SPECIAL REPORT: Just when you thought you saved a buck, the "Tax Man" cometh

With Tennessee's sales tax rate at nearly 10%, it's no surprise many Tennesseans head into Virginia every week to cash in on major savings. Virginia's sales tax is only 5%. But don’t think the State of Tennessee isn’t paying attention. In fact, if the Tennessee Department of Revenue finds out about a recent purchase in Virginia, that trip may cost you more than if you just stayed in Tennessee.

Diana Walls found that out the hard way, three years after the Bristol, Tennessee resident bought furniture in Bristol, Virginia. A television, couch, and bed cost her more than $2,300. By buying the goods in Virginia, Walls saved more than $100 in sales tax, but she says that was never her intention.

"I didn't go over there not to pay taxes,” Walls said. “There's nowhere in Bristol to buy furniture except Bristol, Virginia."

Regardless, all that matters to the State of Tennessee is that Walls bought something in Virginia she planned to use in Tennessee. Tennessee Department of Revenue tax auditors recently found out about an audit of Schewels, the Bristol, Virginia business that Walls bought her furniture from. After reviewing that audit, the Tennessee Department of Revenue mailed Walls a bill for $118 dollars, the amount of sales tax she saved in Virginia plus interest; money she legally owes Tennessee according to the state's little-known use tax law. After that audit, the state mailed about 140 similar letters to other Tennesseans.

"I can't be the only one that didn't know this," Walls said.

Although the existence of the law came as news to Walls, Tennessee’s consumer use tax is nothing new. In fact, it's been on the books in Tennessee since 1947.

“Our department receives numerous complaints each year about sales lost to out-of-state businesses because of the tax that in-state businesses are required to collect,” Tennessee Department of Revenue Communications Director Sara Jo Houghland said. “In fairness, local merchants not only collect the sales tax, but also pay property taxes, employment taxes, provide jobs and serve the community in other ways. Without providing a level playing field and enforcing the use tax, these local businesses would not survive.”

Every year, the Tennessee Department of Revenue uncovers use tax violations by sharing information such as audit findings with other states, like Virginia. Statewide since 2004, those random audits of both individuals and businesses have helped Tennessee collect nearly $15 million in owed taxes from more than 17,000 customers. During that time, the Department of Revenue has also collected nearly $39 million from more than 25,000 Tennessee businesses that bought items in other states.

The state sent some of those people bills. The others filled out the paperwork and paid their use taxes on their own. According to Department of Revenue Commissioner Reagan Farr, it’s on the consumer to take the initiative to pay the use tax.

“It saves you if you just pay on the front end,” Farr said. “(Then) it’s just the tax. If you are audited and assessed, it’s tax, penalty, and interest and we go back if you’ve never filed a use tax return. We can go back indefinitely.”

Walls is currently contesting her bill. She says singling out just a select few violators isn’t fair. In her eyes, if you tax her you should tax everyone.

"It’s not right,” Walls said. “It’s not fair to me or the other (140 Schewels' customers) that got letters…lack of better words, if you get caught you’re going to have to pay for it."

Walls did get caught. And the worst part? If she lived just a few feet further north she wouldn’t be in this mess in the first place.

“You can step across my fence and you’re in Virginia,” Walls said. “I’m the last house in Tennessee.”