Use Tax Compliance: The Role of Norms, Audit Probability, and Sanction Severity (2014)

ABSTRACTUtilizing the slippery slope framework, this study examined the determinants of individuals' motivation to report use tax. Structural equation modeling analysis suggested that voluntary use tax compliance was heavily influenced by personal and social norms. In contrast, enforced use tax compliance was primarily related to social norms and individuals' perception of audit probability and sanction severity. The current study further found that voluntary compliance accounted for a higher proportion of the variance in use tax reporting behaviors than enforced compliance. The above findings confirm the importance of power and trust in the context of use tax compliance. Implications for policy makers are discussed.INTRODUCTIONOne of the most common tax compliance issues facing state and local governments in the United States is the enhancement of use tax compliance (Sanders, Reckers, & Iyer, 2008). Use tax is complementary to sales tax. According to state and local tax laws, purchases are subject to use tax in the state where the goods are consumed if sales tax has not been collected in the state of purchase. It is believed that use tax has a relatively lower compliance rate than other major taxes because of its low visibility (e.g., Sanders et al, 2008; Washington State Department of Revenue, 2006). Researchers have consistently found evidence that consumers make Internet purchases to avoid sales tax as well as use tax (e.g., Aim & Melnik, 2005; Charles & Jaimin, 2007; Goolsbee, 2000). Iyer, Reckers, and Sanders (2010) further suggest that consumers from states with a high sales tax rate are more likely to purchase goods from a proximal state with no sales tax or a lower sales tax rate without reporting use taxes on their purchases. Because of the important contribution of use tax to state and local government revenues, more research is needed in the field of use tax compliance (Johnson, Masclet, & Montmarquette, 2010). States' desires to increase use tax compliance provide the motivation for the current paper.To provide a clearer understanding of use tax compliance, this paper employed the slippery slope framework (Kirchler, Hoelzl, & Wahl, 2008) to explore the important antecedents of voluntary versus enforced compliance with respect to use tax. Specifically, structural equation modeling (SEM) analysis was conducted to obtain insights into the indirect effects of personal, social, and national norms, as well as perceived audit probability and sanction severity on use tax reporting behaviors via voluntary and enforced compliance.Given the significant role of use tax in state and local tax revenues, understanding the intentions of individuals to comply with use tax is an important topic for researchers and policy makers. Although researchers have become increasingly interested in investigating the determinants of use tax compliance (e.g., Hageman, 2009; Iyer et al, 2010; Jones, 2009; Sanders et al., 2008), studies on use tax are still rare (Alm, Sjoquist, & Wallace, 2006). Furthermore, previous research has generally neither distinguished between voluntary and enforced compliance nor explored the extent to which use tax reporting behaviors differ with respect to voluntary versus enforced compliance (Kirchler et al., 2008). This study contributes to the literature on use tax compliance by explicitly examining the relative importance of norms, audit probability, and sanction severity on use tax reporting behaviors via voluntary versus enforced compliance. The results may be particularly informative to policy makers who are interested in understanding and increasing the inclination of consumers to report use tax when sales tax has not been charged.The remainder of this paper consists of four sections. The first section reviews the existing literature on use tax compliance and develops the research model. The second section describes the methodology. The third section presents the results, and the final section concludes the paper by discussing the implications of the current study and providing suggestions for future research. …