax.

And that is what the story is about.

The NJ Division of Taxation got a hold of the records of a jewelry store located in New York (possibly as a result of a NYS audit of the store – I don’t remember the actual details) and made a list of all purchases where the items were shipped to a New Jersey address and no NY state sales tax was paid. The Division then sent a bill for the appropriate amount of use tax to the registered NJ residences of all those on the list.

One of these bills arrived at the home of a married doctor and was opened by the wife. After she reviewed the bill she immediately called the NJ Division of Taxation.

“I have just received a bill for use tax from the Division of Taxation and I think you have made an error,” she said.

“What is the error,” the DOT employee asked.

“My husband only gave me one diamond bracelet!”

So the moral of the story – if you are going to give your wife and your mistress the same expensive gift don’t buy both at the same time, and be sure to pay state sales tax on the gift for your mistress!


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