Travelers Irked by Surprise Tax on Foreign Buys

When Rita Carton visited Hong Kong, Singapore and Thailand last summer she thought she was getting a bargain when she purchased handsome custom-made clothing, delicate silks and a watch.

But then she opened her mailbox last week to find the state of California had the last word--a bill for $110.16 in taxes.

“I was livid,” said Carton, a buyer for a women’s specialty store in Los Angeles.

It wasn’t the amount of the tax that made her so angry, she said, but the fact that when she left American soil last May she had no inkling that she would be expected to pay a 6.5% tax on any goods she purchased and brought home with her. Had she known about the tax, Carton said, she might have kept her spending to a minimum.

“I’ve gone out of the country two or three times a year for the past five years and never had to pay this tax before,” she fumed. “Everybody knows they have to pay (federal) duty when they bring more than a certain amount back, but this state tax was totally out of the blue.”

Carton is not alone. The State Board of Equalization has billed 4,000 California residents for “use taxes” owed on purchases made abroad last year.

By the end of 1990, board officials estimate that as many as 58,000 California residents will have received the unwelcome notice to pay the state use tax, which generally applies to any goods purchased out of state for use in California.

They estimate the average foreign traveler will pay a tax of $160, which will add a total of about $9.4 million in revenue to the state treasury each year.

Carton and others included in the first wave of billings called the agency last week to protest.

“There was absolutely no notice of this. It was a total surprise. No one had ever heard of it,” said John Myers, the president of a small mining company in King City who got a bill for $83.44 after a European trip.

Most states have a use tax, but California and North Dakota are the only ones to attempt to apply it to all residents traveling overseas. Although residents are supposed to pay a use tax on all goods purchased in other states as well, the board has not found a way to enforce such a levy across the board.

However, officials said the new enforcement effort in California and North Dakota is being watched closely by other states that might copy it if it is successful.

The California tax bills will be sent to any state resident who traveled abroad in 1989 and made a declaration with the U.S. Customs Service of goods purchased in foreign countries. Taxpayers are given a four- to eight-week deadline to pay the bill. If they fail to make the payment on time, they become subject to penalties and interest charges.

Charles Cordell, the state board’s assistant deputy director for business taxes, said the tax has been on the books since 1935, but until recent months it was rarely possible to enforce it on overseas purchases.

As it turns out, he said, California taxpayers have the Customs Service to thank for this new opportunity to pay more taxes.

Cordell said state officials decided to begin enforcing the tax when they learned that the customs agency had automated its files to such an extent that it would be a relatively simple procedure to pull out documents filed by California residents and turn them over to the state board for perusal.

“These declarations used to be kept in millions of files. We would have had to send our whole staff out to paw through them if we wanted to enforce this tax,” he said. “But as things were automated the information became easily available. Then all we had to do was work out an arrangement with customs.”

Once an agreement was reached with customs, the agency decided it would begin to enforce the tax on all purchases made in 1989.

But officials acknowledge that when they made that decision they failed to consider that most California residents who stepped onto a ship or airplane destined for foreign lands would have no knowledge of the tax.

Delena Bratton, tax service specialist for the board, said in December the agency distributed press releases and included notices about the new enforcement of the tax in bulletins it sends to 900,000 businesses, but by then most taxpayers had already taken their trips.

“Typically, when there is a new tax there is a lot of discussion about it before it goes into effect. We lost the opportunity for information to get out that way on this tax because it was a tax started in 1935. However, all of that is not to say we shouldn’t have done a better job of getting the word out,” she said.

The board is now trying to make up for its oversight, she said, by notifying travel agents and accountants of the tax and posting notices at ports of entry.

Conway Collis, the new chairman of the Board of Equalization, said he has received so many complaints about the tax that he may propose that the board delay the enforcement until “proper notification can be made.”

“It’s outrageous that we didn’t let anyone know about this before we enforced it,” he said. “The Board of Equalization is not out to get taxpayers as we have shown by recent changes like the addition of a taxpayers’ rights advocate to our staff. (But) we obviously need to make sure that there is a standard procedure for notifying taxpayers when a tax is being enforced. “

However, for Carton and Myers, notification is only part of the problem. To add insult to injury, both said they were overcharged on their tax bills.

They said they should have been taxed at a rate that was in effect last summer when they took their trips but instead they were taxed at a rate that was in effect in December, when taxpayers were being charged an extra quarter of a percent to help pay for earthquake relief.

Bratton acknowledged that the additional charge was a “mistake” and that a similar error had been made on nearly all the tax bills that were distributed. She said the agency would refund any amount over $10 that was due a taxpayer.

Myers, who traveled to Europe and purchased leather goods, jewelry and gifts for family and friends, said the tax enforcement also appeared to be “discriminatory” because travelers who purchased less than $400 worth of goods do not have to make a customs declaration. The federal government only charges a 10% duty tax when the total amount of a travelers’ purchases exceeds $400.

“It (the state tax) should be paid by everyone not just those who exceed the limit and file a declaration,” Myers said.

Cordell acknowledged that there is no way the state can bill people who aren’t required to declare their purchases with customs.

“Technically they still owe us, and we would appreciate it if they would contact us voluntarily and (pay the tax). The state needs the money,” he said.

The California use tax was originally passed to protect state businesses who were hurt by residents purchasing high-priced items out of state to avoid sales taxes.

Cordell said the Board of Equalization already taxes automobiles, boats and airplanes purchased out of state. But until the agreement with the Customs Service, it was not cost-effective to collect the tax on most consumer goods purchased overseas.

On her next trip, Carton, for one, plans to test how effective the board’s new program really is. She intends to re-enter the United States in Washington state--not California.