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Understanding and improving use-tax compliance

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Title:
Understanding and improving use-tax compliance a theory of planned behavior approach
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Book
Language:
English
Creator:
Jones, Christopher Robert
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University of South Florida
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Tampa, Fla
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Subjects / Keywords:
Use tax
Theory of planned behavior
Tax compliance
State and local taxes
Remedies
Dissertations, Academic -- Accounting -- Doctoral -- USF   ( lcsh )
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non-fiction   ( marcgt )

Notes

Abstract:
ABSTRACT: This study seeks to understand specific factors that are pertinent to individuals when making a use-tax compliance decision and to test a remedy to improve use-tax compliance. This study investigates use-tax compliance using a three-step approach. The first step involved building a survey to determine potential salient beliefs that are pertinent to individuals when facing a use-tax compliance decision. Results of the initial survey reveal that the effort of complying with the use tax, potential revenue to the state if the individual complies, fairness of the use tax, monetary concerns of the individual, perceived knowledge of the use tax, and social influences were the most mentioned factors contributing to individuals when making a use tax compliance decisions. The second step in this study develops a model, based on the Theory of Planned Behavior, incorporating these salient beliefs. Results indicate that most of the salient beliefs identified in the survey were correlated to an individual's attitude. Finally, the third step involved testing two remedies. The first remedy gave the individual the option to have the website automatically collect the use tax due. The second examined remedy provided information to the participant regarding the use tax. Results indicated that the effort remedy developed, having the website give the individual the choice whether the website will automatically collect the tax, does improve the likelihood the individual will comply with the use tax. In addition, results also show compliance improves if participants are given information regarding the use tax.
Thesis:
Dissertation (Ph.D.)--University of South Florida, 2009.
Bibliography:
Includes bibliographical references.
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Statement of Responsibility:
by Christopher Robert Jones.
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Title from PDF of title page.
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Document formatted into pages; contains 103 pages.
General Note:
Includes vita.

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University of South Florida
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aleph - 002064196
oclc - 567799152
usfldc doi - E14-SFE0003076
usfldc handle - e14.3076
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Understanding and Improving Use-Tax Complian ce: A Theory of Planned Behavior Approach by Christopher Robert Jones A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy Department of Accounting College of Business Administration University of South Florida Co-Major Professor: Jennifer Kahle-Schafer, Ph.D. Co-Major Professor: Uday Murthy, Ph.D. Edward Levine, Ph.D. Brad Schafer, Ph.D. Nathan Stuart, Ph.D. Date of Approval: July 9, 2009 Keywords: use tax, theory of planned behavi or, tax compliance, state and local taxes, remedies Copyright 2009, Christopher Robert Jones

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Acknowledgments I gratefully acknowledg e the helpful comments, suggestions, and support received from my dissertation committee memb ers: Jennifer Kahle-Schafer (co-chair), Uday Murthy (co-chair), Edward Levine, Brad Schafer, and Nathan Stuart. I also thank Donald Bellante, Maureen Butler, Andrea Ke lton, Lee Kersting, Gary Laursen, Robert Marley, Norma Montague, Nazgol Moshtaghi, Linda Ragland, Jacque line Reck, Dahlia Robinson, Anissa Truesdale, and Sajeev Varki for their helpful comments and suggestions during the process. I would al so like to thank my fellow Ph.D. colleagues and friends at both the Univer sity of South Florida and th e University of Alabama not mentioned above: Ann Dzuranin, Travis “Boss Man” Holt, Johan Perols, Jessie Robertson, and Spencer Usrey. In addition, I appreciate all comments and suggestions from the faculty at Florida International Un iversity, Cal-Poly Po mona, Western Illinois University, and Nicholls State University during my paper presentations at these institutions. Finally, I would also like to thank Carilee J ones and Archer Montague for countless hours of proofreading.

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i Table of Contents List of Tables iii List of Figures iv Abstract v Introduction 1 Background and Hypotheses 6 Federal Income Tax Compliance 6 Use and Sales Tax Compliance 7 The Streamlined Sales Tax Project and The Internet Tax Freedom Act 8 Use Tax 10 Theory of Planned Behavior 12 Initial Survey 17 Method 17 Participants 18 Results 21 Developing and Testing the Model 23 Developing a Use-Tax Compliance Model 23 Salient Beliefs Determined in Survey 25 Attitude 25 Effort 25 Funding for State 28 Monetary Concerns 28 Fairness 30 Knowledge 34 Another Tax 36 Social Norms 37 Perceived Behavioral Control 39 Overall Model 40 Differences from Federal Income Tax 40 Method 41 Participants 42

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ii Procedure 45 Results 46 Remedies for Improving Use-Tax Compliance 51 Remedy – Effort 51 Remedy – Information 52 Method 54 Participants 56 Manipulation Checks 59 Assumptions of ANOVA 59 Results 60 Supplementary Analysis 63 Conclusion 65 References 69 Appendices 76 Appendix A: Initial Survey Instrument 77 Appendix B: Model Validation and Remedy Instrument 85 About the Author End Page

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iii List of Tables Table 1 – Demographic Data for Participants in the Survey 19 Table 2 – Internet Buying Habits and Use Tax Data for Participants in the Survey 21 Table 3 – Most Commonly Listed A dvantages and Disadvantages of Paying Use Tax 22 Table 4 – Demographic Data for Participants in the Model Validation Step 43 Table 5 – Internet Buying Habits and Use Tax Data for Participants in the Model Validation Step 45 Table 6 – Factor Loading and Cronbach’s Alpha for Factors with Multiple Questions 47 Table 7 – Descriptive Statistics for Variables in Model Validation Step 48 Table 8 – Models from Model Validation Step 49 Table 9 – Summary of Hypotheses for M odel Testing 50 Table 10 – Demographic Data for Participants in the Remedy Step 56 Table 11 – Internet Buying Habits an d Use Tax Data for Participants in the Remedy Step 58 Table 12 – Cell Mean and Standard De viations for Treatment Conditions in Remedy Step 61 Table 13 – ANOVA Results 61 Table 14 – T-Tests Comparing Salient Be liefs between Participants in the Remedy and No-Remedy Conditions 63

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iv List of Figures Figure 1 – General Model of the Theory of Planned Behavior 13 Figure 2 – Model of Use Tax Complia nce using the Theory of Planned Behavior 24 Figure 3 – Experimental Set-up for Re medy 55

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v Understanding and Improving Use-Tax Compliance: A Theory of Planned Behavior Approach Christopher Robert Jones ABSTRACT This study seeks to understand specific fact ors that are pertin ent to individuals when making a use-tax compliance decision a nd to test a remedy to improve use-tax compliance. This study investigates use-tax co mpliance using a three-step approach. The first step involved building a survey to de termine potential salient beliefs that are pertinent to individuals when facing a use-tax compliance deci sion. Results of the initial survey reveal that the effort of complying w ith the use tax, potential revenue to the state if the individual complies, fairness of the us e tax, monetary concerns of the individual, perceived knowledge of the use tax, and soci al influences were the most mentioned factors contributing to individuals when making a use tax compliance decisions. The second step in this study develops a model, based on the Theory of Planned Behavior, incorporating these sa lient beliefs. Results indicate that most of the salient beliefs identified in the survey were co rrelated to an individual’s attitude. Finally, the third step involved testing two remedies. The first remedy gave the individual the option to have the website automatically collect the use tax due. The second examined remedy provided information to the participant rega rding the use tax. Results indicated that the e ffort remedy developed, having th e website give the individual

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vi the choice whether the websit e will automatically collect the tax, does improve the likelihood the individual will comply with the use tax. In addition, results also show compliance improves if participants are given information regarding the use tax.

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1 I. Introduction This study seeks to understand specific fact ors that are pertin ent to individuals when making a use-tax compliance decision a nd to test a remedy to improve use-tax compliance. Specifically, I use a survey-based approach to determine salient factors of use-tax compliance. Given the survey results, I design and experimentally test remedies that are expected to improve compliance. The use tax is similar in spirit to a sales tax. It is a state ta x a consumer pays to store, consume, or use an item in a part icular geographic loca tion (i.e., a state).1 A use tax is generally owed when an individual pur chases an item “out of state” and does not pay any sales tax (or pays a sale s tax of a lesser amount than wh at is charged in his or her state of residence). It is im portant to note that it does not matter what the legal residence is for the person: if he or she lives in a state temporarily (i.e., for school) and stores an item there, he or she is obligated to pay the use tax if (s)he did not pay a sales tax on the purchase. Although there are numerous situations in which an individual could owe a use tax to his or her state of re sidence, in this study I focus on purchases made online since states continue to lose va st amounts of money due to unt axed internet purchases. The largest revenue source for state gove rnments is the sales tax (Goolsbee and Zittrain 1999). States that have a sales tax generally also have some form of a use tax that is due only when the individual di d not pay sales tax on a purchase.2 Traditional brick 1 The multistate tax commission defines a use tax as "a no nrecurring tax, other than a sales tax, which (a) is imposed on or with respect to the exercise or enjoyment of any right or power over tangible personal property incident to the ownership, possession or custody of that property or the leasing of that property from another including any consumption, keeping, retention, or other use of tangible personal property and (b) is complementary to a sales tax” (S treamlined Sales Tax Project Website 2007). 2 For instance, in Florida, residents are required to fill out Form DR-15MO quarterly and pay 6% tax on all purchases made out of state if the amount of tax owed is greater than $1.00

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2 and mortar stores automatically collect the sa les tax and remit it to the state, eliminating the need for the purchaser to pay the use ta x. Purchases made via the internet, however, are largely untaxed. Since internet vendors are ra rely required to collect a sales tax for an out-of-state sale, it is left to the purchaser to pay any use tax in his or her state. In 2004, it was estimated that by 2008 st ates would lose between $21. 5 billion and $33.7 billion a year because of untaxed purchases made online (Bruce and Fox 2004). Florida alone could lose as much as $2.3 billion, repres enting approximately ei ght percent of total revenue for Florida in 2008 (State of Florida Long-Range Financial Outlook 2008).3 Not only are states losing money, but residents in st ates are losing jobs because of uncollected use tax (Florida Tax Watch 2009). Due to the economic significance of this revenue loss, it is important to examine both factors that influence use-tax compliance and ways to improve use-tax compliance. Although states recognize that untaxed internet sales continue to be a problem, few remedies exist due to the difficulties in monitoring and enforcement. A typical internet transaction with usetax implications would involve a person located in one state buying a product from a vendor in another stat e. Currently, vendors are not required to collect use or sales taxes for a state unless they have a physical presence in the state ( Quill Corp. vs. North Dakota 1992 ).4 Therefore, in order to enforce use-tax compliance for a specific purchase, a state would have to determine if a sales tax was collected at the point of sale, where the item was shipped, whet her the item is in “use” in the state, and who would be responsible fo r paying the use tax. 3 Florida is currently projecting a budget deficit of $2.33 billion for 2008. 4 The ruling in Quill Inc.vs.North Dakota determined that Quill Inc. did not need to collect a sales tax for catalog orders from North Dakota.

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3 Despite the considerable amount of fede ral tax compliance re search, there is a dearth of research on other types of taxes. The use tax differs from the federal income tax in many potential ways. For example, taxpa yers may not be as aware of the use tax or the compliance requirements. Federal income tax research has s hown that raising the penalty and/or audit rate should improve compliance (Allingham and Sandmo 1972). Given that very few people are aware the use tax even exists, it would serve little purpose to raise the penalty and/or a udit rate – people stil l would not pay since they are not aware that they should pay. Other potential differe nces between the two ta xes include the fact that the use tax is a consumption based tax whereas the federal income tax is income based and the fact that the us e tax is generally much smaller in amount than the federal income tax and could be deemed “immaterial” by the taxpayer. Recent empirical research has begun to examine different taxes in addition to the federal income tax (e.g., Sanders et al. 2008). Given the multitude of potential differen ces, the use-tax co mpliance decision is likely to involve different psychological fact ors than the decision to comply with the federal income tax. More specifically, each difference could alter the decision process for the individual. Thus, an important firs t step in improving use-tax compliance is to identify factors associated with th e use-tax compliance decision. This study investigates use-tax compliance using a three-step approach. The first two steps create a model for use-tax complian ce using the Theory of Planned Behavior (TPB) (Ajzen 1991). The TPB posits that actual behavior is based on a person’s intention to perform the behavior. This intention, in turn, is based on three factors: attitude

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4 towards the behavior, subjective norms regard ing the behavior, and perceived behavioral control. The first step in this study gathers factor s that are pertinent to individuals when facing a use-tax compliance decision. I develop a questionnaire based on Ajzen and Fishbein (1980) to determine the anteced ents to attitudes, subjective norms, and perceived behavioral control th at are pertinent to individuals making a use-tax decision. The second step in this study develops a model, based on the TPB, incorporating these factors. This approach serves two purpos es. First, it allows me to experimentally test if the factors identified in the questionnaire are in fact antecedents to use-tax compliance behavior. Second, by using regr ession analysis, I can show the relative importance of each factor. These first two steps have been used in many research settings. Taylor and Todd (1995) used a si milar approach to pr edict adoption of new technology. They also used the approach to help predict composting behavior. Bobek and Hatfield (2003) used a sim ilar approach to explain federal income tax compliance. Bobek, Hatfield, and Wentzel (2007) use TPB to explore wh y people prefer a refund to having less tax withheld on their paycheck. The final step in this study involve s developing and testing technology-based remedies aimed at changing the attitudes, subjective norms, and perceived behavioral control factors that are found to be pertinent to use-tax co mpliance behavior from steps one and two. Specifically, this study examines a remedy where individuals are given the option to have the vendor’s website automatica lly collect the use-ta x due. In addition,

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5 this study examined a remedy were the particip ant is simply given information on the use tax. Results of the initial survey reveal that the effort of complying with the use tax, potential revenue to the state if the individual complied, fair ness of the use tax, monetary concerns of the individual perceived knowledge of the use tax, and the fact that participants considered the use tax just “an other tax” were the mo st mentioned factors influencing individuals’ use tax compliance d ecisions. Accordingly, a model using these beliefs was developed and tested. Results of the model testing indicate that most of the salient beliefs identified in the survey were correlated to an individual’ s attitude. Specifically, effort involved in paying the use tax, fairness of the use tax, fundi ng provided to the state, and the fact the use tax was considered just another tax were all significantly related to an individual’s attitude towards paying the use tax. In a ddition, the attitude measure was positively correlated with intent ion to comply. The results of the remedy step indicate that the proposed remedies do increase the likelihood of use-tax compliance.

