States Share Information on Use Tax Evaders

There was this interesting article in Forbes magazine¹ about the number of states that include a line on their individual state income tax form for people to voluntarily enter how much use tax they owe on their own purchases. The article discussed the various methods used to encourage voluntary compliance. In the end, though, even the most effective approach (which was to provide lookup tables for taxpayers) resulted in only 3% of taxpayers reporting any use tax. That's not very good. Now to quote from the article:

"So meanwhile, the states have begun to enforce their use-tax laws against consumers, particularly high-income purchasers of big-ticket items.

"Virginia, for example, routinely sends use-tax bills to residents who buy furniture in North Carolina and have it shipped home, Smith notes. How does Virginia know? North Carolina audits the furniture sellers and gets a list of tax-free sales to Virginia residents, which it shares with Virginia tax authorities. Such interstate tax sharing agreements are now common. "

Clients will frequently ask us how the states could possibly find them². This is a good example of how they do it.