Curious Wichita

Is vehicle tax fraud a problem? The cost of making cheaters pay up

I see TX and OK plates on cars all around town. Many still register out of state to avoid paying their fair share of KS taxes. How to stop? Commodities Trader at Koch Industries

Numerous employees that live and work in Kansas illegally register their automobiles in other states to avoid sales tax and property tax. Roger Williams

The Eagle received two nearly identical questions about Kansas residents who register their vehicles out of state to avoid paying taxes.

Both questions came from Wichitans concerned about Kansas’ budget shortfalls. One works at Koch Industries and the other works at Cargill, the two largest private companies in the U.S. Both say they tend to be wary of bigger government and more taxes, but they think people should pay their fair share of what taxes there are.

The energy trader at Koch, who asked not to be named, said he started noticing Texas and Oklahoma license plates on his drive to and from work and began to count them: about one in every 10 cars had an out-of-state license plate, he said. (People are not required to give their names when submitting questions to Curious Wichita.)

Roger Williams, the food scientist at Cargill, said he has noticed expensive luxury cars and trucks in the company’s parking garage with out-of-state tags. These cars have been parking there for years, he said, indicating they are Kansas, not Oklahoma, residents.

He estimates the back taxes on just one of these illegally registered luxury vehicles would bring in more than $10,000 over the life of the vehicle. He should know, he said. In the past two years he purchased two vehicles, each of which cost more than $50,000, he said, and is paying thousands in taxes on both.

The taxes include the one-time sales tax and the annual tax to renew a license tag.

“The state keeps having supposedly money issues, and we have people move into our state and take really good jobs, and they find a way around paying their sales tax and legitimate property tax,” Williams said. “I think it borders on fraud that these people get away with it.”

Kansas charges both a one-time sales tax and a yearly property tax based on the value of a person’s car. If it’s a luxury car, that sales tax can be several thousand dollars up front and the tax to get a car tag can be more than $1,000 a year. But some states charge lower sales tax and a flat fee every year no matter how expensive the vehicle: In Oklahoma the sales tax is smaller and the yearly fee is less than $100 for a Porsche or a Pinto. This creates an incentive for Kansas residents to cheat and register their vehicle in Oklahoma if they have an Oklahoma address.

Local car businesses suspect that fraud is probably happening. Brad Cox, the manager at Scholfield Honda, said he hears from customers who considered buying their cars in other states before learning it’s hard to cheat on sales taxes. But Cox thinks some people never show up at his lot because they do buy their cars in another state.

Dan Beat, who used to sell insurance, said he sometimes turned away customers who wanted to register their vehicles in Oklahoma. He wasn’t licensed to sell car insurance there. But he said an insurance agent licensed in Oklahoma would probably not ask whether a customer’s home address and vehicle address matched up.

In order to register a car in another state, a Kansas resident would need an out-of-state address.

When Beat goes fishing in Missouri, at Table Rock Lake, local officials there refer to one of the small towns on the lake as “Little Wichita” because so many of the homes are owned by Wichitans. The same is true when he goes fishing at Grand Lake, in Oklahoma. In fact, according to the Kansas Department of Wildlife and Parks, there are thousands of boat owners in Oklahoma who have their registration documents sent to a Kansas address.

The suspicion is that some people who own vacation homes out of state, or who have family or friends who do, are registering their vehicles out of state.

But is it true? Are there huge numbers of Kansans registering their vehicles out of state? Are there any ways to stop it? And if it was stopped, would it generate enough revenue to make a dent in Kansas’ budget problems?

How big is the problem?

The Kansas Highway Patrol had about 43,000 stops last year in which a driver was warned or cited for breaking the car registration law.

But the law has 16 different parts, including expired tags, and only one of those is about registering a vehicle in the wrong county (or state). So someone would have to read through the notes of all 43,000 stops to figure out how many were ticketed for out-of-state registrations, according to trooper Stephen LaRow.

The district attorney’s office in Sedgwick County has reported a few thousand potential infractions but, according to spokeswoman Georgia Cole, the majority of them are residents with expired Kansas license plates – not cheats who registered in a different state. Wichita police reported just a handful of cases.

The number of cases may actually be much higher than law enforcement knows because the crime is so hard to detect.

The most common way to get caught is by having a driver’s license from one state and a license plate from another, according to LaRow. In that case, a trooper could ask questions but it would still only be enforceable if the trooper could get the driver to admit the crime.

