For years, a long-standing communication gap between two key government agencies allowed many business owners and nonprofits to skip paying taxes but still maintain the company’s registration and receive a stamped document proving good standing.
But no longer.
Among the pile of bills passed during the previous legislative session was a technical revision to interdepartmental procedures that – to the surprise of some – wasn’t already standard practice.
Because the R.I. Division of Taxation had no mechanism to share the tax status of registered businesses with the R.I. Department of State, businesses and nonprofits in Rhode Island that owed back due taxes could still re-register, paying the annual fee and receiving an officially signed and stamped document proving good standing.
But passage of an amendment to the Rhode Island Corporations Act requested by Secretary of State Gregg M. Amore will now put business tax scofflaws at risk of losing their charters by allowing tax statuses to be forwarded by the Division of Taxation. The legislation was sponsored by Sen. Dawn Euer, D-Newport, and Rep. Brandon T. Voas, D-Cumberland.
The changes will take effect Jan. 1.
Amore says the business registry now has more than 103,000 active and registered entities. The legislation was in response to a growing call for a more standardized process to notify business owners about unpaid tax obligations, which would reduce future penalties and interest charges that “can be severe.”
“Unfortunately, some businesses only become aware that they owe fees or taxes when they reinstate or dissolve their business,” he said.
The Rhode Island Business Coalition came out staunchly against an earlier version of the bill filed last January that would have given the secretary of state the power to revoke business charters for failure to pay anything, from corporate tax to a $25 fee.
Testifying before the House Corporations Committee, a coalition representative said such a move was anathema to fixing the state’s reputation as anti-business, asking, “What message are we sending to potential new businesses considering operating in our state?”
The organization also took issue with language that would have given Amore the authority to “proactively” ask the Division of Taxation if a corporation or LLC was compliant or non-compliant “and move forward based on the answer.” Another provision would have required the division to be notified of any proposed major sale or transfer of assets by taxpayers in arrears.
It “casts a very wide net with a very heavy hammer,” the coalition argued, calling the revocation of business charters in essence “a corporate death penalty.”
But R.I. Tax Administrator Neena Savage said in testimony that non-tax compliance information should be deemed public data.
The taxation division employs 223 tax professionals to handle the 58 different taxes and fees that bring in more than $5 billion annually. Still, close to 5% of taxes due went unpaid in fiscal 2023, amounting to nearly $256 million.
But advocates argue the change wasn’t necessarily meant to bring in more tax revenue in the face of a projected $400 million-plus deficit.
Voas says it is less about getting more tax revenue from the private sector and more about improving the process of doing business in Rhode Island.
“It’s an opportunity for small businesses, or just businesses in general, to understand their standing with the secretary of state before they go delinquent,” he said, “so they can get ahead of what’s owed.”
Voas says legislators held multiple meetings with Rhode Island Business Coalition member Melissa Travis to hash out the details and address the group’s concerns. The coalition subsequently supported the revised version of the bill.
The bill is part of a multilayered approach by the state to boost compliance and tax collection. The division recently released a request for proposals for a 30-month contract beginning in February to provide “collection and compliance tools,” among them ways to determine underreporting in tax filings using credit card data and historical credit-to-cash ratios, enhancing the ability to identify nonregistrant entities, developing analytic models to identify audit leads based on external taxpayer information. Also, the RFP calls for ways to identify underreporting or nonreporting businesses “with a focus on determining revenue not reported from emerging and new digital-based income and sales streams.”
Amore said the goal is to help businesses avoid potential fees and penalties that could accumulate and lead to “unnecessary financial stress.”
“We want to keep businesses apprised and aware of their responsibility to file their taxes annually and to inform them of the consequences associated with not fulfilling their tax obligations,” he said. “Business owners must take steps to maintain good standing. And paying taxes is one part of that equation.”
