Tax Reform May Provide Boon to Mail-Order Firms

When the shopping urge hits Brian Graifman of New York, he doesn’t head for a store or thumb through the Yellow Pages. Instead, he consults a stack of mail-order catalogues, whips out his credit card, dials some toll-free numbers and has merchandise delivered to his door tax-free.

In this manner, Graifman, a second year student at New York Law School, has acquired a videocassette recorder, a cordless telephone, stereo equipment and even a facsimile municipal parking meter.

“Mail-order is more convenient,” said Graifman, who says he receives about a dozen mail-order catalogues a year. “You eliminate the middle man. If you order out of state, you don’t pay (sales) taxes . . . you get the stuff at rock bottom prices.”

The tax-free appeal of mail-order merchandise may increase with the recent enactment of the historic tax overhaul measure. The new law would end the deductibility of state sales tax on federal income tax returns. Some experts expect more consumers, in an effort to avoid paying a levy they can no longer deduct, to be lured to the booming $46-billion-a-year mail-order business.

“There’s going to be more incentive to buy out-of-state and avoid paying sales taxes,” said Leon Rothenberg, executive director of the Federation of Tax Administrators and State Revenue Agents in Washington, which represents state tax officials. “The impact of tax reform is just going to add to the problem.”

States are already losing at least $1 billion a year due to the failure of many mail-order customers to pay sales tax, according to the federal Advisory Commission on Intergovernmental Relations, a body established by Congress. Alarmed at the loss, many states are becoming more aggressive in collecting the levy.

The problem, officials say, is especially acute in California, which is one of the leading mail-order markets and, as a result, loses about $150 million annually in sales tax revenue.

“In the last five years, the amount of lost revenue has tripled,” said Ernie Dronenburg, chairman of the California State Board of Equalization. “People have a statutory responsibility to pay the tax. But millions of people are violating the law.”

Under a 1967 decision, the Supreme Court ruled that a state cannot require a mail-order company to collect a sales tax unless the company has an office, warehouse or some other physical presence in that state.

Consumers are supposed to pay the tax voluntarily in the state where they live. Some states, such as New York and California, print a special “use tax” form for such reporting. But enforcement and public awareness of the requirement are all but non-existent.

“In my 24 years of practice I’ve never seen anybody volunteering to pay taxes on goods ordered through the mail,” said Irwin Pomerantz, a private accountant in Los Angeles. Noting that the state makes little effort to inform individual taxpayers about what to do, Pomerantz said: “What does the state expect people to do? Write a letter saying ‘Dear Sir, here’s the money I owe you?’ ”

Problem Has Grown

Even without the seeming incentive brought about by tax reform, the problem of collecting sales tax has grown dramatically in recent months. More mail-order firms accept credit cards and use toll-free numbers in an effort to make interstate shopping easier. And new home shopping services reach millions of out-of-state mail-order customers through appeals over cable television.

At the largest of the TV services, Home Shopping Network of Clearwater, Fla., sales totaled $160.2 million in the year ended Aug. 31. And Paul Kagan, a Carmel, Calif.-based cable-TV consultant, estimates that by the end of 1987 the home-shopping industry will have sales of at least $800 million a year, with more than a dozen services airing programs.

The rapid growth of the mail-order industry is especially evident to Harold L. Dittmer, a retired Los Angeles resident who says he received about 1,300 catalogues last year, about 400 more than he received in 1983, when he started keeping track.

“I get catalogues selling government surplus equipment; I’ve gotten Saks Fifth Avenue, Bloomingdale’s,” Dittmer says.

Dittmer says he likes receiving catalogues and, as a result, has ordered roughly $1,600 worth of merchandise through the mail in the past 12 months alone. He says he has ordered scores of items, ranging from seed and garden fertilizer to outdoor apparel and insect repellent.

Quite an Advantage

“The big advantage is the lack of sales tax,” Dittmer said. “I even look in catalogues to see if a company is located in California or outside the state so I can avoid paying sales tax. And when you figure you don’t have to drive around town comparing prices, burning gas . . . that’s quite an advantage,” Dittmer said.

State officials say that mail-order firms have an unfair price advantage over retail outlets that pay sales taxes. They also say the companies entice in-state retailers to move out of state, thus creating a loss of tax revenue and jobs.

“The problem is simply going to get worse and worse if the loophole is not closed,” said state Sen. Barry Keene (D-Benicia), who sponsored a measure last year that tightened regulation over interstate mail-order firms. The measure requires mail-order merchants to collect and remit California sales tax if they utilize a California advertising agency or local media to place their advertisements.

The mail-order industry argues that it is burdensome, unfair and unconstitutional to charge mail-order companies a tax to support government services in a state where they have no presence and, therefore, receive no benefits.

