Little companies could face big penalties
Heads up if you own a small retail shop: The state of California may come knocking on your door looking for your seller’s permit.
That little piece of paper, which must be displayed at your business, requires you to collect state sales tax. That’s the easy part. It also obliges you to pay that tax to the state as often as monthly, depending on business size.
About 33,000 businesses in California are selling without that little piece of paper, estimates the Board of Equalization, which issues the permits and collects the taxes. The resulting loss in tax revenue adds up to about $344 million a year, according to the board.
The agency is in the midst of a two-year pilot program to help close that tax gap.
So far, visits to businesses have uncovered 2,000 that didn’t have a seller’s permit.
“We’re not doing this program to try to do a ‘gotcha’ or to drive businesses into shutting down but to ensure a level playing field,” said Betty T. Yee, chairwoman of the board.
Businesses that don’t collect or pay sales tax have an unfair advantage over their competitors, said Yee, the elected representative of the board’s coastal 1st District, which runs from parts of Santa Barbara County to the Oregon state line.
Those firms also aren’t carrying their share of the burden for state services, including public education, healthcare and public safety.
Based on the success of the pilot program, which has covered about 55,000 businesses in the Los Angeles and San Francisco metropolitan areas since July 2006, the board voted 3 to 2 last month to expand the effort statewide.
The proposal, which still must make it through the state budget process, would extend the program for three years, cost $38 million and add about 80 temporary positions to the 32 already involved in the effort.
It is expected to increase revenue by about $224 million over three years. That means for every $1 the state spends running the program, it would collect an estimated $6 in revenue.
The proposal has been sent to the state Department of Finance for possible inclusion in the governor’s 2008-09 budget, which is due Jan. 10, board spokeswoman Anita Gore said
If approved, the statewide program probably would start next summer.
The hundreds of vendors at the Santa Fe Springs Swap Meet already have been visited by a team of inspectors. The two-day check this past summer found almost all to be in compliance, said Rick Landis, president of the Santa Fe Springs Chamber of Commerce and an area supervisor for the swap meet operator, Newport Diversified Inc. of Irvine. Any problems found probably were related to displaying the permit, he said.
Landis said he approved of the permit-check program.
“It’s the right thing to do,” he said. “We want to be on a level playing field with all retailers.”
State law requires that all retailers and wholesalers doing business in California have a seller’s permit if they intend to sell or lease items that would be subject to sales tax if sold at retail.
That includes catering trucks, hot dog cart vendors and temporary operations such as Christmas tree lots and fireworks booths. Even street artists and garage sales are considered temporary retail operations that require a seller’s permit and collection and payment of sales tax.
Although a crackdown on garage sales is not in the works, the board’s proposal would identify industries that have a history of noncompliance.
Those industries have included used-car sales, automotive repair shops, beauty supply stores and salons, and jewelry and food retailers, the board said.
The proposal also calls for outreach efforts to alert businesses about the program and to bridge the language barrier that prevents some businesspeople from understanding their tax responsibilities.
It would entail the largest street presence in more than a decade, Yee said. She blamed budget constraints for the decline in on-site visits to storefronts and shops.
The statewide program would be operated out of the board’s 13 district offices, integrating the seller’s permit program with other license checks. It is also expected to generate more work for the board’s audit department.
In fact, the proposal calls for working with -- and sharing information among -- not only board departments but also other state agencies, such as the departments of Motor Vehicles and Employment Development, as well as city business license offices.
The goal is to increase tax revenue and decrease the size of the underground economy, said Judy Chu, vice chairwoman of the board.
Follow-up will be an important part of the success of the statewide effort, she said.
The pilot program found that a hefty 75% of those businesses found not to have a valid seller’s permit did not voluntarily register for one after a first visit by an inspector.
It took two and sometimes three visits to get 45% of the businesses without seller’s permits to voluntarily obtain them.
“People don’t understand how important it is to be compliant, and they don’t understand how steep the penalties are,” Chu said.
There are penalties for failing to pay taxes and file for a seller’s permit, among other things. And there are interest charges.
Those who refuse to get a permit also can face criminal misdemeanor charges and penalties.
To get a sense of how quickly the various penalties and interest charges can mushroom, take a look at the tax bills owed by the top 250 sales- and use-tax debtors listed by law on the board’s website at www.boe.ca.gov.
One-third of them are more than $1 million each. The highest is $17 million.
“It’s really astounding to see how high the penalties can be, and people are quite shocked when those levies come down,” said Chu, who represents the board’s 4th District, which includes most of Los Angeles County.
The penalties are high in some cases in part because of an income tax and sales- and use-tax amnesty deal Chu crafted in 2004 when she was a member of the state Assembly. The deal projected $300 million in additional income and sales-tax revenue but brought in $4.8 billion, she said.
It included provisions for new penalties, including the doubling of some under certain circumstances.
The bottom line: It could cost you dearly to ignore the seller’s permit requirement.
Businesses “don’t have a realistic perspective on the consequences,” Chu said. “If it were laid out for them, they might think differently.”
