CNN Money: Fraudsters in the Making?
Sometimes I manage to stumble across fairly good personal finance articles on the Yahoo! Finance homepage, a typical stop on my early morning Internet circuit.
Today’s story is a feature from CNN Money titled Millionaires in the Making. They highlight a young couple, John and Gina Rodrigues, who are in their late 20′s earning a healthy combined salary, saving a lot, and practicing frugal spending habits.
Although, one of Mr. Rodrigues’ past attempts at being frugal actually borders on fraud. Here’s the clip:
About a year after they began their careers – John at Microsoft, Gina at Wells Fargo – John proposed. But first he drove to Oregon (12 hours each way) to buy Gina’s engagement ring, thereby avoiding $1,500 in California sales tax.
Warning, warning! Just because John was able to drive north to Oregon and buy an engagement ring free of sales tax, he isn’t free from paying California’s use tax. You can bet that California’s Franchise Tax Board will have a thing or two to say to Mr. Rodrigues after learning about his rather significant out-of-state purchase. To owe roughly $1,500 in sales tax, I estimate the engagement ring cost at around $18,000 by accounting for state and local sales tax of 8.25%.
I’m not an attorney, but this scheme is a fairly clear case of tax evasion, which is illegal. It’s a lot different from tax avoidance, the legal practice of following tax law to minimize taxes owed.
So who has to pay the use tax and how is it calculated? The FTB has a succinct description of the use tax on its website here: http://www.ftb.ca.gov/current/usetax.shtml.
The state Board of Equalization also has a good description about calculating and paying the tax here: http://www.boe.ca.gov/sutax/usetaxreturn.htm.
Sorry John, but your clever attempt at saving $1,500 in taxes might turn out to become a big headache with the Franchise Tax Board resulting in steep penalties and interest.
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September 3rd, 2008 at 11:01 am
I hate to break the news to you sir, but driving to another state to buy any kind of merchandise to avoid sales tax is totally not illegal, and if so, please call the authorities to arrest the entire eastern portion of the state of Maryland for driving to Delaware.
September 3rd, 2008 at 3:12 pm
Hi Mike,
Thanks for taking the time to comment on my post.
Coincidentally, I was a resident of Maryland from 2005 to 2006. Here’s what the Comptroller of Maryland has to say about use tax:
Every time you purchase taxable tangible goods, whether in person, over the phone, or on the Internet, the purchase is subject to Maryland’s 6 percent sales and use tax if you use the merchandise in Maryland. For more information, see Use Tax.
See http://individuals.marylandtaxes.com/usetax/default.asp for all the details.
I stand by what I said in my post: it is the responsibility of each individual to pay the appropriate sales and use tax due to the state of residence. Even if millions of folks buy goods in Delaware and decide not to pay their home state’s use tax, the practice doesn’t make it legal.
November 22nd, 2009 at 9:48 pm
I’ve been active in taxes for lengthier then I care to admit, both on the private side (all my employed lifetime!!) and from a legal viewpoint since passing the bar and following up on tax law. I’ve rendered a lot of advice and rectified a lot of wrongs, and I must say that what you’ve posted makes impeccable sense. Please persist in the good work – the more individuals know the better they’ll be equipped to cope with the tax man, and that’s what it’s all about.