Bill Seeks to Curb Abuse : Tax-Cheat Gas Stations Costing State Millions

The state government, and thus California’s taxpayers, are losing an estimated $150 million to $500 million annually because some service station operators are cheating on paying their sales taxes, industry and state sources report.

The cheating reportedly is particularly prevalent in Southern California. In an effort to stop it, while at the same time improving their own competitive position, an organization of independent filling station operators persuaded the Legislature to rewrite the way the sales tax is collected from gasoline retailers.

The big question now is whether Gov. George Deukmejian will go along and sign the bill, let it become law without his signature or veto it. Despite the measure’s potential for capturing escaped taxes, it would result in major costs to the state--and to a lesser extent local governments--during the first year of operation.

A Deukmejian spokesman on Wednesday said the governor had taken no position yet on the bill, which was carried by Sen. William Craven (R-Oceanside). His top fiscal advisers at the state Department of Finance initially opposed the measure, but have since taken a second look and now are reported “open on it.”

The state Board of Equalization, in an analysis of the bill, reported that some station operators apparently pocket the sales tax “as operating profits or as a means of undercutting competition without incurring any losses.”

The board said its auditors have “detected an increasing pattern of tax evasion” by some operators who have “understated their sales tax liability by as much as 500%.”

Such operators sell gasoline at or near their cost and underreport their sales tax liabilities to turn a profit, the report said, noting that many sell large quantities of gasoline, “resulting in rather significant unpaid sales tax liabilities.”

The report said many stations remain in business only a few months, close up and skip out, leaving the board’s tax collectors virtually helpless to get the money owed.

J. D. Dotson, the board’s executive in charge of business taxes, said the problem of tax cheats in the highly competitive retail gasoline industry actually began showing up about two years ago. Although it reaches statewide, Dotson said the problem seems to be more pervasive in Southern California.

Board Audits

Dotson said it was uncovered both by gasoline industry sources and by board audits of some of the estimated 22,400 service stations throughout California.

Paul T. Erdos of Los Angeles, executive secretary of the Serve Yourself and Multiple Pump Assn., an organization representing about 2,000 independent filling stations in California that sponsored the bill, conceded that his group had a good deal of self-interest involved.

“The bill was needed, because many marketers of retail gasoline are not collecting the sales tax and this gives them an unfair competitive edge over the man who does pay his taxes,” Erdos said.

He said that station operators may get a profit of three or four cents after expenses on a gallon of gasoline. However, the operators who do not pay the tax make “an additional six or eight cents a gallon, which is a beautiful profit.”

Although the tax board did not estimate how much the bill might capture in unpaid taxes, Scott Johnson, an assistant to Craven, said figures developed from various sources put the sum at $150 million a year. Others say the figure is much higher.

Estimate Made

“We estimate it at something closer to $500 million,” said Charles Shooster of Beverly Hills, an association member and president of Sunny Gas Co.

However, the Legislature’s nonpartisan fiscal adviser, Legislative Analyst William Hamm, declined to make his own projection, saying only that the collections could be “potentially significant but unknown.”

Under the current system, station operators pay the basic 6% statewide sales tax on their proceeds after the gasoline is sold. In some counties, including Los Angeles, the tax is 6 1/2 cents on the dollar.

The tax is based on sales that the station operators say they made. However, some are believed to be deliberately underreporting both sales and taxes owed.

Craven patterned his bill after systems in operation in New York, Michigan and Illinois.

A legislative staff report says the program in Illinois, which sells about a third as much gasoline as California, produced $50 million a year in sales taxes that previously had gone uncollected.

Prepay Tax

Under Craven’s measure, operators would prepay five cents per gallon of the tax to the oil refiner when the gasoline is sold to the station. The refiner, in turn, would send the tax and gallonage records to the board. The records then could be compared by board computers with reports filed by the operators.

The additional gasoline sales tax due the state would be paid to the Board of Equalization, after the original five-cents-per-gallon prepayment was made. Unlike other state and federal fuel taxes that are fixed to the gallon, the sales tax is based on the amount of gasoline sold.

The five-cents-per-gallon prepayment procedure would take effect Jan. 1.

The new tax collection system would cost the state between $82 million and $98 million--perhaps even more--in the current fiscal year, the legislative analyst said.

The initial cost stems from a provision in Craven’s bill that would give station operators a one-month credit on their tax liability, which ultimately would have to be paid. The tax credit was proposed to ease the operators over the cash-flow pinch that would result from having to pay part of the gasoline tax before they sell the fuel.

Increased Revenue

After the first year, the legislative analyst said increased revenue from enhanced tax collections would probably contribute unknown but “probably major amounts” and more than offset the initial costs of cranking up the toughened program.

Because cities and counties share in the sales tax revenues, the analyst noted that during the current fiscal period, they too could experience a revenue loss of between $2 million and $6 million. Likewise, he indicated that in subsequent years, they probably would experience major revenue gains.