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6 II. Background and Hypotheses Federal Income Tax Compliance The United States has a voluntary tax co mpliance system, and understanding what motivates consumers to voluntarily pay (or not pay) the federal income tax has been a focus of extensive investigation by researchers. The official vi ew of the IRS is that there are three dimensions of federal tax co mpliance: filing, reporting, and payment compliance (IRS 2003). Filing compliance refe rs to whether the taxpayer submitted the correct forms to the IRS. Reporting comp liance refers to whether the return was accurate. Finally, payment compliance refers to whether the taxpayer paid his/her reported tax liability in a timely manner. Base d on the IRS’s definition of compliance, all three of these dimensions lead to a taxpayer being viewed as “non-compliant.” Virtually all tax compliance research to date, however, ha s been restricted to situations in which a taxpayer intentionally pays less than the am ount owed (i.e., payment compliance). The motivation behind this stream of research is the large amount of tax revenue the U.S. has lost due to non-compliant behavior. For th e tax year 2001, the IRS estimated this amount to be to be $345 billion dollars (IRS 2006).5 There are several reviews of federal income-tax compliance research (e.g., Long and Swingen 1991; Cuccia 1994; Jackson and Milliron 1986). Jackson and Milliron (1986), the broadest and most comprehe nsive study, provide a framework for understanding tax compliance by identifying in dividual variables (e .g., age, gender, and education), perception variab les (e.g., fairness and social norms), and environmental 5 The IRS bases its current estimated tax gap on 2001 data. The tax gap refers to the total difference between what is owed and what is being paid to the IRS.

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7 variables (e.g., penalty and a udit rate) that help to expl ain and potentially improve, federal income tax compliance. Thus, while these reviews are he lpful for understanding federal income tax compliance, they do not encompass all po tential taxes since different taxes could make different fact ors more or less salient. Use and Sales-Tax Compliance Many states collect taxes on purchases made by residents in the form of sales and use taxes. A sales tax is a tax an individual pays upon purchase of a tangible item. A use tax is a tax an individual pays to utilize, store, or consume an item in a particular location. The individual who purchases the item is ge nerally responsible for complying with all applicable use-tax laws. A sale s tax differs from a use tax in that retailers (as opposed to the buyer) are generally held responsible for collecting and enforci ng the sales tax. When an individual buys and does not pay a sales ta x in the state in whic h the individual plans to use the item, the individual may be required to file a use-tax retu rn and pay a use tax. This situation is common when an individua l places an order through a catalog or online store where the retailer is lo cated in a different state and will not collect the local sales tax. Perhaps the easiest and most convenien t method of collecting the use tax would be to have the state force the vendor to automatically collect payment. However, the Supreme Court (in Quill Corp. vs. North Dakota 1992 ) ruled that a vendor is not required to collect the use tax for a state unless the vendor has nexus, a physic al presence, in the state. The largest revenue source for state gove rnments is the sales tax (Goolsbee and Zittrain 1999). States that have a sales tax generally also have some form of a use tax. For

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8 example, in the state of Florida use tax is due on purchases if the amount of tax owed is greater than $1.00. Compliance requ irements for the use tax vary from state to state. For example, many states (e.g., New York) have a use-tax line item on th eir state income tax form. Other states have separate forms that must be completed. For example, in Florida, a resident must submit a form quarterly to comply with use-tax laws. States continue to lose sales tax re venue because individuals make purchases online and avoid state sales tax, as these purchases made via the internet from out-of-state vendors remain largely untaxed. In 2004 it was estimated that, within four years, states would lose between $21.5 billion and $33.7 bill ion in revenue annua lly due to untaxed purchases made online (Bruce and Fox 2004). A primary contributor to this trend is online auction sites such as eBay. Uncollected sales and use taxes on eBay auctions have been estimated to be around $60 million annua lly (Albring et al. 2000) yet this figure appears conservative as indivi dual states have just begun to disclose estimates of how much revenue is lost due to consumers not paying use taxes.6 For example, Maine has estimated it loses between $30-$100 million a ye ar (Maine Revenue Services Website 2007). Information indicates that sales made vi a the internet continue to grow. The U.S. Census Bureau recently released its 2006 E-Commerce Multi-sector report showing that retailers’ e-commerce sales increased by 22 pe rcent in 2006 (U.S. Census Bureau 2008). The Streamlined Sales Tax Project and the Internet Tax Freedom Act The Streamlined Sales Tax Project (SSTP) is a project undertaken by many states to simplify sales and use-tax compliance, and has resulted in the Streamlined Sales and 6 Not all purchases on eBay require a person to pay the use tax. Payment of the use tax depends on a number of factors including whether the seller was a business or individual and location of seller (Heckman 2005).

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9 Use Tax Agreement (SSUTA). This agreement allows companies to use computer programs (called “certified service providers”) to automatically determine the amount of tax to be collected from each customer and the state to which the tax should be paid. The company then collects the use tax owed from the customer and remits it to the proper state. Although the SSTP is voluntary, one in centive for participation is that compliant companies are allowed to keep a por tion of the tax proceeds collected.7 Currently, 18 states have adopted the SSUTA (United Stat e Sales Tax Site 2008). Cornia et al. (2004, 1) expressed doubt over whether the project would act ually work, noting that “states are unlikely to adopt extensive reforms.” To date there has been little empirical research addressing the Streamlined Sales Tax Project or the Streamlined Sales and Use Tax Agreement. Finally, it is important to address a common misconception involving collection of the use tax for online sales. The Inte rnet Tax Freedom Act (established in 1998) provides a ban on certain taxes being imposed. Many people mistakenly believe that the act prohibits states from collec ting a use tax on online sales. This is not the case, as the act merely prohibits state and local governme nts from enacting intern et-only taxes. For example, a tax to send or receive e-mails is prohibited by the Intern et Tax Freedom Act. Since a majority of states already collect a sa les tax on non-internet sa les, a use tax is not disallowed under the act. 7 A similar incentive is used to induce companies to remit sales tax collected in the state. However, this plan has come under scrutiny due to the lost revenue being paid to companies as inducements (Druker 2008).

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10 Use Tax A majority of the literature available on taxing internet sales is descriptive in nature, focusing either on recent trends during the time period the article was written involving taxes and the internet (e.g., Fox and Murray 1997) or the growing problem of uncollected sales tax revenues for various states (McClure 1999; Tannenwald 2002). Many of these articles are now outdated, pr ovide little more than opinion, and do not offer any empirical evidence about the causes of non-compliance or so lutions that could be implemented to improve non-compliance. Goolsbee and Zittrain (1999) examine several issues in the debate on whether to tax internet sales. Their pape r is not designed to test hypothe ses related to the use tax, but several findings in the paper warrant furthe r discussion. One impor tant contribution the article makes is in estimating the actual am ount of revenue states are losing due to not taxing internet purchas es. Goolsbee and Zittrain (1999) determined that states lost approximately $430 million in revenue due to untaxed internet purchases during 1998. In addition, the authors found that not taxing internet sales tends to favor the more affluent since richer and mo re highly-educated individuals tend to purchase online more often than poorer and lesser e ducated individuals. Finally the authors argue that the costs associated with taxing internet sales wi ll probably be minimal after an initial system is in place. The authors suggest that so ftware could simplify the collection and distribution of the appropriate taxes to the appropriate jurisdictions. While Goolsbee and Zittrain (1999) contribute to the in itial discussion about the internet and state taxes, their study has limita tions. The authors acknowledge that a lack

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11 of measurable data required them to make numerous assumptions and estimates. Use of the internet for commerce has grown exponent ially since their data were collected in 1998, and the results in this study almost certa inly underestimate the sales tax problem. Significantly, only five years later, Bruce and Fox (2004) predicted that electronic commerce would cost states at least $21.5 billion in lost sales tax revenue by 2008. Interestingly, Goolsbee (2000) suggests that inte rnet sales are highly se nsitive to sales tax rates, and online purchases might be reduced by 24 percent if use-tax laws were enforced. In addition, this article notes that people livi ng in locations with hi gher sales-tax rates are more likely to purchase online. Taken togeth er, these facts suggest that people are using the internet to avoid paying taxes and that “forced” compliance would probably reduce sales via the internet. Sanders et al. (2008) examined use-tax compliance in the construction industry and found that making the taxpayer (i.e., construction firm) aware of the penalty associated with non-compliance of the use ta x and having a represen tative of the firm sign an affidavit stating they have reviewed all appropriate use tax rules both increased compliance. One empirical article warrant ing discussion is Trandel (1991). Written before the internet boom of the mid-1990s, this article d eals with use-tax avoi dance on cross-border sales in general. As Trande l’s (1991, 315) analysis shows, “t he ability of consumers to evade the use tax alters their behavior in a wa y that leads firms to charge lower prices. This reduces welfare loss created by the sell ers’ market power, and implies that evasion can increase welfare, even when tax rates are adjusted to offset the effect of evasion on

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12 tax revenue.” Trandel is thus suggesting th at, by not taxing internet sales, states and consumers ultimately benefit since the loss of customers from brick and mortar stores will cause these stores to reduce prices, in turn increasing the overall economic welfare for the individuals. In summary, states are forfeiting a vast stream of revenue by not enforcing the use tax. The actual amount states stand to lose appears to be in constant flux, and the estimates can (and do) change dramatically based on the assumptions made by the investigators. Significantly, consumers have come to recognize that they can avoid sales taxes by purchasing online. Whether avoiding the use tax is simply due to a monetary incentive (i.e., not having to pay a tax) or othe r factors have not been investigated to date. Theory of Planned Behavior As research in tax compliance has pr ogressed, it has moved beyond looking at one or two individual factors asso ciated with a taxpayer’s compliance decision. Instead, some research has attempted to build an in tegrated model of ta xpayer compliance using multiple factors (Hanno and Violet te 1996; Bobek and Hatfield 2003).8 The theory used to help build this “integrated model” is the TPB. The TPB suggests that the key factor in determining whether a person will engage in a certain behavior is the in tention to perform the behavior itself. This is intuitively easy to understand: the greater the intention to perform th e behavior, the more likely a person is to actually engage in the behavior. The second key point behind the TPB is that it also suggests three key factor s that are associated with th e person’s intention to perform 8 Although the tenets of TPB can be used to explai n any action, in psychology, the action in most TPB studies is generally something that “betters” the individual. It could be argued that paying a use tax does not directly improve an individual, but rather betters society as a whole.

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13 the action: a person’s attitude towards the behavior in que stion, social factors (termed “subjective norms”), and perceived behavioral control. Subjective norms are how society influences an individual’s be havior. Perceived be havioral control d eals with the amount of control a person believes he has over a ce rtain action. A key point is that it is also possible to determine antecedents of the attitude towards the behavior, allowing researchers to determine what specific factor s influence the behavior of interest. This theory was originally discussed by one of th e “founders” of the theory of reasoned action, Icek Ajzen, and has been validated in numer ous studies since (e.g., Beck and Ajzen 1991; Taylor and Todd 1995).9 Bobek and Hatfield (2003) f ound evidence consistent with the model’s predictions for federal tax compliance intentions. A genera lized picture of the TPB model is depicted in Figure 1. FIGURE 1 – General Model of the Theo ry of Planned Behavior Numerous accounting studies have used th e TPB, and its predecessor--the theory of reasoned action--to explai n a decision choice (e.g., Cohe n et al. 1991; Mauldin and 9 A complete literature review of the theory of planned behavior can be found in Ajzen (1991). Salient Beliefs Attitude towards compliance Intention Behavior Social Norms Peer Groups Perceived Behavioral Control

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14 Arunachalam 2002).10 Hanno and Violette (1996) used th e theory of reas oned action in a tax compliance setting and found that th e theory explained taxpayer compliance decisions. In general, most re cent research uses the TPB in stead of its predecessor, the theory of reasoned action. However, both ha ve been used to e xplain taxpayer federal compliance behavior, and are good starting poi nts for an integrated model of tax compliance decisions. In addition, the theory incorporates social factors and personal attitudes. Therefore, the three factors used to explain intention in the TPB will be useful in determining use-tax compliance. To date, no research has examined the TP B in relation to the use tax. Although federal tax compliance research has used th e TPB, it is important to develop a model specific to the use tax. As discussed in the introduction, the use tax differs from the federal income tax in many ways: The use tax is paid on a completely se lf-reporting basis. Although individuals do voluntarily comply with the federal in come tax as well, the government is provided with numerous documents (e.g., W-2s, 1099s) that are used for verification purposes. Since states do not receive verification of out-of-state purchases, the state would have no wa y of easily determining whether a resident is complying with the use tax. The use tax is a consumption tax whereas the federal income tax is incomebased. Taxpayers may view the fairne ss of a tax based on how much they spend differently than on how much they earn. 10 The only difference between the theo ry of reasoned action and the theory of planned behavior is that the former does not have perceived behavioral control as a determinant of intention.

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15 Taxpayers making multiple purchases are required to keep track of each instance, and, in certain states, file multiple use tax returns throughout the year versus the requirement for only one federal income tax return. This potentially creates a burden for taxpayers to keep receipts for each purchase, know when and how to submit the use ta x due, and how to comply correctly. The use tax itself is a cash outlay incr easing the cost of the item purchased, whereas the income tax is often withheld on earnings (a re duction to a cash inflow) and is potentially less salient since taxpayers never see the cash. The state is the taxing aut hority, not the federal gove rnment. Thus, revenues benefit the state the individual resides in rather than the broader federal government. Taxpayers may not be as aware of the use tax or the compliance requirements; whereas, most individuals know of th e IRS and the federal income tax. Individuals may perceive getting taxed by their state differently than getting taxed by a federal government for nume rous reasons including different enforcement procedures, the individual’s knowledge of each, and differing opinions of federal and state governments. Given the numerous differences between the income tax and the use tax, it is important to determine what specific factor s are relevant for a person making a use-tax compliance decision. Considering factors th at are pertinent to federal income tax compliance might lead to suboptimal remedies since those factors may not be relevant to use-tax compliance decisions. A richer disc ussion of differences between the federal

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16 income and use taxes can be found below fo llowing identification of specific factors pertinent to the use-tax compliance decision. This study uses the approach developed by Ajzen and Fishbein (1980) and Ajzen (1991) to build a model that explains usetax compliance behavior. This provides a method for not only determining what ant ecedents are important in forming one’s attitude, social norms, and perc eived behavioral control, but also the relative importance of each.

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17 III. Initial Survey Method I developed a survey utilizing the recomm endations of Ajzen and Fishbein (1980) in order to determine antecedents of a pe rson’s attitude towards paying a use tax (i.e., attitude towards compliance in Figure 1). Aj zen and Fishbein refer to these antecedents as “salient beliefs” toward the action itself. Accordingly, for the remainder of this study the term salient beliefs will be used. The survey consisted of four sections.11 The first section aske d participants to list anything they knew about the use tax. This was used to determine how much prior knowledge a participant had about the use tax. The second section gave the participants relevant information on the use tax (e.g., definition and example of when the use tax would apply). Anecdotal evidence indicates th at many individuals know little or nothing about the use tax and asking them for their opinions on paying the use tax would yield few useful results without first provi ding background information to them. In the third section, participants received a scenario in which they were told to assume they had purchased an item onlin e and therefore they owed a use tax. Participants were then asked to list “adva ntages, disadvantages, a nd anything else they associate” with paying the use tax on the purchase. To be as consistent as possible with the recommendations of Ajzen and Fishbein (1 980), participants we re asked about paying a use tax on a particular purchase, not paying a us e tax in general. This is important since the theory of planned behavior deals with the attitude towards a specific action not the 11 The research project received IRB approval from the University of South Florida before any data were collected.