Another reason it’s so hard to enforce is that Kansas gives people 90 days to register their vehicles, as opposed to a state like California, which gives only 20 days. So it takes longer for law enforcement to follow up. And some drivers, such as active military personnel and college students, are not required to register their vehicles in-state.

About 10 percent of cars in New York City were illegally registered in a different state, according to a police study from 1987. The study estimated the lost revenue exceeded $50 million in today’s dollars. Though Kansas is much smaller, if this data is correct, it suggests that governments in Kansas could be losing several million in taxes as well.

But California’s Highway Patrol, which is much larger and actively trying to find cheaters, is recovering only about $1.5 million every year.

Enforcement attempts

Sedgwick County collected nearly $60 million in vehicle taxes in 2015. So if it were true that 10 percent of cars were registered in the wrong state, that would mean local government agencies are missing out on $6 million in revenue.

Sedgwick County used to have a special unit to catch car registration cheaters. The unit was started in 1991 and included a sergeant, two deputies and a secretary. But several former sheriffs and current deputies said they couldn’t remember the name of anyone who worked on the unit because it was so low-profile.

The sheriff’s office couldn’t find any old reports about the unit. Former Sheriff Gary Steed said he remembers seeing reports that the unit was saving hundreds of thousands of dollars, but the only complaints he remembers were from people who wanted to move the officers from tax collection to crime fighting.

The car registration unit was disbanded in 2008 during budget cuts, according to Lt. Lin Dehning of the sheriff’s office, and that was after the unit had already shrunk to a single sergeant who worked on it part time. An online form to anonymously report car tax cheaters still exists, but last year only nine residents filled it out.

It would cost more than $250,000 to fully fund the officers in the unit again, Dehning said. So even if the unit recouped hundreds of thousands in lost tax revenue, the total gain after expenses would be smaller.

Another problem is that the $60 million currently collected in vehicle taxes is divided among more than 100 different taxing entities, mostly cities and townships in the county but also drainage and cemetery improvement districts. The city of Wichita is the largest recipient at around $12 million, and the school district receives nearly $10 million.

Each of these agencies is “free riding” on the sheriff’s office to collect its missing revenue, according to Jeremy Hill, an economist at Wichita State University. So while the city and the school district would receive more money if the county spent more money catching cheaters, only the sheriff’s office pays to enforce it.

Even if the sheriff’s office collected more from tax cheats than it spent on the effort, it doesn’t get that money back.

The same “free rider” problem applies to spending money to figure out whether there is a problem at all. The Kansas Department of Revenue does not collect data about how much revenue might be lost across state lines for car registrations, according to Jeannine Koranda, a spokeswoman.

Part of the reason is that the state has little incentive to track it: The state received less than $1 million of Sedgwick County’s vehicle taxes last year. So even if more enforcement could help local governments, it wouldn’t help the state budget that much.

Enforcement options

There are steps that Kansas could take, in addition to hiring officers. Many states have a website or phone number where people can report car registration cheaters. This is cheaper than paying officers for enforcement. Although Sedgwick County has a form on its website, the state does not.

But few people know about the county’s form, including The Eagle’s questioners. One of the questioners suggested that a $100 reward for reporting cheats could be an efficient way to catch cheaters.

The state could also increase the fines. Larger penalties for people who are caught could discourage some cheating, according to Hill, the WSU economist. Right now the fines are so low that people with expensive vehicles could save money even if they are eventually caught.

Special case

Another option would be to lower Kansas’ car tax so that it is closer to Oklahoma’s. If Kansas’ tax was lower, there would be little reason to cheat. And then the state could try to make up that revenue by raising another kind of tax that is harder to cheat on, such as income tax.

This would be politically difficult, but it’s close to what happened just a few years ago with another tax that some Kansans avoid: the boat tax.

For a long time Kansas boat owners thought their tax rate should be lower. Boats were being taxed as luxury items, not ordinary vehicles. And more than half of Kansas voters agreed to lower the boat tax from 30 percent in 2013 to 5 percent this year. This decreased tax revenue on the nearly 90,000 boats licensed in Kansas by almost $10 million, from about $12 million in 2009 to about $2 million in 2015, according to the department of revenue.

The Kansas wildlife department had estimated that around 10,000 boats owned by Kansans were registered in another state before the change in tax rates took effect, according to Christopher Tymeson, the department’s attorney.

In theory large numbers of boat owners could now switch their registration to Kansas, which would make up some of the lost tax revenue. And while this might happen in the long run, so far the number of boats registered hasn’t changed.

Oliver Morrison: 316-268-6499, @ORMorrison

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