What does this all mean? We take a closer look at the arguments for and against uncollected online sales taxes below.

The Argument in Favor: Lost Government Revenue

The supporters of making online retailers collect sales tax (largely politicians) make some version of the following argument. Fundamentally, they say, an online bookstore is no different than a local sellers that already collect sales tax every single day. Supporters point to the staggering amount of tax these companies generate each year, look at the even higher volume of orders from websites, and conclude that states are letting millions or even billions of dollars in revenue slip through their fingers.

This argument is exemplified by California Congresswoman Jackie Speier, who told CBS News:

“When you’re losing that sales tax revenue, that means it’s affecting your roads, it’s affecting the resources for local government, it’s affecting the resources for education.”

In short, the argument in favor amounts to making online retailers pay their fair share, leveling the playing field with competitors, and providing more revenue to state and local governments.

The Argument Against: Depressed Online Sales

The critics of this law make a starkly different argument. States, they say, have no constitutional right to levy sales taxes on out-of-state merchants. Only states in which retailers have a physical presence can do that. The other argument is that taxing an activity (such as online book-buying) causes people to engage in that activity less. Therefore, when someone claims that a tax will produce a certain amount of revenue, those calculations are wrong—they are assuming pre-tax sales levels will continue after the tax is in place, when that almost never happens.

There is some evidence for this theory. In the last two years, online retailers have terminated profitable relationships with successful resellers in states ranging from Illinois to Texas to California, all because the sales tax collection requirement was deemed too onerous and difficult to be worth complying with from a dollars-and-cents standpoint. Clearly, this is an unintended byproduct of the requirement, but deserves consideration nonetheless.

Who’s Right?

The answer is: it depends. The consequences in various states have reminded us that the intentions of a law often vary from the actual results. On the other hand, states do stand to collect at least some revenue from making web retailers charge sales tax. The full economic impact of these laws will become evident in the years a

The law offers a tax break similar to that already available to taxpayers on their federal taxes, but with different limitations.  Most affected taxpayers can exclude forgiven debt of up to $500,000 from their 2009 California taxable income.

Lenders “forgive” or cancel mortgage debt when they cannot recover what they are owed. The amount forgiven is generally the difference between what is owed on the mortgage and the home’s value on the open market.  Debt forgiveness typically occurs when people lose their homes in foreclosure, abandon them, give them back to their lenders or have their debt modified by the lenders.

Here is a good example from the Examiner:

“Say you borrow $500,000 and buy a house with it.  You stop making your payments, and the house that was put up as collateral is seized and sold (foreclosed).  After the auction, the bank clears only $300,000.  The $200,000 shortfall is money you received and spent, so according to our government’s income taxers you “made” $200,000.”

California had offered debt forgiveness tax relief along with the federal government for 2007 and 2008, but now has extended and enhanced it for tax years 2009 through 2012.  Prior to 2007, forgiven debt was usually counted as taxable income to the mortgage borrower.

For more information about the April 12 law, see Mortgage Forgiveness Debt Relief Extended on the California Franchise Tax Board website.

TurboTax will be updated to include this tax law change on April 20th.  Taxpayers that need to file before that can follow the instructions in this FAQ.

When taxpayers don’t take advantage of EITC, everyone suffers. And I mean everyone. When these dollars don’t reach the pockets of hardworking families, the money fails to make it into the revenue stream of our communities, our states and our country. That stifles small business sales and job creation and potentially limits individual economic security and opportunity.

How EITC Works

This video (link) explains what EITC is, who qualifies and why it’s important. Or, from the New America Foundation: An individual must have earned income, be a U.S. citizen or legal resident and have a valid social security number. For tax year 2009, a qualified claimant may have investment income of less than $3,100 and a maximum annual earned income of varying levels based on the number of qualifying children. Confused, don’t be; watch the video!

The federal EITC benefit for the 2009 tax year ranges from $5,657 for families with three children to $457 for individuals or couples without children.

Sounds easy enough. Yet sadly, new research by the New America Foundation shows that in California alone, as many as 800,000 eligible Californians alone are not claiming EITC and leaving more than $1.2 billion dollars on the table. That’s a lot of money!

What you can do

There are two ways to break down the barriers and help yourself and other hard working people get the money they deserve.

• Check out WEb Connector (it’s free!). Intuit and the Intuit Financial Freedom Foundation have partnered with California First Lady Maria Shriver’s WE Connect campaign to connect citizens to numerous money-saving programs and help them take advantage of unclaimed state and federal dollars. As part of the partnership, Intuit created and donated the WEb Connector, a free online tool in English and Spanish. Modeled after Intuit’s own TurboTax technology, WEb Connector easily guides people through a few questions and helps them learn if they might be eligible for federal and state programs (like EITC) that can put more money in their pockets, and how to apply for these programs.
• Attend an upcoming event in California. Encourage your co-workers, friends and family to learn more about EITC and other money-saving programs. Attend a WE Connect Weekend in Fresno (March 19 – 21) or Los Angeles (March 26 – 28) that bring together local, state and federal public and private resources all in one place.

Together, we can make a difference, put money in the pockets of those who need it the most, and boost our economy.

Earlier in the tax season, California refunds were delayed. Taxpayers didn’t get any IOUs; California was just saying the checks were late. (I filed my California return the last week in January and didn’t get the refund until mid March.)

The State of California is sending IOUs to taxpayers.

Starting July 2nd, California taxpayers are getting IOUs, also known as a registered warrants, in place of their tax refund checks.  The IOU is not redeemable until October 2, 2009 however there will be 3.75% annual interest included with the redemption. Originally some large banks were offering to accept the IOUs now at full value.  Then they would redeem the IOU in October and get the interest too. However it sounds like many of those banks have changed their minds.  I hear it’s a good idea to check Credit Unions; seems they may have agreed to accept the warrants.

For “everything you wanted to know about CA IOUs and we afraid to ask”, check out this latest TurboTax article “California: Now Issuing IOUs for Income Tax Refunds.”