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18 subject of the action. For example, although it might very well be important to determine one’s attitude towards the use tax in general, that is only one salient belief in determining one’s overall attitude towards paying the use tax on a specific purchase. As mentioned previously, this type of questioning has b een used in prior fe deral tax compliance research (e.g., Bobek and Hatfield 2003) to determine salient beliefs towards federal tax compliance attitudes. The final section gather ed demographic data on the participants. A copy of the survey can be found in Appendix A. Participants The participants for this survey were undergraduate students from a large university located in the southeastern Un ited States. They were enrolled in an introductory accounting class at the time of data collection. One hundred six individuals took part in the survey. Demographic data for the participants can be found in Table 1. Given that the participants were undergraduate students, the demographic data are not surprising. The majority of participants were young, unmarried, and in low income brackets.12 12 The average internet shopper tends be slightly ol der than an undergraduate student (Forsythe and Shi 2003).

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19 TABLE 1 – Demographic Data for Participants in the Survey Number % of Total Gender Male 53 50.00% Female 53 50.00% Age Under 20 48 45.28% 20 to 29 57 53.77% 30 to 39 1 0.94% 40 + 0 0.00% Household Income Zero to $20,000 54 50.94% $20,001 to $35,000 11 10.38% $35,001 to $50,000 5 4.72% $50,001 to $65,000 5 4.72% $65,001 to $80,000 5 4.72% $80,001 to $100,000 10 9.43% $100,000+ 16 15.09% Tax Return Status (2007 Return) Single 93 87.74% Married Filing Jointly 3 2.83% Married Filing Separately 0 0.00% Head of Household 4 3.77% Qualifying Widow(er) 0 0.00% Did Not File 6 5.66% n = 106 In addition to collecting general dem ographic data, the survey also asked participants questions relating to the use ta x and the participant’s online buying habits. Table 2 summarizes this data. Only one of the 106 participants had any prior knowledge of the use tax before taking the survey. The one participant who was aware of the use tax had this knowledge because her job require d her to pay the use tax for the company where she worked. Thirteen of the partic ipants admitted they had no knowledge of the

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20 use tax, but attempted to define it anyway.13 Ninety-two of the participants had never heard of the use tax. In addition, 100 of the 106 particip ants had purchased a product online, with over half spending over $100 in the past year on online purchases. These data, while limited to a relatively homogeneous sample, indicate that the participants are representative of the typical online purchaser. In addition, the data support the idea that states have done a poor job educating peopl e about the use tax, a majority of people do not pay the use tax, and the states are losi ng a great deal of money due to this noncompliance. 13 In order to be counted in this group, a participant ha d to say, “I don’t know, but I will say.” or use similar wording.

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21 TABLE 2 – Internet Buying Habits and Use Tax Data for Participants in the Survey Number % of Total Awareness Did Not Know 92 86.79% Guessed Wrong 9 8.49% Guessed Correctly 4 3.77% Knew 1 0.94% Purchased Online Before Yes 100 94.34% No 6 5.66% Spent Online in Past Year Zero 6 5.66% $1 to $100 23 21.70% $101 to $500 50 47.17% $501 to $1,000 15 14.15% $1,001 to $5,000 12 11.32% $5,000 + 0 0.00% Paid Florida Use Tax Before Yes 3 2.83% No 57 53.77% Not Sure 46 43.40% Paid a Use Tax in any State Before Yes 3 2.83% No 60 56.60% Not Sure 43 40.57% n = 106 Results The participants were asked to list a ny “advantages, disadvantages, or anything else they associated with” paying a use tax on a particular purchase. The responses were then coded and tallied.14 A list of the more commonly gi ven answers is shown in Table 3. The two most common responses for di sadvantages and advantages were that complying with the use tax w ould require additional effort and that compliance would give the state more funding, respectively. Intere stingly, the second most common listed 14 Only one coder was used in this process. Multiple coders were not used since there were no hypotheses being tested. However, it is a potential limitation to the study.

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22 advantage of paying the use tax was that the use tax was less than the sales tax. This occurred since the county that a majority of students lived in has an additional one percent sales tax that is avoi ded by paying the use tax. While it could be argued that this advantage would only be applicable to the citie s and/or counties that have an additional sales tax, offering a lower use tax than th e sales tax in the state might increase compliance just due to the fact that pe ople feel better about saving even a small percentage then if they had to pay the sales tax in full. TABLE 3 – Most Commonly Listed Advantages and Disadvantages of Paying Use Tax The survey yielded 336 total identifiable responses. This table lists the most commonly given a dvantages and disadvantages. Salient belief was included in the model ** Responses were combined to form the Fairness salient belief before being included in model ***Response were combined to form the Monetary Concerns salient belief before be ing included in the model Number of Times Listed Advantages Funding for state* 53 Lower than sales tax in county*** 29 Pay fair share** 15 Might get caught if you don't pay 15 Might incur penalty 13 Obeying the law 7 Moral Obligation 6 Disadvantages Effort* 58 Monetary payment*** 37 Another tax* 23 Knowledge* 23 Majority of people would not pay 20 Tax is not fair** 16

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23 IV. Developing and Testing the Model Developing a Use-Tax Compliance Model A model of use tax compliance was built using the data obtained from the survey. The first step is choos ing the salient beliefs identified in the survey to put in the model. Ajzen and Fishbein (1980) suggest using enough beliefs so that 75 percent of all responses ar e represented in the model. The survey yielded 336 separate responses; accordingly responses were ranked and added to the model until the model contained at least 252 responses (or 75 percent of all responses). During this step certain a dvantages and disadvantages that involved the same underlying concept were combined to form one salient belief. For example, participants listed paying their fair share of taxes as an advantage and the tax not being fair as a disadvantage. Since both of these responses concerned fairness they were combined into one salient belief (termed Fairness ). An identical approach was taken with the disadvantage of moneta ry payments and the above mentioned advantage that the use tax owed on the purch ase was less than the sales tax that would have been due for the participants in the county where the initial survey was administered. This salient belief was termed Monetary Concerns As mentioned above, salient beliefs were then added to the model until at least 75% of all responses were included. For example, monetary concerns was the most often listed salient belief (60, approximately 20 % of the total number of responses given). The second most often listed salien t belief was effort; this salient belief was listed 58 times (or approximately 17 percent of the total number of responses given).

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24 Combining these two totals yields 37 per cent of the total numbe r of all responses. The next salient belief added was funding to the state (53, equaling approximately 16% of the total number of responses given) Adding this salient belief meant the model now included 53% of all responses. Accordingly, the sa lient beliefs of fairness, another tax, and knowledge were a dded to the model so that 75% of all responses were included. Salient beliefs highl ighted with an asterisk in Table 3 were included in the model. The fu ll model is shown in Figure 2. FIGURE 2 – Model of Use Tax Compliance using the Theory of Planned Behavior Effort (-) Funding for State (+) Monetary Concerns (-) Knowledge (+) Attitude towards compliance (+) Intention (+) Behavior Social Norms (+) Co-workers Friends Perceived Likelihood of Detection (+) Fairness (+) Another Tax (-) Friends

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25 Salient Beliefs Determined in the Survey Attitude General attitude towards an action re fers to a person’s feelings toward performing the stated action. Having a positiv e (negative) attitude towards the stated action increases (decreases) the likelihood th at the person will perform the stated action. The next section disc usses the salient beliefs dete rmined in the survey that should influence attitude. Effort One area of taxpayer compliance of singul ar relevance to th e use-tax question comes from the compliance requirements them selves. For purposes of this paper, I specifically define effort as the complianc e requirements imposed on the taxpayer to pay the use tax. Most states require the individual to include the use-tax owed on their state income tax return (e.g. Alabama, New York). In Florida, there is no income tax, thus there is no accompanying income tax form to complete. In general, for states that do not have an income ta x, the individual must find the appropriate form online, complete it, and submit it to the appropriate taxing authority. In each case, the burden is on the taxpayer to maintain adequate records to ensure compliance. Keeping track of all purchas es is also the responsibility of the individual. Unlike the federa l income tax, where forms ar e given to the individual (e.g., W-2s, 1099s, etc.), the burden of main taining records is completely on the individual. This could lead the individual to have a mo re negative “attitude” towards compliance.

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26 Fifty-eight participants listed some fo rm of “effort” as a disadvantage to paying the use tax. To date, little tax rese arch has actually examined the requirements to comply with a tax. This is probably due to the fact that most analyses focus on the federal income tax, which, in its present form, presents minimal confusion on how to actually comply with that ta x (i.e., fill out a form and s ubmit it to the IRS). Prior research has tended to focus mainly on th e complexity of tax laws (Kaplow 1998; Krause 2000). Kaplow (1998) developed a framework discussing how accurate a tax return should be and if, and why, a taxpaye r seeks outside advice when preparing a tax return. Krause (2000) argued that income tax laws are so complex that the IRS cannot always determine the “true” liability owed. The results of most of this research are not overly surprisi ng: as complexity increases, compliance decreases. In their literature review, Alm and McKee ( 1998) indicate that “burden of compliance” indeed might be a factor in tax compliance behavior. The discussion of prior research linked to burden of compliance in Alm and McKee (1998), however, focused more on complexity and uncertainty. Tax research has also focused on other issues that might make tax compliance less complex. For example, Masselli et al. (2002) examined how the use of tax preparation software influenced compliance. The results of Masselli et al. (2002) indicate that less-experienced taxpayers tend to ‘overreact’ to embedded audit warnings in these programs and increase the amount of income reported. A second way in which taxpayers reduce complexity is by using paid tax preparers to prepare tax returns. Research has examined how the use of tax preparers influences

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27 compliance (Hite and McGill 1992; Christia n et al. 1994). The results of these studies have generally shown that the us e of tax preparers generally reduces a person’s tax liability (Christi an et al. 1994). Research ha s not establishe d that this reduction in tax liability is the primary reas on for using preparers, however. In fact, some evidence suggests that taxpayers do not always prefer aggressive advice, but rather that the return be accurate (Hite and McGill 1992). Taken together, this research suggests that people try to redu ce complexity by a number of means. There are few ways that a taxpayer could reduce the complexity and/or compliance requirements of the use tax, howev er. No tax software exists that the general population could use for complying wi th the use tax, and tax preparers offer little in the way of services to help. Thus, the use tax pr ovides an interesting setting as the burden to comply currently rests with the taxpayer as compared to the sales tax where the tax is collected by the vendor. Under current regulations, an online vendor website is not required to provide any information about the responsibility for the use tax to the individual nor does it provide any information to the state if the vendor sells an item and sales tax is not collected. Th e burden thus lies with the taxpayer, who must find all applicable forms, print them, fill out, and submit the forms to the state. One may posit that this level of effort reduces compliance, and some interesting questions emerge: how much assistance (if a ny) does a taxpayer require in order to comply with use-tax laws? Would taxpaye rs prefer a system where the website automatically fills out the appropriate form for them? This area offers many avenues of investigation for future use-tax research.

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28 In summary, there is little prior empi rical research related to effort (i.e., compliance requirements imposed on a taxpa yer). Research addressing complexity has shown that as a tax law becomes more complex, however, compliance with the tax law decreases. Based on the abov e discussion, I propose the following hypothesis: H1a: The salient belief Effort will be ne gatively correlated with the Attitude variable. Funding for State The advantage most often listed in the sa lient belief identification survey was the idea that paying the use tax leads to more funding for the state. Interestingly, little tax research has examined this rather obvious point. Alm, Jackson, and McKee (1992) find that the level of popular suppor t for a public good aff ects the level of compliance. Falsetta et al. (2008) offer expe rimental evidence that taxpayers are more likely to comply with income tax laws when they support the government program with which the tax is associated. No research has examined how the indi vidual feels about paying a tax towards their state versus the federal government Based on the above discussion, I propose the following hypothesis: H1b: The salient belief Funding for State wi ll be positively correlated with the Attitude variable. Monetary Concerns Monetary concerns as defined in this st udy refer to the fact that taxpayers will have less money if they pay the use tax. Th is point generally pr ovides the tension in

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29 most tax compliance research. The seminal study of Allingham and Sandmo (1972) is widely recognized as pr oviding the foundation for modern tax compliance research. In this study, the authors developed a mode l for explaining taxpayer behavior. This model is based on the notion that given a ta x, penalty, and detecti on rate, individuals will choose a compliance level to maximize monetary utility. In my survey, 37 participants listed monetary concerns as a disadvantage to paying the use tax and saving money over paying full sales ta x in county as an advantage. Empirical research has also found that th e predictions of this model hold in a compliance setting. Both Beck et al. (1991) and Carnes and Englebrecht (1995) confirm that increasing either penalty or audit rate led to an increase in compliance.15 Cuccia (1994) refers to this line of study, which assumes that individuals will act to maximize utility, as economics-based compliance research and provides a comprehensive literature review on the topic. It should be noted that in all of these studies, individuals maximize their utility based on maximizing thei r monetary return. With regards to this current study, taxpaye rs could be making a use-tax compliance decision based on maximizing monetary utility. These prior results could be of partic ular importance when examining use-tax compliance for a number of reasons. First, there is little ch ance of an individual being caught in noncompliance of a use tax due to the low audit rate. Second, if an individual were to be aud ited, the use tax would only appl y if that individual used, stored, or consumed the taxable item in the state. If the item could conceivably be shown to have been purchased as a gift, the individual would not owe the use tax. 15 In both of these studies the term “audit rate” is analogous to “detection rate.”

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30 Hence, there is little chance that a state coul d ever prove that the individual is subject to the use tax since the indi vidual could always claim the item is elsewhere. Third, since there is minimal chance of being ca ught, there is consequently minimal chance that a person would ever incur a penalty by non-compliance. Four th, as mentioned in the list of potential differences between th e federal income and use tax earlier, the use-tax is a cash outlay. due to the wit hholding of federal tax, individuals federal income tax liability is never paid as a lu mp sum amount when the tax return is due, whereas the use tax represents an exp licit cash outlay for every transaction. (Schepanski and Shearer 1995). Based on the Allingham and Sadmo (1972) model and the fact that a person will have a minimal chance of being caught or incur a penalty for non-compliance, a person will always be monetarily better off not paying the use tax. Based on the above discussion, I propose the following hypothesis: H1c: The salient belief Monetary Concerns will be negatively correlated with the Attitude variable. Fairness The term fairness relates to the justification and validity a consumer assigns to the imposition of a given tax.16 Fifteen participants listed “pay fair share” as an advantage of paying the use tax, while 16 liste d “tax is not fair” as a disadvantage. The earlier list of potential differences described the fact that the use tax was a consumption based tax whereas the federa l income tax is income-based. People 16 A more accurate term would be “perceived fairness” si nce fairness implies that a tax is fair or unfair when in reality each person makes this decision. Ho wever, to be consistent with prior literature, the term fairness is used.

