State knocks on doors to collect sales taxes

They look like accountants, housewives, sales people, and computer geeks – even reporters. But they're not.

They are tax enforcers and they are knocking on doors – thousands of doors – one-by-one, to make sure the state gets all the sales-tax money that's coming to it. The state tried a pilot program in San Francisco and the Norwalk area, in which tax officials personally visited businesses. Now, the Board of Equalization is taking the program statewide, prompted in part by a tight budget year.

"There will be seven statewide teams visiting businesses for whom we have a record and addresses," said board spokeswoman Anita Gore. "We estimate that there are between 3 percent and 5 percent noncompliance rate of businesses in California." That means an estimate 33,000 businesses, perhaps more, are not forwarding the sales taxes they collect to the state. The state has nearly a million businesses. Each team has eight members, which means their work is cut out for them.

California's sales tax varies from county to county and averages about 7.25 percent among the 58 counties, although several have sales tax rates above 8 percent. The highest, in Alameda, is 8.75 percent. Los Angeles' is 8.25 percent; San Francisco's is 8.5 percent. When purchasers pay the tax, the business collects it, tracks the amount and forwards the money to the government. The problem is, some businesses collect the tax but they don't send it in.

"They can charge less for their products because they are not paying the tax, and that puts the others at a disadvantage," she added. "But these figures also mean that about 97 percent of the businesses are in compliance."

The new program, which already has received bipartisan approval from the Legislature, is contained in the latest state budget, which is 59 days overdue, little more than a week shy of California's 67-day record for a tardy budget set in 2002.

From their experience of the pilot program, tax officials say an official visit to the business results in the purchase of a permit about 20 percent of the time; after a second, follow-up visit, the proportion is about 45 percent, or nearly one out of every two businesses visited.

But you have to spend money to make money.

The first year the statewide effort will cost an estimated $11 million, and $13 million the next. But the board says it will bring in $61 million initially, and $81 million when it gets cranked up. That may sound unimportant in a state that collects $28 billion annually in sales taxes, but every dollar counts at a time when the state faces a $15.2 billion shortage. And sales tax collection may become even more critical, if a proposal by Gov. Arnold Schwarzenegger to boost the tax by a penny ultimately is approved in the 2008-09 budget.

The board has divided the state into a seven-part grid, and each of the teams will be assigned to a sector, Gore said. They include a coastal strip from the Oregon line to San Jose, inland northern California from Madera County east to Nevada and north to Oregon, the coast from Santa Barbara to Santa Clara and eastward to Nevada; Los Angeles and Ventura counties; San Bernardino and Orange counties; Riverside county south to the Mexican border and east to Arizona; and Norwalk and Culver city in Los Angeles county.

Why a full time assigned to the Norwalk area, which geographically is a pinprick compared to the vast swaths of territory facing the other teams?

"It is a densely populated area. It was part of the original pilot program and we want to continue and follow up on our efforts," Gore added.

While tax officials may have, at least in part, the image of law enforcement agents, the reality is different. Those knocking on doors aren't out to make arrests. The board calls the visitors "specialists," not agents. They are out to educate the businesses about state laws requiring sales permits, and to remind them if they fail to do so. If the businesses don't participate after being warned at least twice, the state has the option of getting tough.

The penalty for selling without a license is a $1,000 fine and six months in jail. Penalties can include an assessment on back taxes of up to 10 percent, plus regular future audits.

But in its initial letters to the businesses, the stick is hidden. "Specialists will visit your business in order to help you learn more about the tax laws and regulations that apply to your business. They will ask to see your sellers permit…and will ask about any other tax and fee licenses or permits that you hold," the official board letter says.