“It is a regressive, meddlesome tax,” said Robert J. Levering, director of government affairs for the Direct Marketing Assn., which represents many mail-order businesses. “The average mail-order sale is, after all, only for about $40.”

Mailing costs on out-of-state merchandise can, of course, outstrip the sales tax savings on large items. And the nation’s two largest mail-order companies, Sears, Roebuck and J. C. Penney, collect sales taxes on most purchases because they have stores across the United States.

Substantial Savings

However, the savings on small and expensive items such as clothes, computers, telephones, art work, stereo and video equipment can be substantial when purchased from an out-of-state mail-order company, especially when the price tag already includes a discount.

One New York discount mail-order firm said shipping a $500 compact disc player to Los Angeles can cost about half the $32.50 a consumer would pay in California sales taxes. Similarly, while taxes would run $195 on a $3,000 computer system with printer and monitor purchased in Los Angeles, mailing the equipment from New York would cost less than $80.

Still, it is mostly the non-discount firms such as the Freeport, Me., outdoor sporting goods firm L. L. Bean Inc. and the giant Oak Brook, Ill.-based Spiegel Inc. that dominate the mail-order industry. And they say the sales tax has little or no effect on their business.

“We at Spiegel can find no evidence that sales tax has a plus or minus effect on our sales,” said Paul Stinneford, Spiegel vice president and general counsel. “The logic (of avoiding taxes) may be on their (critics) side but the evidence is just not there.” Graifman, who says he has made mail-order purchases both in California, where he lived until early this year, and from his current home in New York, says he buys through the mail mostly for the convenience and low prices. However, he says the recent tax law changes won’t affect his mail-order buying habits because: “I’m not in a tax bracket where it (deductibility) makes much of a difference.”

Crucial Marketing Tool

In other cases, avoiding sales tax has proved to be a crucial marketing tool for some merchants.

Last January, in the largest sum ever to be paid as a result of a New York criminal tax prosecution, Cartier Inc., a prominent Fifth Avenue jewelry store, pleaded guilty to a felony for failing to collect $1.22 million in sales tax from its customers.

New York authorities charged that Cartier would allow its customers who provided out-of-state addresses to take jewelry with them upon leaving the store. Following their departure, Cartier would send an empty box or a worthless item to the customer’s out-of-state address in order to create a false business record indicating that the transaction was an out-of-state, non-taxable sale.

“Jewelers, furriers, art galleries . . . we are cracking down on every form of evasion involving every tax,” fumed New York State Tax Commissioner Roderick G. W. Chu, following the plea bargain. New York officials, who have indicted five other New York retailers in the last 18 months, vowed to also seek stiff penalties against buyers who do not pay the sales taxes on their purchases.

Whatever the motivation for ordering by mail, critics say the states have done little to publicize consumers’ obligation to pay sales tax on out-of-state purchases and, therefore, have only themselves to blame for the loss of revenue.

Pushing for Reform

In an effort to ease collection, state tax commissioners are supporting a new federal reform measure aimed at negating the 1967 Supreme Court decision.

The bill, introduced in June by Rep. Jack Brooks (D-Tex.), calls for any company engaged in interstate sales to collect and remit sales taxes if it systematically solicits business and has more than $12.5 million in annual sales nationally--or $500,000 in any one state. There would be a uniform tax rate per state; the state would have to sort out each local government’s share.

Meanwhile, some other states are more aggressively pursuing collection on their own.

New Jersey and Illinois, among other states, have negotiated reciprocal agreements requiring state tax auditors to share mail-order customer lists to help track down mail-order customers who have not paid sales tax.

Texas Comptroller Bob Bullock appeals to state pride in a newspaper ad campaign that urges Texans to write Congress in support of the sales tax reform measure. “When was the last time a New Yorker sent money to pay for your local schools?” asks the comptroller’s ad.

California is in the process of negotiating reciprocal agreements with a dozen states west of the Mississippi similar to the pacts in New York, New Jersey and Illinois, officials said.

“The problem is that the nickel and dime purchases aren’t worth billing” to each individual, said Dronenburg. “At this point we are working on trying to get the retailer to cooperate.”

Small Firms Object

Some small mail-order firms, however, say they have become fed up with the administrative burden of keeping track of a bewildering array of sales-tax rates.

Jack Bleddoe, owner of Audio Unlimited, got so fed up he moved his mail-order firm to La Grange, Ore., from San Jose 16 months ago to avoid the blizzard of paper work.

“When I was in California, I tried to do as much business out of state (as possible) so I wouldn’t have to (mess) around with the state sales tax,” said Bleddoe, who added that his company had sales of about $750,000 in 1985. “There was like half a dozen different sales tax rates (in California), depending on where the person lived. Figuring out the extra paper work was a nightmare. I’m far enough away now (that) they can’t bother me.”