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31 could perceive one type of tax as more or less fair than the other. Given that people could find one tax more or less fair than the other, compliance decisions between the taxes could differ. Generally, equity theory is employed wh en investigating tax fairness (Moser et al. 1995; Maroney et al. 2002) It is generally assumed in these studies that an individual is more likely to pa y a tax if he or she perceive s the tax as equitable. For example, if a taxpayer believes his or her ta x liability is the co rrect/fair amount, then he or she is more likely to pay the tax. In addition, equity theory states that if a discrepancy emerges between the amount due and the amount paid, this discrepancy can be attributed to the c oncept of fairness. Thus, a ta xpayer who believes he or she owes too much is less likely to pay the full amount owed because he or she does not find the tax fair (Mos er et al. 1995). While the link between fairness and compliance is a significant and valuable research stream, other research has attempted to understand what aspects of the tax itself cause an individual to find it unfair. Jackson and Milliron (1985) identified two dimensions associated with the perception of fairness with regard to the tax: the equity of trade (commonly referred to as exchange equity) and a taxpayer’s burden relative to others (vertical and horizontal equity). Exchange equity, as defined by Jackson and Milliron (1985), refers to th e difference between the amount of tax a person pays and to the benefits he or she rece ives from the tax. If a person feels he or she pays too high of an amount relative to the benefits he or she receives, a person will find the tax unfair.

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32 There are two forms of inequity that ha ve been shown to address a taxpayer’s burden relative to others: horizontal and verti cal inequity. Horizontal inequity occurs when one individual pays a higher amount in taxes than another despite both individuals being classified in the same income bracket. For example, two single factory workers with the same compensa tion package should, according to horizontal equity theory, be paying r oughly the same in taxes. Ve rtical inequity, in turn, suggests that people who make more money sh ould consequently pay more in taxes. For example, if an extremely wealthy person such as Bill Gates is paying a smaller percentage of his income in tax than a middle-class individual, the tax more likely would be considered an unfair tax burden on the less affluent payer. An additional empirical example linking the types of ine quities with taxpayer behavior is provided by Moser et al. (1995). In this study, th e authors examine how horizontal and exchange inequity each affect tax repor ting decisions. The authors predict that taxpayers will report less income when tax rates and horizontal inequity increase. Just increasing the tax rate itself does not decrease compliance. This can be attributed to the fact that individuals will find horizontal inequity unfair and report less income, but will be less likely to find exchange ine quity unfair given the universality of the tax increase. This study thus provides evid ence that not all forms of inequity are perceived as uniformly unfair by the taxpaye r, but instead the pe rception of fairness does play a part in a taxpayer’s reporting decision. For instance, an individual may believe there is no benefit to himself/ herself in paying the use tax (exchange

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33 inequity), yet is still likely to pay the tax in recognition of the universal burden of the tax (vertical/horizontal inequity). Maroney et al. (2002) introdu ced the concept of verti cal inequity in addition to the horizontal and exchange equity dime nsions of their study. Their study explored the provision of different e xplanations based on these di mensions and its effect on taxpayer compliance. The tax used in th e study was the social security tax, with participants given an explanation as to why their social security benefits were being taxed. The parameters of the horizontal equity explanation as defined by the study stated (page 83): Congress decided to tax social secu rity income for some tax payers in an effort to enhance tax equity. Congress believes that social security benefits are intended to replace lost wages, which is very similar to other forms of retirement income (for example, a pension from an employer). Sinc e these other forms of retirement income are subject to tax, C ongress believes that a portion of social security benefits s hould also be subject to tax. The results indicate that there is not one universal type of explanation that allows for generalizations of all taxpayers in all situations. Specifically, for a subject who is already being taxed on social securi ty, the exchange equity explanation leads to greater levels of acceptance and higher degrees of perceived fairness.17 For subjects not already paying a tax on thei r social security, the higher level of acceptance is consistent with the vertical exchange explan ation. It is important to note, however, that the ethical exchange e xplanation did not actually lead to higher levels of perceived fairness for those not currently paying taxes on their social security benefits. 17 The participants in Maroney et al. (2002) were senior citizens.

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34 In summary, there is a growing body of evidence to suggest that exchange, vertical, and horizontal inequ ity all are negatively related to tax compliance behavior. Based on the above discussion, I pr opose the following hypothesis: H1d: The salient belief Fairness will be pos itively correlated with the Attitude variable. Knowledge Knowledge, as defined for this study is the information required by the taxpayer to comply with use-tax laws. K nowledge is a potentia lly significant factor that has to date received lit tle attention in tax complianc e research. The lack of attention to knowledge as a f actor can probably be attribut ed to the fact that most people are well aware of the federal income tax and know how to comply with it. The concept of knowledge of a tax could be of particular value to use-tax compliance research, however, given the variations in use-tax laws, forms, and compliance requirements from state to state. The con cept of knowledge of use tax is especially important in this study, considering how fe w people knew of the use tax before the survey. Greater knowledge of use tax mi ght help individual s understand not only how to comply, but also why the use tax exis ts. Twenty-three participants listed lack of knowledge as a reason for not paying the use tax.18 Creating knowledge is, above all, a form of education, and numerous empirical studies have examined the infl uence of education on taxpayer compliance (Kasipillai et al. 2003; Witte and Woodbury 1983). The results are mixed; Kasipillai 18 Examples of knowledge beliefs include the participant indicating that they would be afraid they would incorrectly fill out the form, not know what online purchases require payment of the use tax, not knowing where to obtain th e correct forms, etc.

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35 et al. (2003) finds that mo re education leads to an increase in compliance of undergraduate students in Malaysia. Witte and Woodbury (1985), however, find the opposite, noting that more education coul d instead lead to an increase in noncompliant behavior. The authors suggest th at this could be attributed to the fact that, for some individuals, more advanced levels of education actually suggest new avenues for avoiding compliance. This s uggests an inverted-U relationship between knowledge and compliance. When knowledge is low, increases in knowledge will improve compliance. When knowledge reach es a certain point, however, compliance is maximized and any more information given to the taxpayer could provide opportunities to lower compliance. In this current study, I assume the participants will be on the left-hand side of the inverted -U since knowledge of the use tax is low. The problem of increases in internet purchases provides a unique opportunity to improve knowledge and potentially to improve compliance. Knowledge conveyance could occur simply by installi ng a pop-up window at checkout informing the customer of the use tax due on the purch ase. Interestingly, the creation of knowledge could interact with the effort salient belief. Prior tax re search has revealed an interaction between complexity and knowledge (O’Donnell et al. 2005). Specifically, as the complexity of a tax decision increases, tax professionals with higher procedural knowledge tend to favor le ss aggressive tax positions. Procedural knowledge deals with the type of knowledge that is needed to complete a specific task. In terms of this study, I posit that gi ving a person the knowledge as to what the

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36 use tax is and how to comply with it will increase compliance through reducing the perceived effort of compliance. The question emerges as to how the me ssage can be most effectively and efficiently conveyed when attempting to cr eate awareness. Sanders et al. (2008) found that sending construction firms a letter detailing penalties associated with noncompliance did increase use-tax complianc e. Based on the above discussion, I propose the following hypothesis: H1e: The salient belief Knowledge will be positively correlated with the Attitude variable. Another Tax Participants listed as a disadvantage to paying the use tax that the tax itself is just “another tax” that must be paid. It could be argued that this salient belief is similar in scope to the monetary concern or fairness salient beliefs. Since numerous participants listed it as a sepa rate disadvantage over having to pay a tax, it was left as its own salient belief.19 No empirical research has addressed how adding a new tax to taxes already being paid by people affects their beliefs or actions towards the new tax. The current study does not seek to explore to explor e the psychological phenomena underlying the cause of Another Tax being a significant variable. Future research, however, could investigate the specif ic psychological factors i nduced when individuals are presented with a new tax. 19 Bobek and Hatfield (2003) took a similar approach to a salient belief in their paper. The authors identified “engaging in illegal” behavior as a separate salient belief over incurring a penalty or potentially being audited.

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37 Lack of prior research makes predicti ng how this salient belief will influence attitude towards paying the use tax difficult. It seems intuitive, however, that since numerous individuals listed it as a disa dvantage that paying a nother tax should be negatively correlated with attitude. Ba sed on the above discussion, I propose the following hypothesis: H1f: The salient belief Another Tax will be negatively correlated with the Attitude variable. Social Norms A potentially critical factor in a person’ s decision to comply with the use tax is the influence of social norms in general. Twenty participants listed the fact that other people do not pay as a disadvantage of complying with the use tax. Alm and McKee (1998) list social norms a main f actor in tax compliance behavior. This section highlights severa l of the theories that help to explain how and/or why social norms may affect an individual’s use-ta x compliance choice and tax-compliance research that has examined social factors and their influence on tax compliance decisions. Social comparison theory (Festinger 1954) states that an i ndividual seeks to compare him/herself to others to determ ine how he/she is doing. For example, a person may be more inclined to laugh if others around him/her are laughing. Festinger (1954) argues that this effect is more pronounced under conditions of uncertainty. Social identity theory is similar in scope to social comparison theory, but provides richer detail as to which specif ic social groups a person would compare

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38 him/herself too. Social identity theory stat es that a person will classify themselves in groups/categories. The group(s) that a person most closely identifies themselves with will become ingroups and a person will base actions and decisions to conform to the ingroup norms (Ashforth and Mael 1989). Social theories have been employe d in explaining taxpayer compliance decisions. King and Sheffrin (2002), for inst ance, examine prior research and suggest that social comparisons infl uences tax-paying behavior. For example, if a person finds his or her friends are co mplying with a tax, he or she is more likely to comply. It is important to note, however, that King and Sheffrin’s article was not an empirical study addressing social comparison theory directly. Stalans et al. (1991) examine the roles co-workers and family/friends play when an individual forms his or her beliefs about IRS enforcement activities and the acceptability of noncompliance on tax returns. The authors predicted that individuals would use work colleagues to obtain info rmation about IRS enforcement activities given the fact that tax burdens are more likely to be similar among co-workers. Further, the study predicted that co-worke rs and family members assume differing roles for the individual when it comes to tax compliance decisions. Specifically, communications from family members ar e concerned with normative issues (e.g., right versus wrong) and the fairness of ta x laws. Communications from co-workers are more likely to be concerned with opport unities or techniques to avoid detection when not complying with tax laws. Comm unication with co-workers would then decrease judgments of the appropriateness of tax compliance, the fairness of tax laws,

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39 the likelihood of formal detection for ove rstating deductions, and the severity of informal sanctions if caught by authorities. Stalans et al. (1991) utili zed data from phone interviews with adult Minnesota residents conducted by the Minnesota Center for Social Research. The results indicate that communication with co-workers lowered the perceived likelihood of detection of overstated deductions, lowered the perceived severity of punishment if caught, and lowered the perceived fairness of tax laws and positive personal norms toward compliance with tax laws. Furthe r, as the study pred icted, communication with family members increased the perceived fairness of tax laws and positive personal norms towards compliance with ta x laws. An important limitation of the study, however, is that the authors fail to link these “new” feelings with actual compliance behavior. The TPB provides th e necessary link between these findings and actual compliance, however. Based on the above discussion, I include family, friends, and co-workers as three fact ors to control for social norms. Perceived Behavioral Control As discussed previously, perceived beha vioral control deal s with the amount of control a person believes he has over a certain action (Ajzen 1991). This is not the same as actual control over an outcome. For example, suppose a forty-five year old man wanted to learn to play basketball we ll enough to play in the NBA. Even though the actual odds of a prof essional basketball team gi ving him a tryout would be remote, he might still try if he perceives that he can, in fact, make the NBA. In this

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40 study, to be consistent with Bobek and Hatfield (2003), perc eived likelihood of detection will be used to proxy fo r perceived behavioral control.20 Overall Model As discussed, according to the TPB attit ude, perceived behavioral control and social norms should be positively related to one’s intention to comply with the use tax. Stated in hypothesis form: H2: The attitude, social norm, and percei ved behavioral control constructs will be positively correlated with an i ndividual’s intention to pay the use tax.21 Differences from Federal Income Tax As discussed previously, Bobek and Hatf ield (2003) used a similar procedure to develop a model of federal tax complia nce. Only one salient belief is common between the two studies – fairness. A sec ond salient belief identif ied in this study-monetary utility--is similar in scope to B obek and Hatfield’s “minimize taxes paid.” The three other salient beliefs identified in Bobek and Hatfield (2003) were guilt feelings associated with non-compliance, br eaking the law, and incurring a penalty. It is important to note that all three of th ese variables were listed by participants in this study (see Table 2). However, they we re not included in th e current model since they were not within the 75% range cutoff fo r inclusion. Taken together, these results 20 Bobek and Hatfield (2003) actually use the audit rate multiplied by the likelihood the IRS would discover the non-compliance if audited. In th is current setting audit and discovery would occur simultaneously, so only one question will be asked. 21 Intuitively perceived likelihood of detection should be negatively correlated with perceived behavioral control (i.e., the higher the perceived likelihood of detection, the less “control” one actually has over a situation). A tax compliance setting is actually somewhat unique setting for the TPB since increasing compliance should invo lve taking away control.

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41 indicate that although people have similar salient beliefs when paying the federal income tax and the use tax, the beliefs are not identical. Method To test the model, questions were deve loped similar to othe r studies that use the TPB to test a salient beliefs mode l (Taylor and Todd 1994; Taylor and Todd 1995, Bobek and Hatfield 2003; Bobek et al 2007). This process involves asking participants about individual be liefs and the relative importa nce of these feelings with regard to each construct. For example, the survey determined that an important salient belief affecting attitude towards paying the use tax was the effort of complying with use tax. Participants were aske d how much they agree with the following statement pertaining to effort, “paying th e use tax on this purchase would be time consuming” on a 7-point likert type scale. The relative importance of this factor was determined by asking participants how much they agree with the following statement on a 7-point scale, “The amount of time it would take to pay the use tax on this purchase was very unimportant/very importa nt to me when making my compliance decision.” The “effort” score then was determined by multiplying the two questions together.22 The antecedents for social norms ask participants about different “groups” of people that would influence their decisi on: family, co-workers, and general population. For example, a participant wa s asked how much they agree with the statement, “my co-workers would want me to pay the use tax on this purchase.” 22 Some salient beliefs had more that one set of questions asked. This was to ensure that the instrument captured multiple dimensions of the construct. For example, the effort score had four questions. The full survey can be found in the Appendix.

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42 Similar to the attitude antecedents, these scores were weighted against the relative importance that the co-workers would want the individual to pay the use tax. The perceived behavioral control questi on asked participants to indicate how likely it was that Florida would discover this purchase on a 7-point scale. The overall attitude score asked participants to indicat e on a 7-point scale how much they agreed with the statement, “I have a positive att itude towards paying the use tax.” Finally, the behavioral intention was derived by as king the participant how likely is it they will pay the use tax on the purchase in the scenario (0 to 100 percent). Participants Seventy-three undergraduate and gradua te students from accounting classes were used. Demographic data for the participants can be found in Table 4.

