State cracking down of tax-delinquent businesses

The R.I. Division of Taxation’s threats last month to close more than 1,000 businesses that had failed to submit overdue sales tax payments has sparked debate on whether the state should have been more forgiving in difficult economic times.
And in that discussion, much of the business community hasn’t exactly come to the defense of the small businesses that received the violation notices in July and were forced to scramble to keep their store and restaurant doors open.
“I have no sympathy,” said Evan Smith, president and CEO of the Newport County Convention and Visitors’ Bureau, an agency that works cooperatively with numerous retailers and other companies. “This is about a level playing field. It’s not fair for someone to be collecting sales taxes and paying them, and then others aren’t doing it.”
“It’s the law and there should be consequences if you don’t follow the law,” he added.
Smith’s sentiments have been echoed elsewhere, including in comments on Providence Business News’ Web site. “The sales tax is collected at the time of the sale and should be passed along to the state, not [used] to float the business owners’ expenses,” wrote one reader identified as Sheila.
“To me, this is another instance of keeping those in business that don’t belong,” wrote another reader, identifying himself as Tom. “Play by the rules or GET OUT!”
Some business groups remained publicly silent. A spokeswoman at the Greater Providence Chamber of Commerce said President Laurie White was out for the week last week and no else was available to speak on the matter. The Northern Rhode Island Chamber of Commerce didn’t respond to a call seeking comment.
Grafton “Cap” Willey IV, chairman of the Rhode Island chapter of the Smaller Business Association of New England, called the matter “delicate.” While acknowledging that businesses should be prevented from using their sales tax collection as a lifeline to survive the recession, Willey said state tax officials should be mindful that many business owners were caught in an unprecedented downturn last fall when the bottom dropped out.
At the time, consumers made drastic reductions in spending, and at the same time, the credit crunch made it difficult for retailers to borrow to get through the lean times.
“It came quickly, and they were caught in the middle,” Willey said.
For its part, the Carcieri administration has defended its actions, saying the Division of Taxation is required to enforce the state’s tax laws and doesn’t have the authority to forgive tax burdens. “They don’t have a lot of leeway,” said spokeswoman Amy Kempe.
And, Kempe added, the steps taken to collect on overdue payments are no different from efforts in the previous three years.
In February, tax officials sent out about 4,000 initial notices, then mailed another three rounds of written warnings in the following months.
Despite the recession, Kempe said, there were only 100 to 200 more violation notices issued this year in comparison to recent years.
About 3,000 of those companies owing delinquent taxes paid a combined $3 million, Kempe said. Last month, the remaining 1,092 businesses that still owed sales taxes – and about 100 more that owed payroll and meal taxes – received final notices: Pay up or shut down.
Since then, about 600 businesses have paid in full, while the remaining companies have either worked out payment plans, been granted extensions or have closed because they no longer qualify for the retail sales license. The Carcieri administration didn’t provide a breakdown of those numbers. The state collected $1.3 million in overdue sales taxes in the week after the final notices were issued.
Kempe said it would be unfair for the remaining businesses to get away with not paying all of the sales tax due, since the vast majority had already done so.
Bill Vernon, state director of the National Federation of Independent Business for Rhode Island, said he understands the argument from both the Carcieri administration and some in the business community that companies that aren’t remitting their sales tax collections are reaping an unfair advantage.
But he takes issue with the state’s collection methods.
“I don’t think the way to collect unpaid taxes is [to] do a mass shutting down of business,” he said. “They wanted to scare people into paying taxes.”
And in many cases, he continued, notices were issued in error or there were extenuating circumstances. Some companies, such as a construction supply business, may charge a customer sales tax on a purchase, but not see that payment for weeks or months, Vernon said. Under state law, the tax still is due to the state.
Indeed, the state needs to be a “kinder and gentler collection agency,” Willey said, although he acknowledged that many of the businesses that had used their sales tax collections as a “bridge loan” should just be allowed to collapse.
Smith said business owners he has talked to about the sales tax issue have a less forgiving mindset. “Everyone has said, ‘This is our responsibility to pay this tax. We all need to do this,’ ” Smith said. “I agree. To me, it’s pretty clear cut.” &#8226