California tax officials are going door-to-door in an unprecedented attempt to capture cash for the state’s treasury from retailers who aren’t sending their sales-tax money to Sacramento. Thus far, about 5,300 businesses have been visited, and some 200 were found to be unlicensed.
The sellers include businesses in San Francisco and San Mateo counties, and 30 Los Angeles-area cities, mostly low- and moderate-income communities that include Artesia, Compton, Lynwood, Signal Hills, South Gate, Hawaiian Gardens, Bellflower, Norwalk and Paramount. More than 100,000 businesses, or about 10 percent of the roughly 1 million businesses in California, are expected to be inspected during the two-year program, run by the state Board of Equalization.
The pilot project, at a cost of $3.5 million, was approved in the 2006-07 budget signed by Gov. Arnold Schwarzenegger. Its goal is to collect $25 million, and two 10-member teams–one in the Bay Area, the other in Southern California–are making the rounds.
At various times, the Board has canvassed the state for licensed retailers, including a major push some 60 years ago, said BOE member Bill Leonard. “It’s the first time since the ’40s that we’ve done this,” he noted. But in scope and approach, the current effort surpasses that and other earlier registration drives, said BOE spokeswoman Anita Gore.
“It’s not that it hasn’t been done, it’s just that it hasn’t been done to this degree. It is one of our areas to address the ‘tax gap,’ which is the amount between what is owed and what is paid to the state,” she said. “We are literally going to the streets where there are storefronts and our inspectors are going inside each location. When retailers get a seller’s permit, they are required to post it. If it’s not, and the person is working without a permit, then our inspectors give them an application, and they can file it and take of care of it within a week.”
Size doesn’t matter, at least officially, but the program inevitably targets smaller businesses that may be falling through a revenue-collections crack. It also doesn’t focus on the so-called underground economy, in which workers may be paid in cash under the table in order to avoid payment of income, social-security, workers’ compensation and other taxes or fees.
California has a statewide base sales-tax rate of 7.25 percent, or seven and one-quarter cents on the dollar, which is levied on most products at the point of the transaction. Many counties have a higher aggregate sales tax because local officials have imposed extra levies, specifically to pay for such things as local roads or other improvements.
The seller, who keeps track of the sales, collects the money on behalf of the state and sends in the money regularly. Small businesses may submit the payments quarterly, although larger companies transfer the money monthly. In many cases, the money is shipped electronically, although paper checks are also common. There are regular, state-ordered audits.
Most of the money goes to the state’s General Fund, the main purse that pays for everything from interest on bond debt to schools to job training. This fiscal year, through the end of next June, the state expects to receive about $27.5 billion in sales and use taxes.
“In any notions of reforming taxes, people are always saying, ‘Let’s go out and collect what’s already there,’ and they’re right. This sounds like a lot of hard auditing work,” said Leonard Goldberg of the California Tax Reform Association. Sales taxes, unlike income taxes, don’t stay in the consumer’s pocket.
“Sales tax is collected from you, the consumer, but it has never been your money,” Goldberg added. “A seller collects it from the consumer, and if the seller doesn’t remit it [to the state], he is ripping people off. The question of sales-tax fraud and the failure to pay is very serious, but retailers sometimes complain that they are forced to act as tax collectors, and that they don’t get the money. That’s true, but they get the ‘float,'” Goldberg said, referring to the seller’s ability to temporarily draw interest on the money.
Sen. Carole Migden, D-San Francisco, a former Assemblywoman and member of the BOE, authored two bills to crack down on sales-tax fraud. The first, SB 323, was rejected two years ago by Gov. Schwarzenegger, who called it a “rigid and overly severe punishment” and failed to accommodate businesses that had made innocent mistakes in failing to remit money.
But the second, SB 1449, which was supported by an array of public employee, labor, business and school groups, was signed into law by Gov. Schwarzenegger. Migden’s bill penalizes sellers who knowingly collect the sales taxes but fail to remit them to the state in a timely manner. The penalty is 40 percent of the tax that is due.
In the end, the state believes that about 3 percent to 5 percent of California retailers may not be registered–so the state wants its money.
“And if they are not registered, then there is no mechanism for them to remit the sales tax to us. So, either they are collecting the sales tax, or they are not sending it back to us,” Gore said.
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