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43 TABLE 4 – Demographic Data for Participants in the Model Validation Step Number % of Total Gender Male 44 60.27% Female 29 39.73% Age Under 20 7 9.59% 20 to 29 43 58.90% 30 to 39 17 23.29% 40 + 6 8.22% Household Income Zero to $20,000 25 34.25% $20,001 to $35,000 13 17.81% $35,001 to $50,000 11 15.07% $50,001 to $65,000 5 6.85% $65,001 to $80,000 4 5.48% $80,001 to $100,000 2 2.74% $100,000+ 13 17.81% Tax Return Status (2007 Return) Single 49 67.12% Married Filing Jointly 15 20.55% Married Filing Separately 1 1.37% Head of Household 4 5.48% Qualifying Widow(er) 1 1.37% Did Not File 3 4.11% n = 73 The participants are sligh tly older and have higher household income than the participants from the initial survey. This is not surprising since some these participants were graduate st udents, whereas the participants in the initial survey were all undergraduate students. As mentioned above, the average internet shopper tends be slightly older than an undergraduate st udent (Forsythe and Shi 2003). Thus, these subjects are even more reflective of a typical internet consumer than those

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44 participants used in the initial survey. Table 5 shows data re garding participants’ internet shopping habits. Like the participants in the initi al survey, a majority of the participants have purchased online while on ly a few have ever paid the use tax. Unlike the survey, participants were not as ked to list everything they know about the use tax. Instead, a self-r eported use-tax knowledge que stion was asked (7-point scale). The results show that the participants tended to feel they had a fair amount of use-tax knowledge (over 50% responded on the mid-point or greater). This result is probably attributed to the fact that all but tw o of participants had taken a tax course in the past where the use tax was discussed.23 23 The university that these gradua te students are attending does spend some time discussing the use tax in various tax courses. However, some of the graduate students may have attended other institutions for their undergraduate degrees where the use tax was not discussed.

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45 TABLE 5 – Internet Buying Habits and Use Tax Data for Participants in the Model Validation Step Number % of Total Awareness (Self-Reported, 1 to 7 scale) 1 (No Knowledge) 10 13.70% 2 4 5.48% 3 1 1.37% 4 5 6.85% 5 14 19.18% 6 4 5.48% 7 (High Knowledge) 5 6.85% Purchased Online Before Yes 71 97.26% No 2 2.74% Spent Online in Past Year Zero 2 2.74% $1 to $100 7 9.59% $101 to $500 32 43.84% $501 to $1,000 17 23.29% $1,001 to $5,000 11 15.07% $5,000 + 2 2.74% Paid Florida Use Tax Before Yes* 7 9.59% No 36 49.32% Not Sure 30 41.10% Paid a Use Tax in any State Before Yes 9 12.33% No 34 46.58% Not Sure 30 41.10% n = 73 To ensure that participants actually ha d paid the use tax, a follow-up question was used asking whether or not the participan t had filled out and submitted form DR-15MO. None of the 7 who indicated they had paid the use tax in the past had filled out this form. Although not conclusive, this indicates that the participant did not actua lly pay a use tax to Florida (since the o nly way the use tax can be paid in Florida is through submission of the form DR-15MO). Procedure Subjects were given the same scenario a nd description of th e use tax used in the survey. They then were asked how likel y they would be to pay the use tax on the

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46 purchase discussed in the scenario. After answering that questi on, the salient belief, attitude, social norm, and perceived beha vioral control questions discussed above were asked. Finally, demogra phic data were obtained. Results Before analyzing results, factor analysis was performed.24 The main results of the factor analysis are shown in Table 6. The questions relating to the three variables linked to social norms (family, co-workers, a nd friends) loaded to form one variable. In addition, the questions re lating to the salient belief Effort Another Tax, and Funding for State loaded correctly as well (i.e., the four questions relating to Effort loaded to form one factor two questions relating to Another Tax formed one factor, etc). For the analysis, I used these factor load scores. 24 Factor loading was conducted based on the suggestions in Fields (2005).

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47 TABLE 6 – Factor Loading and Cronbach’s Alpha for Factors with Multiple Questions Factor Cronbach's Load Alpha Salient Beliefs Effort 0.918 Hassle 0.884 Require effort 0.895 Inconvenient 0.929 Time consuming 0.874 Funding for State 0.913 Give Florida more money 0.959 Florida would benefit 0.959 Another Tax 0.785 Another tax in a multitude of taxes 0.912 Another way government is trying to get my money 0.912 Variables Directly Linked to Intention Social Norms 0.948 Family .795 Friends .770 Co-Workers .842 Descriptive statistics for all va riables can be found in TABLE 7.

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48 TABLE 7 – Descriptive Statistics for Variables in Model Validation Step Construct Mean (Std. Dev) Likelihood to pay (DV) 21.51 (31.79) Variables Directly Linked to Compliance Attitude 3.29 (1.44) Social Norms 20.72 (13.68) Perceived Behavioral Control 2.62 (1.59) Salient Beliefs Effort 95.06 (39.29) Funding for State 33.59 (19.79) Monetary Concerns 21.33 (13.59) Knowledge 17.22 (8.61) Fairness 14.70 (8.63) Another Tax 42.61 (21.81) Likelihood to pay asked participants how likely they would be to pay the use tax on a 0 to 100 percent scale. Attitude ranged from 1 to 7 Social Norms used the factor load scores from TABLE 6 (range 2.41 to 54.74) Perceived Behavioral Control ranged from 1 to 7 Effort used the factor load scores from TABLE 6 (range 14.26 to 175.52) Funding for State used the factor load scores from TABLE 6 (range 6.71 to 80.56) Monetary Concerns ranged from 1 to 49 Knowledge ranged from 1 to 36 Fairness ranged from 2 to 42 Funding for State used the factor load scores from TABLE 6 (range 6.71 to 80.56) The likelihood to pay measure had a mean of 21.51% with a standard deviation of 31.79. Next the hypotheses were tested using simply linear regression techniques. To test Hypotheses H1a through H1f, the following model was used: Attitude = 0 + 1Effort + 2Funding For State + 3Monetary Concerns + 4Knowledge + 5Fairness + 6Another Tax + To test H2, the following model was used: Likelihood = 0 + 1Attitude + 2Social Norms + 3PBC + All results can be found in Table 8.

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49 TABLE 8 – Models from Pilot Study Variable Coefficient Standa rd Error P-Value (1-tail) Likelihood = 0 + 1Attitude + 2Social Norms + 3PBC + Constant -19.049 9.179 .021 Attitude 3.448 2.55 .091 Social Norms .400 .248 .055 PBC 7.997 2.225 <.001 R2 = 27.7% Adjusted R2 = 24.6% Attitude = 0 + 1Effort + 2Funding For State + 3Monetary Concerns + 4Knowledge + 5Fairness + 6Another Tax + Constant 3.708 .530 <.001 Effort -.011 .004 .003 Funding for State .015 .009 .048 Monetary Concerns .001 0.011 .47 Knowledge .009 .017 .30 Fairness .045 .020 .018 Another Tax -.019 .008 .013 R2 = 39.8% Adjusted R2 = 34.3% The results regarding the effects of th e salient beliefs on attitude towards compliance are encouraging. Four of the si x beliefs are signifi cant at the .05 level ( Effort Funding for State Another Tax and Fairness ).25 The two salient beliefs that were not significantly re lated to attitude were Monetary Concerns (p-value = .47) and Knowledge (p-value = .30). The in significant results for the Monetary Concern variable could be attributed to the fact that the use-tax owed in this case was relatively small ($12.00). Future research coul d investigate at what point this variable does become significant (i.e., how much tax is owed before people start caring about 25 All p-values are one-tail unless otherwise mentioned.

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50 the effect on their finances paying would have). The Knowledge variable will be discussed in greater detail in the remedy section. The overall attitude score, factor load score for so cial norms, and perceived likelihood of detection (i.e., th e proxy used for PBC) were all significantly correlated in the predicted direction with intention to comply. This result supports the idea that TPB is a valid framework for explaining a person’s intention to comply with the use tax. A summary of the hypotheses and th eir results can be found in Table 9. TABLE 9 – Summary of Hypotheses Testing for Model Testing Hypothesis P-Value (1-tailed) Support/Fail H1a Effort .003 Support H1b Funding for State .048 Support H1c Monetary Concerns .47 Fail H1d Fairness .018 Support H1e Knowledge .30 Fail H1f Another Tax .013 Support H2 Model N/A Support

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51 V. Remedies for Improving Use-Tax Compliance The final part of this study develops two remedies that could help states improve use-tax compliance. Although there are numerous potential remedies, I first develop remedies based on whether it addr esses factors determined in the survey, could be easily implemented by both the st ate and the Internet vendor on the website, and do not involve the website automatica lly collecting the use tax. This last requirement is important since Quill Inc. vs. North Dakota determined that vendors did not have to collect a sa les tax for a state unless they had nexus in that state. The first specific remedy chosen was one developed to address the Effort salient belief. This remedy was chosen since it met the criteria listed above, was the most frequently listed disadvantage in th e survey, and an easy to implement solution for this remedy already exists (as explained below). Remedy – Effort The effort remedy examined is a situ ation where the online vendor asks the customer if they would like the use-tax a nd payment to the appropriate state to be automatically collected by the vendor at the time of purchase. The technology for this remedy already exists due to the Streamlined Sales and Use Tax Agreement (SSUTA) discussed previously. This agr eement allows companies to use computer programs (called “certified service providers”) to calculate the amount of tax to be collected from each customer, and to determ ine the state to which the tax should be paid. The company then collects the use tax owed from the customer and submits it to the proper state. The SSUTA is a volunt ary program and a business does not have

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52 to comply. Under the current remedy propos ed in this study, the website would not be forced to collect the use tax, but rather simply gives the customer the option of having the website collect the use tax due on be half of the customer. If the customer wishes to pay, the vendor would collect th e money and submit it to the proper state based on the shipping address of the cust omer. This remedy would thus remove almost all effort (and/or complexity) require d for compliance. A customer would just pay an additional amount (i.e., the use tax) on the online purchase. Based on this, I predict the following hypothesis: H3: When given the effort remedy, participants’ intention to comply with the use tax will be higher than when not given the remedy. Remedy Information As discussed above, the participants in the initial survey a nd pilot test were given a brief description of the use tax prior to reading the scenario. This use tax information was provided since anecdotal evidence indicates th at many individuals know little or nothing about the use tax. Without providing some minimal knowledge of the use tax to participan ts, antecedents to use tax co mpliance could not fully be examined in the model-testing phase of th is study. However, providing participants this information did not allow an examination of whether the information itself may improve compliance intentions. In this final step of the study, an info rmation manipulation is included for two reasons.26 First, it provides me with a control sample. In the absence of the remedy, having a condition with no information allows me to measure what the use-tax

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53 compliance rate currently would be for a re presentative sample of the current real world population. In the presence of the remedy, having a condition with no information allows me to measure what the use-tax compliance rate would be for individuals if they only saw the remedy. In other words, it would reveal what would happen if a state chose to impl ement the remedy while taking no other action (e.g., an education campaign). The second reason this study includes the information manipulation is because it allows me to understand how knowledge of the use tax influences compliance. As discussed above, anecdotal evidence suggests that most individuals have little knowledge of the use tax. Results of the survey in this study lend support to the notion that most people have limited knowledge of the use tax. Given this, it would be unlikely that the compliance rate for the use tax would ever increase given that the current state of knowledge of the use tax for individuals is virtua lly zero. Smith and Kinsey (1987) support this clai m by stating that in order fo r individuals to engage in the decision making process on whether to comp ly with a tax, the tax must be salient to them. One of the factors that determines if a tax is salient to the individual is whether the individual has information about the tax itself. Thus, at a bare minimum, states will need to inform individuals of what the use tax is and how to comply with the use tax. Stated in hypothesis form: H4: When given information of the use tax, participants’ intention to comply with the use tax will be higher than when not given the knowledge.

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54 An important point warrants further discussion. This hypothesis is not intended to argue that a positive linear re lationship exists between an individual’s knowledge base of the use tax and use-tax compliance. Rather, it is built on the Smith and Kinsey (1987) argument that before a person can engage in a tax compliance decision, he or she must have know ledge of the tax. In layman’s terms, zero knowledge will lead to zero compliance. Giving an individual the information on a tax will allow them to make a tax compliance decision. The individual may still decide not to comply, but the information allows the opportunity for compliance if the person chooses. It could be argued that individuals, ev en without information of the use tax, could still click the button to have the website automatically collect the tax in the remedy condition. It seems unlikely, however that individuals would choose to pay the use tax using the remedy unless they ha ve some basic knowledge of the use tax. In other words, in order for the state to s ee a significant increase in compliance, the state must not only implement the remedy, but also provide some information about the use tax to individuals. Based on this, I propose the following hypothesis: H5: Intention to comply with th e use tax will be highest when individuals are given information pertaining to the use tax and when given the effort remedy. Method The method for testing the remedy uses a 2x2 between-subjects design manipulating the effort remedy (no remedy, remedy) and information remedy

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55 (present, absent).27 In the information-present c ondition, participants saw the same paragraph describing the use tax shown in th e survey and the model validation steps. Participants in the information-absent condition did not receive any information regarding the use tax. Participants were th en given the same decision scenario as in the first two steps of the st udy. After reading the scenar io the participants saw a screen resembling a check-out screen from a typical vendor website. In the effort remedy treatment, participants were given an option to have the website automatically collect and remit the use-tax owed to the state in addition to paying a shipping and handling charge. In the no-effort remedy tr eatment, participants were not given the option, but were only shown the purchase pri ce and shipping and handling charges. The participants in the effort remedy c ondition made a decision whether to have the website collect the use-tax due. In the ot her no-effort remedy condition and in the effort remedy condition if the participant c hooses not to have th e website collect the tax, the participant was asked how likely are they to submit the use tax on the purchase. This measure serves as the dependent variable.28 A figure describing the conditions can be seen in Figure 3. Figure 3 – Experimental Set-up for Remedy Effort Remedy (website collects tax) Present Absent Information Present Remedy Absent 27 The instrument used in the Remedy step can be found in Appendix B. The instrument used in the Model validation step was virtually identical except those participants did not have the option to have the website collect the use tax. 28 If the participant chooses to have the website collect the tax, the dependent measure becomes 100.

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56 All participants were then asked the identical questions used in the model testing phase (i.e., importance of salient beliefs, weights, background). Participants One hundred and twenty-two graduate and undergraduate students at a large university participated in th is portion of the experiment. Demographic data for the participants can be found in Table 10. TABLE 10 – Demographic Data for Participants in the Remedy Step Number % of Total Gender Male 67 54.92% Female 55 45.08% Age Under 20 24 19.67% 20 to 29 87 71.31% 30 to 39 11 9.02% 40 + 0 0.00% Household Income Zero to $20,000 55 45.08% $20,001 to $35,000 26 21.31% $35,001 to $50,000 18 14.75% $50,001 to $65,000 7 5.74% $65,001 to $80,000 5 4.10% $80,001 to $100,000 3 2.46% $100,000+ 8 6.56% Tax Return Status (2007 Return) Single 95 77.87% Married Filing Jointly 11 9.02% Married Filing Separately 0 0.00% Head of Household 2 1.64% Qualifying Widow(er) 2 1.64% Did Not File 12 9.84% n = 122

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57 The participants in the experiment were similar to the participants in the model validation step. The average partic ipant tended to be under 30, unmarried, and had an annual income under $50,000. Descriptive statistics pertaining to th e participants’ use-tax knowledge and internet purchasing habits can be found in Table 11.

