California is owed $1.4 billion in sales and use taxes

California is owed nearly $1.4 billion by auto dealers, restaurants and other businesses that collected sales taxes from buyers but didn’t pass the money along to the state — a situation that is aggravating California’s budget crisis.

The tab is up about 25% from a year ago and has almost doubled since 2007, state records show.

That money could make a significant dent in the state’s $19-billion budget gap. Watchdog groups say the state’s failure to collect it is particularly galling because much of the tax money has already been paid by consumers — it just hasn’t been turned over by merchants to the state Board of Equalization.

“All of us want people to pay the tax they legally owe before lawmakers go looking to raise taxes,” said Jean Ross, executive director of the California Budget Project, a Sacramento nonprofit that advocates for lower-income Californians. She said the Board of Equalization “needs to be more aggressive” in collecting from delinquent merchants.

Jon Coupal, president of the anti-tax Howard Jarvis Taxpayers Assn., said part of the problem is the state’s antiquated collection methods.

“You would think there is an efficient way to collect those taxes at time of sale,” he said.

Consumers pay sales taxes at the time of purchase, but merchants remit those taxes to the state on a monthly or quarterly schedule. The money can go uncollected when a retailer goes out of business or is otherwise unable — or unwilling — to turn it over.

Board of Equalization officials blame the rising tide of uncollected taxes on the sour economy, which has pushed more businesses into bankruptcy. But they also complain that the Legislature has been reluctant to put substantially more resources into tax collection efforts.

“Money, technology and people” are what’s needed so California tax collectors can crack down on sales-tax scofflaws, particularly used car dealers, said Betty Yee, chairwoman of the Board of Equalization, which collected $39.9 billion in sales and use taxes last fiscal year.

Bigger budgets would pay for new computer systems that could keep better track of tax delinquents, Yee said. She also wants more money to hire tax collectors, who Yee said bring in $4 in new revenue for every $1 spent on salary and benefits.

The total of uncollected sales- and use-tax revenue — including unpaid penalties and interest — stood at $1.4 billion as of June 30, according to the Board of Equalization figures obtained by The Times. Much of that money was paid by consumers but not turned over to the state by retailers, although it also includes some transactions in which the debt is in dispute.

About a third of the largest defaults come from auto dealers and related businesses, according to a Times review of state records.

One of those is Big Valley Chrysler Jeep Dodge of Van Nuys, which owes the state about $1.2 million, according to the Board of Equalization.

Owner Howard Sellz said he closed his Big Valley new-car dealership, but he’s still in business — selling used cars and providing repairs from the 3-acre lot where he used to sell new Chryslers.

He said he couldn’t pay the sales tax he had already collected because that money was mixed in with the revenue from car sales and was not sequestered in a tax-only account.

“We were paying bills at the time and we were paying vendors and that’s how we got behind,” Sellz said. “You multiply the tax by three months and it adds up.”

Sellz said he would remit the taxes when he sold the car lot.

At least one other person on the list of tax delinquents — Mohammed Suleman, identified as operating Auto Warehouse in San Leandro — also continues to hold a license to sell vehicles in California. He owes almost $800,000, according to the state. Suleman could not be reached for comment.

There is no requirement for merchants to set aside the sales tax dollars they collect, Board of Equalization spokeswoman Anita Gore said. Retailers are simply required to take the amount they have collected and send it to the state either monthly or quarterly, depending on their size and payment plan.

Board officials are considering ways to improve collections from auto dealers. But Yee said requiring dealers to isolate sales taxes in separate accounts would be tough to enforce.

“A better option” would be to set up a “daily remittance” system jointly with the California Department of Motor Vehicles, she said. DMV computers would track a car’s vehicle identification number when it changes hands and make sure the tax gets collected immediately upon registration of the vehicle.

But the DMV would need new funding to upgrade its data processing system, Yee said.

Another approach, now being studied, Yee said, would require wholesale auto auctioneers to collect the tax when they sell the vehicle to used-car dealers.

Until some change is made, retailers have plenty of leeway in paying sales tax as long as they meet current deadlines. If they don’t pay, they typically get notified of the delinquency within about 30 days. They are also subject to fines for missing payments.

Sen. Denise Ducheny (D- San Diego), chairwoman of the state Senate Budget Committee, said she would support cracking down on car dealers that have collected sales tax from buyers but haven’t passed it along.

“They are paying the tax, so why isn’t it being remitted” to the state? she said.

Peter Welch, president of the California New Car Dealers Assn., said there was no need for new laws to collect taxes. Most dealers pay the taxes promptly, and existing laws are adequate to go after those who fail to comply, he said.

“If you shorten the time you have to remit sales taxes, that has a huge effect on the cash flow of dealers,” he said. “Ninety-nine percent of the dealers are all paying their sales tax on time, and I would hate to see them penalized by having to front all of that money every day.”

California attempts to recover unpaid sales taxes by mailing notices and contacting the tax debtor, Gore said. If that doesn’t work, the agency attempts to seize assets such as bank accounts and credit card receipts.

In 2007, the state began putting out quarterly news releases naming the 250 largest debtors in an effort to embarrass scofflaws. Officials credit that effort with getting retailers to pay $4 million in taxes.

Bruce McNall, former owner of the Los Angeles Kings hockey team, is on the latest list. The state says McNall owes $7.6 million in use tax, for horses he purchased out of state and brought to California for his racing stable.

But R. Todd Neilson, the court-appointed bankruptcy trustee for McNall, said the case was settled for $250,000 as part of his 1994 bankruptcy and that McNall should not be on the list.

Board of Equalization officials don’t comment on specific cases but said delinquent taxpayers are notified 30 days before the information is made public.

jerry.hirsch@latimes.com

marc.lifsher@latimes.com