Compliance study

Compliance Study 2003
Estimates of taxpayer noncompliance have been developed for state taxes included on the Department's excise tax return. January 2003, 14 pgs.

Compliance Study 1996
Estimates of taxpayer noncompliance have been developed for state taxes included on the Department's excise tax return. November 1996, 19 pgs.

Executive Summary

The primary focus of this study is on taxpayers registered with the Washington State Department of Revenue. Estimates of taxpayer noncompliance have been developed for state taxes included on the Department's excise tax return. Estimates are based on the results of a stratified random sample of audits completed between 1989 and 1993. Assessments were annualized to a single year and statistically projected to Calendar Year 1991. All estimates are for the total population of registered taxpayers, as if an audit was performed on each Department of Revenue excise tax return filed. Major findings include the following:

• Total annual excise tax noncompliance for registered taxpayers was estimated at $145.7 million for CY 1991. This equaled 2.8 percent of total tax liability.
• Use tax had the highest level of noncompliance ($64 million annually, equal to almost 20 percent of total use tax liability).
• Annual noncompliance for sales tax was estimated at $52.6 million. However, this represented only 1.5 percent of total sales tax liability.
• Hazardous substance tax had the second highest rate of noncompliance (6.3 percent).
• The local share of noncompliance was estimated at $26.2 million per year -- $14.4 million of this was for use tax and the remaining $11.8 million for unreported sales tax.
• Ignorance of the tax law was the most common reason for noncompliance, occurring 34 percent of the time. Computing errors accounted for 26 percent of noncompliance and negligence/fraud for 25 percent.
• Service firms including personal services, business and computer services, hotels, motels and recreational services (SIC range 7000), had the highest level and the highest rate of noncompliance. The estimated annual noncompliance of $33.8 million equaled 5.3 percent of total tax liability.
• Retail firms had the second highest dollar level of noncompliance, but this represented only 1.5 percent of tax liability.
• Rates of noncompliance generally decreased as the size of firms increased. Firms under $100,000 gross income had by far the highest rate, not reporting an estimated 19.9 percent of tax liability. The rate was 1.3 percent for firms between $10 million and $50 million and 1.7 percent for firms with more than $50 million in gross income.
• Despite higher rates of noncompliance, the actual amount of nonreporting per firm for small taxpayers was much less than for large taxpayers.
• Smaller firms were most likely to have ignorance of tax laws as the reason for noncompliance.
• Partnerships and sole proprietors had much higher noncompliance rates than corporations.
• Reasons for noncompliance differed significantly by ownership type. Partnerships had a high propensity for accounting errors (68.8 percent). Ignorance of tax law accounted for over three-fourths of noncompliance among sole proprietors. Legal differences of opinion were limited almost entirely to corporations.
• Noncompliance rates for newer firms were several times higher than those for older firms.
• A majority of noncompliance among newer firms involved sales tax. For older firms, use tax accounted for over half of noncompliance.

Because the methodology of this study is significantly different than that used for the 1990 Washington State Excise Tax Noncompliance Study, the results may not be directly comparable. Stratified random sampling was re-established as part of the Audit program in 1995. Continued utilization of this sampling methodology will provide the basis for ongoing analysis of trends in taxpayer compliance and the effectiveness of Department of Revenue policies. Current plans are for a compliance study update in 1998.