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58 TABLE 11 – Internet Buying Habits and Use Tax Data for Participants in the Remedy Step Number % of Total Awareness (Self-Reported, 1 to 7 scale) 1 (No Knowledge) 80 65.57% 2 16 13.11% 3 11 9.02% 4 7 5.74% 5 5 4.10% 6 1 0.82% 7 (High Knowledge) 2 1.64% Purchased Online Before Yes 120 98.36% No 2 1.64% Spent Online in Past Year Zero 24 19.67% $1 to $100 47 38.52% $101 to $500 29 23.77% $501 to $1,000 21 17.21% $1,001 to $5,000 1 0.82% $5,000 + 2 1.64% Paid Florida Use Tax Before Yes* 8 6.56% No 36 29.51% Not Sure 78 63.93% Paid a Use Tax in any State Before Yes 8 6.56% No 33 27.05% Not Sure 81 66.39% n = 122 To ensure that participants actually ha d paid the use tax, a follow-up question was used asking whether or not the participan t had filled out and submitted form DR-15MO. None of the 8 who indicated they had paid the use tax in the past had filled out this form. The typical participants had little self-reported knowledge on use tax, had purchased online before, and either had neve r paid the use tax or did not recall paying the use tax before.

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59 Manipulation Checks Two manipulation checks were used in this part of the study. First, participants were asked whether or not they were in the effort remedy condition, “Did ABC Inc. offer to collect the use tax for you ?” Eleven people missed this question of the 122 participants (91% pass rate). Resu lts did not differ when these participants were excluded. The second manipulation check asked part icipants their awareness of the use tax before and after taking the experiment on a 7-point scale. The difference between these two questions was then compared be tween the participan ts in the group who received the information on the use tax and the group who did not. The results showed a significant difference in the incr ease in the amount of awareness on the use for those participants who received the in formation on the use tax over those who did not receive the information (p-value < .001).29 This result indicates successful manipulation of information. Assumptions of ANOVA For ANOVA to be the proper statistical technique for analyzing the data, three assumptions should be checked: indepe ndence of observations, normality of the dependent variable, and equality of vari ance of the cells. A ll observations were independent of each other, supporting the first assumption. Normality of the independent variable was tested using the KolmogorovSmirnov test. Results indicated that the da ta was not normally distributed (p-value 29 The means (standard deviations) for the manipulation check for the participants in the knowledge and no-knowledge conditions were 3.11 (1.64) and 1.41 (1.60) respectively.

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60 <.001). This is not surprising given the na ture of the independent variable. Most participants either said there was a very low or very high chance they would comply. ANOVA is robust to violations of this a ssumption depending on the reason why the normality assumption was violated (Becker 1998 ; Pyzdek 2009). If the violation of the assumption is caused by heavy skewness of the data, ANOVA is not the proper statistical technique to use. If the problem is caused by heavier tails, however, ANOVA is robust to the violation of the assu mption normality. In this case, the data is bimodal (i.e., responses clustered in the tails). Given the nature of the problem, ANOVA is robust to this violation of nor mality and is still a proper statistical technique. The equality of variance assumption wa s checked using Levene’s test. The test revealed that a poten tial problem with equality of variances (p-value = .007). ANOVA, however, is robust to this vi olation as well if the cell sizes are approximately equal (DeCoster 2006). In th is study the cell sizes are approximately equal; ANOVA is therefore robust to th e violation of unequal variances. Results Hypotheses 3 through 5 were tested using ANOVA. The dependent variable was the likelihood the participant would pay th e use tax on an internet purchase.30 The mean compliance rate, standard deviation fo r the compliance rate, and number of participants in each treatment can be s een in Table 12. ANOVA results can be found in Table 13. 30 Likelihood to comply could range from 0 to 100 percent. As mentioned above, if a person in the remedy condition elected to have the website collect the use-tax owed, likelihood was coded as 100.

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61 TABLE 12 – Cell Mean and Standard Deviations for Treatment Conditions in Remedy Step fo r Likelihood of Paying the Use Tax Mean Effort remedy (website collects tax) Std. Dev. Present Absent 60.68% 25.30% 43.28% Information Present 45.87 30.53 42.67 Remedy n = 31 n = 30 n = 61 48.22% 15.69% 32.75% Absent 44.20 27.05 40.24 n = 32 n = 29 n = 61 54.35% 20.58% 45.10 29.03 n = 63 n = 59 TABLE 13 – ANOVA Results Source Type III Sum of Squares df Mean Square F Sig. Corrected Model 38557.217 3 12852.4 8.859 <.001 Intercept 171071.043 1 171071 117.915 <.001 Effort Remedy Condition 35113.834 1 35113.8 24.203 <.001 Information Remedy Condition 3708.696 1 3708.7 2.556 0.114 Interaction 61.778 1 61.778 0.043 0.837 Error 171194.75 118 1450.8 Total 386072 122 Corrected Total 209751.967 121 R2 = .184 / Adjusted R2 = .163 The results indicate that participants in the effort remedy condition are more likely to comply than participants in the non-remedy condition (p-value < .001). This provides strong support for Hypothesis 3, a nd indicates that the remedy proposed would increase compliance on the use tax. In addition, Hypothesis 4 is also supported (p-value = .057, one-tailed test). This indicates that providing information to individuals will also increase complian ce on the use tax. Finally, there was no

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62 significant interaction (p-val ue = .837). Thus, Hypothesi s 5 is not supported. Two possible explanations for this exist. First, these two remedies are mutually independent of each other and there is simply no interaction (i.e., they will each improve compliance at the same rate regardle ss of whether the othe r is present). The second potential explanation is that perhap s there is a confou nding problem between the two remedies. Specifically, that th e effort remedy manipulation is providing information about the use tax and, thus, is masking the interaction effects. This potential explanation is explored in the Supplementary Results section. Next, to determine why exactly people were more likely to comply in the Remedy condition, multiple t-tests were run compar ing salient belief scores for the six salient beliefs between participants in the remedy and non-remedy conditions.31 Results of the t-tests can be found in Table 14. 31 T-tests compared only the scores between the remedy conditions for people who received information on the use tax. Factor load values determined in the model validation step were used to determine the salient belief values in this step.

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63 TABLE 14 – T-Tests Comparing Salient Beliefs between Part icipants in the Effort Remedy Conditions Salient Belief No Remedy Remedy T-Test (Std Dev.) (Std. Dev.) P-Value (2-Tailed) Effort 97.42 64.37 3.272 (64.37) (42.99) 0.002 FundingState 29.57 35.27 -1.234 (17.32) (18.67) 0.222 MonConcerns 22.90 23.39 -.141 (13.08) (13.87) 0.888 Knowledge* 14.93 17.58 -1.10 (7.52) (11.01) 0.276 Fairness 13.40 15.23 -0.894 (7.21) (8.64) 0.375 AnotherTax 41.70 49.07 -1.446 (19.63) (20.11) 0.153 Equity of variance tests revealed that the salient belief Knowledge did not have equal variances. The t-test for Knowledge was used then assuming non-equal variances. All ot her reported p-values assume equal variances. The only salient belief score that was significantly different was the Effort (pvalue = .002). This finding indicates th at the only thing that differed between participants in the two conditions was the Effort salient belief. This result supports the conclusion that the effort remedy lowe red effort and this lowering of effort increased compliance. Supplementary Analysis Additional t-tests were run comparing th e effort remedy conditions. The first test examined whether the participant w ould buy from the website in the future (7point scale). This question was asked to determine whether the effort remedy would have a negative impact on future buying be havior, a potential concern for website vendors. Results indicate th at there is not a significan t difference of future buying

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64 habits of participants in the effort re medy present and absent condition (p-value = .109). The second t-test dealt with the quest ion regarding the pe rceived likelihood that Florida (the state where the use tax w ould be applicable) would find out about the purchase. Participants were asked how lik ely they thought it was that Florida would find out about the purchase (7-point scal e). This question was asked due to the potential concern that a pe rson would feel it more likel y they would be caught noncomplying in the remedy condition if they selected not to have the website collect. There was no significant difference in a pe rson’s perceived likelihood they would get caught between the effort remedy present and absent conditions (p-value = .559). Finally, t-tests were run to check to en sure that the effort remedy did not add any additional information to the partic ipants. Specifically, a potential confounding problem could occur if the effort remedy wa s, by itself, providing information to the participant on the use tax. Two t-tests were conducted comparing Knowledge scores between participants in the effort remedy present and absent conditions within the information present and absent conditi ons. No significant results were found. Specifically, there was no significant difference between the Knowledge scores in the effort remedy present and absent conditions within the information present condition (p-value = .666) or within the informa tion not present condition (p-value = .230). These results provide support for the positi on that the effort remedy did not itself enhance knowledge of the use tax, which was the intent of the separate information remedy.

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65 VI. Conclusion This study investigated use-tax complianc e using a three-step approach. The first step involved building a survey base d on the suggestions of Ajzen and Fishbein (1980) to determine potential factors (termed salient beliefs) that are pertinent to individuals when facing a use-tax compliance decision. Results of the initial survey reveal that the effort of complying with the use tax, potential revenue to the state if the individual complied, fairness of the use tax, monetary concerns of the individual, perceived knowledge of the use tax, and soci al influences were the most mentioned factors contributing to individua ls’ use tax compliance decisions. The second step in this study develops a model, based on the Theory of Planned Behavior, incorporating these salien t beliefs. Results of the model testing indicate that the salient beliefs Effort, Funding for State, Fairness, and Another Tax identified in the survey were correlated to an individual’s attitude. Finally, the third step involved testin g remedies that (1) provided explicit information about the use tax on the web site at the time of purchase and (2) gave the individual the option to have the website automatically collect the use tax due. Results indicate that both remedies increased use-tax compliance – compliance increased when individuals were given more knowledge on the use tax and also when presented with the option to have the website automatically collect the use tax. Interaction effects, howev er, were not significant. The results of this study contribute to the academic accounting literature and have implications for policy makers. First, this study expands tax compliance

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66 research into a relatively unexplored tax. Virtually all prior empirical tax compliance research has focused on the income tax. Specifically, prior research has focused on the federal income tax. Given the multitude of differences between different types of taxes, it is important to begin to explor e whether or not compliance decisions differ based on the tax in question. Second, this study identifies six specific factors th at help to explain an individual’s use-tax compliance decision. Thes e results give policy makers and future researchers specific areas to explore when trying to find solutions for the use-tax compliance problem. Third, this study provides some evidence that factors that influence a tax compliance decision change based on the ta x in question. Specifically, the factors that influence a use-tax compliance decisi on are different from the factors that influence a federal income tax co mpliance decision. Specifically the Effort Funding for the State Monetary Concerns Knowledge and Another Tax salient beliefs were different from the salient beliefs determin ed in Bobek and Hatfield (2003). This result gives support to the c onclusion that it is not pr udent for policy makers and researchers to look for compliance soluti ons for a tax based on prior federal tax research. One must take into account the specific tax in question. Fourth, this study provides policy makers with two potential solutions to the use-tax compliance problem. The first pot ential solution involves having internet vendors give the customer a choice whether or not the website would automatically collect the tax. This solution would be beneficial to the state, by increasing use-tax

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67 revenue, without hurting internet vendors’ profit (i.e., those customer who do not wish to pay the use tax do not have to and we bsite could still collect the profits). This solution could be viewed as a compromise between the state forcing the vendor to collect the use tax and the webs ite not having to do anything. The second potential solution this study offers states would not involve any new law. Simply improving the residents’ knowledge base of the use tax would also improve compliance. This could be accomplished by an advertising campaign. This is a low cost remedy for a potentially large tax revenue gain. There are several limitations of this study that should be considered when interpreting the results. First, participants all came from one stat e that does not have an income tax and, thus, participants do not ha ve an income tax return to fill out that has a line item pertaining to the use tax. Different states ha ve different use-tax compliance rules and regulations and, perhap s, publicity regarding their use tax. Future research could rep licate the study using particip ants from a state that does have a state income tax to determine whet her the results differ when participants potentially have increased awareness of th eir state-level tax obligations. A second potential limitation is that the amount of use tax due did not vary, but was held constant throughout all steps. It is unclea r whether people would behave differently if more or less use tax was owed. Third, the type of information provided was not manipulated in anyway. Providing slightly more or less information or changing the wording on the information might lead to different compliance decisions. Finally, only one coder was used when deriving the salient belief list.

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68 This paper provides several avenues for fu ture research. First, research could compare the proposed remedies in this study to remedies implemented by states (i.e., line item on tax return). S econd, research could continue to explore differences between federal and state taxes. For exam ple, are there potential differences between a state and federal income tax compliance decision? Third, research could examine in more detail the specific factors identified in this study. For example, what are the psychological factors behind the salient belief Another Tax ? Fourth, research could potentially examine the most optimal way to improve knowledge on a tax. This current study did not manipulate the type or amount of information received on the use tax. Future research could also examin e what specific pieces of information are useful for improving compliance.

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69 References Ajzen., I. The Theory of Planned Behavior Organizational Behavior and Human Decision Processes (1991) pp. 179-211. Ajzen, I. and M. Fishbein. Understanding Attitudes and Predicting Social Behavior, Englewood Cliffs, NJ: Prentice Hall, Inc. (1980). Albring, S., L. F. Mills, and M. Plumlee. Beanie Baby Billions? Unpaid Taxes on Internet Auctions, Tax Notes (2000) pp. 1153-1159. Allingham, M. G. and A. Sandmo. Income Tax Evasion: A Theoretical Analysis, Journal of Public Economics (November 1972) pp. 323-338. Alm, J., B. Jackson, and M. McKee. Estimating the Determinants of Taxpayer Compliance with Experimental Data, National Tax Journal (March 1992) pp. 107-114. Alm, J. and M. McKee. Extending the Lessons of Laboratory Experiments on Tax Compliance to Managerial and Decision Economics, Managerial and Decision Economics (1998) pp. 259-275. Ashforth, B.E. and F. Mael. Social Identity Theory and the Organization, Academy of Management Review (1989) pp. 20-39. Beck, L., and I. Ajzen. Predicting Dishonest Actions Using the Theory of Planned Behavior, Journal of Research in Personality (1991) pp. 285-301. Beck, P. J., J. S., Davis, and W. Jung. E xperimental Evidence on an Economic Model of Taxpayer Aggression Under Stra tegic and Nonstrategic Audits, Contemporary Accounting Research (Fall 1992) pp. 86-112. Becker, L.A. Explore: Assumption testing for ANOVA, http://web.uccs.edu/lbec kerspss80/explore2.htm (1998). Ben-Sharar, O., and A. Harel. Blaming th e Victim: Optimal Incentives for Private Precautions Against Crime, Journal of Law and Economics (1995) pp. 434455.

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70 Bobek, D. D., and R. C. Hatfield. An Invest igation of the Theory of Planned Behavior and the Role of Moral Obligation in Tax Compliance, Behavioral Research in Accounting (2003) pp. 13-38. Bobek, D. D., R. C. Hatfield, and K. Went zel. An Investigation of Why Taxpayers Prefer Refunds: A Theory of Planned Behavior Approach, Journal of the American Taxation Association (2007) pp. 93-111. Bruce, D. and W. F. Fox. E-Commerce in the Context of Declin ing State Sales Tax Bases, National Tax Journal (2000) pp. 1373-1388. Bruce, D. and W.F. Fox. State and Local Tax Revenue Losses from E-Commerce: Estimates as of July 2004, The University of Tennessee Center for Business and Economic Research (2004). Carnes, G. and T. D. Englebrecht. An Inve stigation of the Effect of Detection Risk Perceptions, Penalty Sanc tions, and Income Visib ility on Tax Compliance, Journal of the American Taxation Association (1995) pp. 26-41. Christian, C.W., S. Gupta, G. J. Weber, a nd E. Willis. The Relation Between the Use of Tax Preparers and Taxpayers’ Prepayment Position, The Journal of the American Taxation Association (1994) pp. 17-40. Cohen, J., L. Pant, and D. Sharp. An Empi rical Investigation of Attitudinal Factors Affecting Course Coverage of International Issues, International Journal of Accounting (1991) pp. 286-301. Cornia, G. C., D. L. Sjoquist and L. C. Walters. Sales and Use Tax Simplification and Voluntary Compliance, Public Budgeting and Finance (2004) pp. 1-31. Cowell, F. A. Tax Evasion and Inequity, Journal of Economic Psychology (1992) pp. 521-543. Cuccia, A. D. The Economics of Tax Co mpliance: What Do We Know and Where Do We Go?, Journal of Accounting Literature (1994) pp. 81-104. DeCoster, J. Testing Group Differences using T-Tests, ANOVA, and Nonparametric Measures, http://www.stat-help.com/notes.html (2006). Druker, J. Struggling States Let Retaile rs Keep $1 Billion in Sales Taxes, Study Says, The Wall Street Journal Online (November 18th, 2008).

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71 Falsetta, D., J. B. Kahle, and G. T. Ts akumis. The Influence of Goal Conflict and Information Asymmetry on Individuals’ Tax Evasion Judgments, Working Paper (2007). Field, A.P. Discovering Statistics Using SPSS – 2nd Edition (2005), London: Sage. Festinger, L. A Theory of Social Comparison Processes, Human Relations (1954) pp. 117-140. Florida Tax Watch. Out-of-State Online S hopping Costs Florida Thousands of Jobs, Online Website (February 2009). Friedland, N., A Note on Tax Evasion as a Function of the Quality of Information about the Magnitude and Credibility of Threatened Fines: Some Preliminary Research, Journal of Applied Social Psychology (February 1982) pp. 52-59. Folkman, S., R. S. Lazarus, S. Pimley, and J. Novacek. Age Differences in Stress and Coping Processes, Psychology and Aging (1987) pp. 171-184. Forsythe, S. M. and B. Shi. Consumer Pa tronage and Risk Perceptions in Internet Shopping, Journal of Business Research (2003) pp. 867-875. Fox, W. F. and M. N. Murray. The Sales Tax and Electronic Commerce: So What’s New?, National Tax Journal (1997) pp. 573-592. Goolsbee, A. In a World Without Border s: The Impact of Taxes on Internet Commerce, Quarterly Journal of Economics (2000) pp. 561-576. Goolsbee, A. and J. Zittrain. Evaluating th e Costs and Benefits of Taxing Internet Commerce, National Tax Journal (1999) pp. 413-428. Grasmick, H.G., and L. Appleton. Legal Punishment and Social Stigma: A Comparison of Two Deterrence Models, Social Science Quarterly (1977) pp. 15-28. Hageman, A. Understanding the Antecedents and Consequences of Sales & Use Tax Policy: Evidence from Three Studies, University of Central Florida (Dissertation 2008). Hanno, D. M. and G. R. Violette. An Anal ysis of Moral and Social Influences on Taxpayer Behavior, Behavioral Research in Accounting (1996) pp. 56-75.

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72 Heckman, Candace. Well Spent: Do I Need to Collect State Sales Tax at My Yard Sale?, Seattle Post-Inte lligencer Online Website (September 28, 2005) http://seattlepi.nw source.com/local/242523_wellspent28.html. Hite, P. and G. McGill. An Examination of Taxpayer Preference for Aggressive Tax Advice, National Tax Journal (December 1992) pp. 389-403. Internet Tax Freedom Act. http://www.ecommercecommission.org/ITFA.htm IRS News Releases, Report to Congress: IRS Tax Compliance Activities, Online Website (2003). IRS News Releases, IRS Updates its Ta x Gap Estimates, Online Website (2006). Jackson, B. R. and V. C. Milliron. Tax Co mpliance Research:Findings, problems, and Prospects, Journal of Accounting Literature (1986) pp. 124-165. Jackson, B. R. and Jones, S. M., Salience of Tax Evasion Penalties Versus Detection Risk, Journal of the American Taxation Association (Spring 1985) pp. 7-17. Kaplow, L. Accuracy, Complexity, and the Income Tax, The Journal of Law, Economics, & Organization (1998) pp. 61-83. Kasipillai, J., N. Aripin, and N. A. Am ram. The Influence of Education on Tax Avoidance and Tax Evasion, eJournal of Tax Research (2003) http://www.austlit.edu.au/a u/journals/eJTR/2003/7.html. King, S., and S. M. Sheffrin. Tax Evasion and Equity Theory: An Investigative Approach, International Tax and Public Finance (2002) pp. 505-521. Kovar, S. E., K. G. Burke and B. R. Kovar. Consumer Responses to the CPA Webtrust Assurance, Journal of Information Systems (2000) pp. 17-35. Krause, K. Tax Complexity: Problem or Opportunity? Public Finance Review (2000) pp. 395-414. Liska, A. E. and Messner, S. F., Perspectives on Crime and Devi ation: Third Edition (Prentice Hall 1999). Long, S. B. and J. A. Swingen. Taxpayer Compliance:Setting New Agendas For Research, Law and Society Review (1991) pp. 637-684.

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73 Maine Revenue Services Website. http://www.state.me.us/revenue/Compliance/UseTaxComplianceFAQs.htm#in drpt Malani, Helen. Will Online Shopping Rema in Tax-Free?, Shopzilla.com (2007). Maroney, J. J., T. J. Rupert and B. H. Anderson. Taxpayer Reaction to Perceived Inequity: An Investigation of Indirect Effects and the Equity-Control Model, The Journal of the Amer ican Taxation Association (1998) pp. 60-73. Maroney, J. J., T. J. Rupert and M. L. Wartick. The Perceived Fairness of Taxing Social Security Benefits: The Effect of Explanations Based on Different Dimensions of Tax Equity, The Journal of the American Taxation Association (2002) pp. 79-92. Masselli, J.J., R.C. Ricketts, V. Arnold, and S.G. Sutton. The Impact of Embedded Intelligent Agents on Tax-Reporting Decisions, The Journal of the American Taxation Association (2002) pp. 60-78. Mauldin, E., and V. Arunachalam. An Experimental Examination of Alternative Forms of Web Assurance for Bu siness-to-Consumer e-Commerce, Journal of Information Systems (2002) pp. 33-54. McClure, C. E. Jr. Electronic Commerce a nd the State Retail Sales Tax: A Challenge to American Federalism, International Tax and Public Finance (1999) pp. 193-224. Moser, D. V., J. H. Evans III, C. K. Kim. The effects of Horizontal and Exchange Inequity on Tax Reporting Decisions, The Accounting Review (1995) pp. 619634. O’Donnell, E., B. Kock, and J. Boone. The Influence of Domain Knowledge and Task Complexity on Tax Professionals’ Compliance Recommendations, Accounting, Organization, a nd Society (2005) pp. 145-165. Porcano, T. M. and C. E. Price. The Effe cts of Social Stigmatization on Tax Evasion, Advances in Taxation (1993) pp.197-217. Pyzdek, T. Does Normality Really Matt er in ANOVA? Six Sigma Training.ORG (2009). Quill Corp. v. North Dakota (91-0194), 504 U.S. 298 (1992).

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74 Ritsema, C. M., D. W. Thomas, and G. D. Ferrier. Economic and Behavioral Determinants of Tax Compliance: Evidence from the 1997 Arkansas Tax Penalty Amnesty Program, IRS Re search Conference (2003). Roberts, M. L. Tax Accountants; Judgme nt/Decision-Making Res earch: A Review and Synthesis, The Journal of the American Taxation Association (Spring 1998) pp. 78-121. Sanders, D.L., P. M. J. Reckers, and G. S. Iyer. Influence of Accountability and Penalty Awareness on Tax Compliance, The Journal of the American Taxation Association (Fall 2008) pp. 1-20. Schepanski, A. and T. Shear er. A Prospect Theory Account of the Income Tax Withholding Phenomenon, Organizational Behavior and Human Decision Processes (August 1995) pp. 174-186. Smith, K.W. and K.A. Kinsey. Understa nding Taxpaying Behavior: A Conceptual Framework with Implications for Research, Law & Society Review (1987) pp. 639-663. Stalans, L. J., K. A. Kinsey, and K. W. Smith. Listening to Different Voices: Formation of Sanction Beliefs and Taxpaying Norms, Journal of Applied Social Psychology (1991) pp. 119-138. State of Florida Long-Range Financia l Outlook Fiscal Year 2008-08 through 201011. Streamlined Sales Tax Project. http://www.streamlinedsalestax.org/ Tannenwald, Robert. Are State and Local Revenue Systems Becoming Obsolete?, National Tax Journal (2002) pp. 467-489. Taylor, S., and P. Todd. An Integrated M odel of Waste Management Behavior: A Test of Household Recycli ng and Composting Intentions, Environment and Behavior (1995) pp. 603-630. Taylor, S. and P. Todd. Understanding In formation Technology Usage: A Test of Competing Models, Information Systems Research (1995) pp. 144-176. Taylor, S. and P. Todd. Understanding th e Determinants of Consumer Composting Behavior, Journal of Applied Social Psychology (1997) pp. 602-628. Trandel, G. A. Evading The Use Tax On Cross-border Sales, Journal of Public Economics (1992) pp. 313-331.

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75 United States Sales Tax Site. http:/ /www.usa-sales-use-tax-e-commerce.com/. United States Census Bureau. http ://www.census.gov/eos/www/ebusiness614.htm. Wagner, R. T. Hearing Before the U. S. Senate Committee on Finance (July 21, 2004). Witte, A. D. and D. F. Woodbury. The Eff ect of Tax Laws and Tax Administration on Tax Compliance: The Case of the U.S. Individual Income Tax, National Tax Journal (1985) pp. 1-13.

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76 APPENDICES

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77 Appendix A: Initial Survey Instrument Survey on the Florida Use Tax Researcher: Chris Jones The University of South Florida COB – School of Accountancy Tampa, FL 33620-5500 jonesc@coba.usf.edu General Instructions In completing this survey you will be asked to an swer questions relating to state taxes. The survey also contains general questions re lated to your background. Please answer the questions as if you were actually faced with the decisions described. Your responses to all questions will remain strictly confidential and will be analyzed only after being combined with data from all other part icipants. Please do not put your name, social security number, school ID, or any other identifying information on the materials. There are no right or wrong answers. By completing the case and related questions, y ou agree to voluntarily participate in this survey. This study is NOT affiliated with the Florida Department of Revenue or the Internal Revenue Service (IRS). The information provided in this survey will only be used by the researcher listed above for his research. Your participation in this survey is greatly appreciated. If you have any questions or comments, please feel free to ema il the researcher listed above.

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78 Many states (and the federal government) impose taxes of which individuals may have little or no knowledge. We are in terested in understa nding individuals’ knowledge of one specific tax called the use tax In the space provided below, please describe everything you know about the use tax Note: If you do not know anything about the use tax please just put, “I have never heard of a use tax.” _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ _____________________________________________________________________ __________________________________________________________________

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79 The following paragraphs define what a use tax is. Do NOT go back and change what you wrote on the previous page. Definition A use tax is a tax imposed by the state to use, store, or consume an item in the state. For example, if you purchase a television in Georgia to use in your apartment in Florida, you might be subject to the Florida Use Tax. A sales tax is collected at the point of pur chase from the retailer (vendor), and the retailer remits the tax to th e state. Conversely, a use ta x is paid by the individual directly to the state. Generally, states offer a credit for any sale s tax paid in another state. That is, individuals typically do not ha ve to pay both use tax and sa les tax on the same item. To pay the use tax in Florida, an indivi dual must fill out and submit Form DR-15MO (Florida Department of Revenue Out-of-State Purchase Return) on a quarterly basis. Online Purchases Often times when an individual makes a pur chase online, no sales tax is charged. Generally in this situation, the individual would owe a use tax to the state where the product is used. For example, suppose you purchase a DVD player from Amazon.com for use in your home in Florida. If Amazon.com does not charge a sales tax at the time of your purchase, you would owe the use tax to th e state of Florida. Currently, the use tax rate in Florida is 6%. If the DVD player in the preceding example cost $100, it would be your responsibil ity to submit the $6 use tax to the state of Florida. Instructions for proceeding Based on the use tax information provided abov e, please read the scenario on the next page and answer the questions that follow.

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80 Internet Purchase Scenario You recently received a gift of $250 for your birthday. After thinking about it for a few days you decide to purch ase an 8 GB Apple iPod T ouch with the money. You shop around and look online for the best deal You find a website selling the 8 GB Touch for $200. You decide to place your order with the website. You notice the website does not charge a sa les tax on the purchase. The Florida Use Tax due on this purchase is $12.00 (6% of $200) and this amount is not withheld by the internet site where you made your purchase. So to comply with the Florida Use Tax, you will need to co mplete and send Form DR-15MO with a $12.00 check to the Florida Department of Revenue.

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81 The following question asks your opin ion on paying the Florida Use Tax You may look back at the scenario at any point while answering the question There are no right or wrong answers 1. Please list all the advantages and disadvantag es of paying the Florida Use Tax on this purchase. What else do you associate with paying the Florida Use Tax on this purchase? ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ _____________________________________________________________________

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82 The following questions relate to your background information. Please check or circle your re sponse unless otherwise indicated. 1. Gender: ____Female ____ Male 2. Age: ____ Under 20 ____ 50 – 59 ____ 20 – 29 ____ 60 – 69 ____ 30 – 39 ____ 70+ ____ 40 – 49 3. Education Level (please mark the selection that best desc ribes your education status): ____ Currently pursuing a b achelor’s degree ____ I have a bachelor’s degree ____ Currently pursuing a master’s degree ____ I have a master’s degree ____ Currently pursuing a doctoral degree ____ I have a doctoral degree ____ Other Please describe _____________________ 4. Tax Return Status (on 2007 return): ____ Single ____ Head of Household ____ Married Filing Jointly ____ Married Filing Separately ____ Qualifying Widow(er) with Dependent Child ____ Did Not File

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83 5. What is your household income? ____ Zero $20,000 ____ $65,001 $80,000 ____ $20,001 $35,000 ____ $80,001 $100,000 ____ $35,001 $50,000 ____ $100,000+ ____ $50,001 $65,000 6. How many years of work experience do you have? ____ Years ____ Months 7. Have you ever purchased an item via the internet? ____ Yes ____ No 8. If you answered “Yes” to Question #7 – in general, on your onlin e purchases, please estimate the percentage of vendors that co llect a sales and/or use tax by making a slash mark (“/”) at the appropr iate place on the scale below. |--------|--------|---------|---------|----------|--------|--------|--------|--------|--------| 0% 10 20 30 40 50 60 70 80 90 100% 9. In the past year, what is your estimate of how much you have spent on purchases made via the internet (in dollars)? ____ Zero ____ $1,001 to $5,000 ____ $1 to $100 ____ $5,001 to $10,000 ____ $101 to $500 ____ $10,000+ ____ $501 to $1,000

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84 10. How often would you estimate you purchase an item via the internet? ____ Once a year ____ Multiple times during a year (but not monthly) ____ Once a month ____ Multiple times during a month (but not weekly) ____ Once a week ____ Multiple times during a week (but not daily) ____ Once a day ____ Multiple times during a day ____ I do not make purchases via the internet 11. Have you ever paid a use tax in Florida? ____ Yes ____ No ____ Don’t know 12. Have you ever paid a use tax in any state? ____ Yes ____ No ____ Don’t know 13. Have you ever taken a tax course at USF or any other college or university? ____ Yes ____ No ____ Don’t remember 14. Please indicate how strongly you agree wi th the following statement by making a slash mark (“/”) at the appropr iate place on the scale below. I think it would be morally wr ong to engage in tax evasion. Strongly Strongly Disagree Agree |--------|--------|---------|---------|----------|--------|--------|--------|--------|--------| 0 10 20 30 40 50 60 70 80 90 100

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85 Appendix B: Remedy Instrument Experiment Examining the Florida Use Tax Researcher: Chris Jones The University of South Florida COB – School of Accountancy Tampa, FL 33620-5500 jonesc@coba.usf.edu General Instructions In completing this survey you will be asked to answer questions relating to state taxes. The survey also contains general questions related to your bac kground. Please answer the questions as if you were ac tually faced with the decisions described. Your responses to all questions will remain strictly confid ential and will be analyzed only after being combined with data from all other partic ipants. Please do not put your name, social security number, school ID, or any other id entifying information on the materials. There are no right or wrong answers. By completing the case and related questions, y ou agree to voluntarily participate in this survey. This study is NOT affiliated w ith the Florida Department of Revenue or the Internal Revenue Service (IRS). The information provided in this survey will only be used by the researcher listed on the previous slide. Your participation in this survey is greatly appreciated. If you have any questions or comments, please feel free to email the re searcher listed on the previous page. The following paragraphs define what a use tax is.

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86 Definition A use tax is a tax imposed by the state to use, store, or consume an item in the state. For example, if you purchase a television in Georgi a to use in your apartment in Florida, you might be subject to the Florida Use Tax. A sales tax is collected at the point of purchas e from the retailer (vendor), and the retailer remits the tax to the state. Although the use tax could be potentially withheld by the vendor, it is often paid by the in dividual directly to the state. Generally, states offer a credit for any sales tax paid in another state. That is, individuals typically do not have to pay both use ta x and sales tax on the same item. Assuming the internet vendor does not withhold the use tax due, to pay the use tax in Florida, an individual must fill out and submit Form DR-15MO (Florida Department of Revenue Out-of-State Purchase Return).

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87 Online Purchases Often times when an individual makes a pur chase online, no sales tax is charged. Generally in this situation, the individual would owe a use tax to the state where the product is used. For example, suppose you purchase a DVD player from Amazon.com for use in your home in Florida. If Amazon.c om does not charge a sales tax at the time of your purchase, you would owe the use tax to the state of Florida. Currently, the use tax rate in Florida is 6%. If the DVD play er in the preceding example cost $100, it would be your responsibility to subm it the $6 use tax to the state of Florida. Instructions for Proceeding Based on the use tax information provided abov e, please read the scenario on a following page and answer the questions that follow.

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88 On the next page you will be shown a scenar io in which you will be asked to make a compliance decision about whether you would pay a use tax. Before proceeding, take a moment to think about use tax. Please f eel free to go back and reread the use tax definition by hitting the "<>" button to proceed to the scenario.

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89 Internet Purchase Scenario You recently received a gift of $250 for your birthday. After thinking about it for a few days you decide to purchase an 8 GB A pple iPod Touch with the money. You shop around and look online for the best deal. You find a website (ABC Inc.) selling the 8 GB Touch for $200. You decide to place your or der on ABC Inc.’s website. You notice ABC Inc. is an out-of-state vendor and does not charge a sales tax on the purchase. So you owe a $12.00 ($200 x 6%) use tax to Florida. The use tax amount is not withheld by the in ternet site where you made your purchase. So to comply with the Florida Use Tax, you will need to complete and send Form DR15MO with a $12.00 check to the Florida Department of Revenue. The next page shows the order form on ABC Inc.’s website.

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90 ABC Inc. Please review your purchase Description Price Item #1001 8 GB Apple iPod Touch $200.00 USD Shipping and Handling $5.00 USD Sales and Use Tax Sales Tax $0.00 USD Use Tax* $0.00 USD TOTAL $205.00 USD *Based on your shipping information, you may be subject to the Florida Use Tax. You are responsible for paying any use tax associated with this purchase. Note that ABC Inc. WILL NOT disclose to FLORIDA any info rmation pertaining to this purchase. If this information is correct please sele ct the "Next>>" butt on located on the bottom right portion of the screen. If you wish to return to the previous screen select the "<
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91 Compliance Decision How likely are you to fill out Form DR-15MO and pay the Florida Use Tax on this purchase (0 to 100, with 0 indicating a 0 pe rcent likelihood you would pay and 100 being a 100 percent likeli hood you would pay)?

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92 Questions The following questions relate to various i ssues associated with previous screens. There are no right or wrong answers Before getting to the check-out screen, how much information was presented to you in this experiment on the use tax? 1 (No information was p resented) 2 3 4 5 6 7 (Much information was p resented) Did ABC Inc. offer to collect the use tax for you? Yes No How much awareness of the use tax did you have before taking this experiment? 1 (None) 2 3 4 5 6 7 (A lot) How much awareness of the use tax, based on information presented in this experiment, do you have now? 1 (None) 2 3 4 5 6 7 (A lot) Assuming ABC Inc. actually existed, how lik ely would you be to purchase from their website in the future? Very Unlikely Unlikely Somewhat Unlikely Undecided Somewhat Likely Likely Very Likely How likely is it that Florida woul d find out about this purchase? Very Unlikely Unlikely Somewhat Unlikely Undecided Somewhat Likely Likely Very Likely

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93 The following questions ask your opinion on va rious issues associated with paying the Florida Use Tax and on your compliance decision. You may go back and look at the scenario an d/or use tax definition at any time by hitting the "<
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94 The inconvenience involved in paying the use tax on this purchase was _______ to me when making my compliance decision. N ot at all Important Very Unimportant Somewhat Unimportant N either Important nor Unimportant Somewhat Important Very Important Extremely Important Paying the use tax on this purchase would be time consuming. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree The amount of time it would take to pay th e use tax on this purchase was _______ to me when making my compliance decision. N ot at all Important Very Unimportant Somewhat Unimportant N either Important nor Unimportant Somewhat Important Very Important Extremely Important Paying the use tax on this purchase would give Florida more money. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree The fact that payment of the use tax on th is purchase would result in Florida receiving money was _______ to me when ma king my compliance decision. N ot at all Important Very Unimportant Somewhat Unimportant N either Important nor Unimportant Somewhat Important Very Important Extremely Important Florida would benefit if I pay the use tax on this purchase. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree

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95 The fact that Florida would benefit if I would pay the use tax was ________ to me when making my compliance decision. N ot at all Important Very Unimportant Somewhat Unimportant N either Important nor Unimportant Somewhat Important Very Important Extremely Important Paying the use tax on this purchas e would affect my finances. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree The effect payment of the use tax would have on my finances was ________ to me when making my compliance decision. N ot at all Important Very Unimportant Somewhat Unimportant N either Important nor Unimportant Somewhat Important Very Important Extremely Important I think I know a lot a bout the use tax. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree The amount of knowledge I have on the us e tax was ________ to me when making my compliance decision. N ot at all Important Very Unimportant Somewhat Unimportant N either Important nor Unimportant Somewhat Important Very Important Extremely Important I think the use tax is fair. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree

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96 The fairness of the use tax was ________ to me when making my compliance decision. N ot at all Important Very Unimportant Somewhat Unimportant N either Important nor Unimportant Somewhat Important Very Important Extremely Important I think of the use tax as another tax among a multitude of taxes. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree The fact that the use tax is just anot her tax among a multitude of taxes was ________ to me when making my compliance decision. N ot at all Important Very Unimportant Somewhat Unimportant N either Important nor Unimportant Somewhat Important Very Important Extremely Important I think of the use tax as just another way the government is trying to get my money. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree The fact that the use tax is just another wa y the government is trying to get my money was ________ to me when making my compliance decision. N ot at all Important Very Unimportant Somewhat Unimportant N either Important nor Unimportant Somewhat Important Very Important Extremely Important My family would want me to pay the use tax on this purchase. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree

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97 Whether my family would want me to pa y the use tax on this purchase was ________ to me when making my compliance decision. N ot at all Important Very Unimportant Somewhat Unimportant N either Important nor Unimportant Somewhat Important Very Important Extremely Important My friends would want me to pa y the use tax on this purchase. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree Whether my friends would want me to pa y the use tax on this purchase was ________ to me when making my compliance decision. N ot at all Important Very Unimportant Somewhat Unimportant N either Important nor Unimportant Somewhat Important Very Important Extremely Important My co-workers would want me to pay the use tax on this purchase. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree Whether my co-workers would want me to pay the use tax on this purchase was ________ to me when making my compliance decision. N ot at all Important Very Unimportant Somewhat Unimportant N either Important nor Unimportant Somewhat Important Very Important Extremely Important I believe I have the ability to pa y the use tax on this purchase. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree

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98 Whether I have the ability to pay the us e tax on this purchase was ________ to me when making my compliance decision. N ot at all Important Very Unimportant Somewhat Unimportant N either Important nor Unimportant Somewhat Important Very Important Extremely Important I believe I have access to all necessary items/re sources that are needed to pay the use tax on this purchase. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree Whether I have access to all necessary items/re sources that are needed to pay the use tax on this purchase was ________ to me wh en making my compliance decision. N ot at all Important Very Unimportant Somewhat Unimportant N either Important nor Unimportant Somewhat Important Very Important Extremely Important I think it would be morally wrong to try to avoid paying the use tax on this purchase. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree I think it would be unethical to avoid paying the use tax on this purchase. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree I think it would be morally right to pay the use tax on this purchase. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree

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99 I feel it is ethical to pay the use tax on this purchase. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree I have a positive attitude towards paying the use tax on this purchase. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree I think paying the use tax on this purchase is a good idea. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree I think paying the use tax on this purchase would be a wise idea. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree I like the idea of paying a use tax on this purchase. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree People who influence my behavior think I should pay the use tax on this purchase. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree

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100 People who are important to me think I s hould pay the use tax on this purchase. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree Paying the use tax on this purchase is entirely within my control. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree I have the resources and ability to pay the use tax on this purchase. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree I would be able to comply with use tax la ws for this purchase if I chose to do so. Strongly Disagree Disagree Somewhat Disagree N either Agree nor Disagree Somewhat Agree Agree Strongly Agree

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101 The following questions relate to your background information. Gender: Male Female Age: Under 20 50 59 20 29 60 69 30 39 70+ 40 49 Education Level (please mark th e selection that best descri bes your educati on status): Currently pursuing a bachelor's degree I have a bachelor's degree Currently pursuing a master's degree I have a master's degree Currently pursuing a doctoral degree I have a doctoral degree Other (Please describe) What is your household income? For purposes of this question, assume household income means the amount of money you have access to in a given year (i.e., you make $20,000 a year at a job and your parents give you $15,000 to cover living expenses, your household income would be $35,000). Zero $20,000 $65,001 $80,000 $20,001 $35,000 $80,001 $100,000 $35,001 $50,000 $100,000+ $50,001 $65,000 Tax Return Status (on 2008 return): Single Head of Household Married Filing Jointly Qualifying Widow(er) with Dependent Child Married Filing Separately Did (or Will) Not File

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102 How many months of work experience do you have? Have you ever purchased an item via the internet? Yes N o In general, on your online purchases, pleas e estimate the percentage of vendors that collect a sales and/or use tax (0 to 100). In the past year, what is your estimate of how much you have spent on purchases made via the internet (in dollars)? Zero $1,001 to $5,000 $1 to $100 $5,001 to $10,000 $101 to $500 $10,000+ $501 to $1,000 How often would you estimate you purch ase an item via the internet? Daily Once a Month 4-6 Times a Week Several Times a Year 2-3 Times a Week Once a Year or Less Once a Week N ever 2-3 Times a Month Have you ever paid a us e tax in Florida? Yes No Don't know Did you complete form DR-15MO? Yes No Don't know

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103 Have you ever paid a us e tax in any state? Yes No Don't know Have you ever taken a tax course at USF or any other college or university? Yes No Don't know Please list any comments/concerns/questions you have regarding th e use tax or this survey below. If you have none, please just put "N/A."

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About the Author Christopher Robert Jones, Ph.D. was born a nd raised in Muscatine, Iowa – a small town located along the Mississi ppi River. He attended bot h undergraduate and graduate school at the University of Miami (FL) wh ere he received a Bachelor’s Degree in Business Administration with a concentra tion in Accounting, a Master’s Degree in Business Administration, and a Maste r’s in the Science of Taxation. He passed the CPA exam in 2003 and ha s professional work experience with KPMG (internship) and Berkow itz Dick Pollack and Brant. In 2004, he started his Ph.D. program at the University of Alabama. In 2006, he transferred to th e University of South Florida. He defended hi s dissertation on July 9th, 2009. Starting in the fall of 2009, Chris will be a faculty member at Western Illinois University located in Macomb, IL. Macomb is a college town located about ninety minutes away from his mother and brother. He currently has 2 cat s (Mia and Teag) and an English bulldog (Tori). He is a die-ha rd Miami Hurricane fan and in his free time enjoys spending time with his pets, watching sports, playing video games, and reading.


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Understanding and improving use-tax compliance :
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ABSTRACT: This study seeks to understand specific factors that are pertinent to individuals when making a use-tax compliance decision and to test a remedy to improve use-tax compliance. This study investigates use-tax compliance using a three-step approach. The first step involved building a survey to determine potential salient beliefs that are pertinent to individuals when facing a use-tax compliance decision. Results of the initial survey reveal that the effort of complying with the use tax, potential revenue to the state if the individual complies, fairness of the use tax, monetary concerns of the individual, perceived knowledge of the use tax, and social influences were the most mentioned factors contributing to individuals when making a use tax compliance decisions. The second step in this study develops a model, based on the Theory of Planned Behavior, incorporating these salient beliefs. Results indicate that most of the salient beliefs identified in the survey were correlated to an individual's attitude. Finally, the third step involved testing two remedies. The first remedy gave the individual the option to have the website automatically collect the use tax due. The second examined remedy provided information to the participant regarding the use tax. Results indicated that the effort remedy developed, having the website give the individual the choice whether the website will automatically collect the tax, does improve the likelihood the individual will comply with the use tax. In addition, results also show compliance improves if participants are given information regarding the use tax.
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Co-advisor: Jennifer Kahle-Schafer, Ph.D.
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