$70 million in delinquent sales, use taxes owed to state
Delinquencies will surpass $100 million by fiscal 2017
DES MOINES — Iowa’s long-term sales and use tax delinquencies have increased 33 percent since 2000 and the dollar value has soared 132 percent to almost $72 million.
The Department of Revenue has written off an additional $6.7 million in the past five years.
At 6 cents state tax on the dollar, that represents a potential $1.3 billion in retail purchases and services for which sales or use tax should have been collected and forwarded to the state coffers.
“Delinquencies have grown faster than sales tax revenues have grown,” said Stuart Vos, Iowa’s chief tax collector at the Department of Revenue.
If the rates of increase continue, delinquencies will surpass $100 million by fiscal 2017 and another $9 million will be purged as uncollectable.
“When I buy a shirt or purchase something, it’s my assumption those taxes are getting turned in to the state,” said Sen. Joe Bolkcom, D-Iowa City. “When it doesn’t happen, we need to have a more robust effort. Taxpayers are paying the money, and if it is leaking out of the system, taxpayers ought to expect it will be collected.”
Many cases are settled, but few cases are ever referred for criminal prosecution, and millions are written off each year as long-term delinquencies hit the statute of limitations.
How much does it matter?
Top revenue officials play down the significance of sales tax delinquencies and said collections are not likely to receive more attention unless the Legislature or governor insists.
“In fiscal year ’11, which ended June 30, the total sales and use tax was about $2.4 billion, so delinquencies of $70 million — it is a big number, but in relation to that overall picture, it’s really relatively small,” said Courtney Kay-Decker, executive director of the Department of Revenue.
“Collections are a small portion of what we do. So when we’re talking about, ‘OK, do we solve this problem by throwing more money at collecting delinquencies?’ we have to weigh that with counsel from the Legislature and from the governor, who is our boss, about where he wants us to put our resources,” she said.
Delinquencies have fluctuated since 2000, making it difficult to dismiss their overall growth as just an effect of the recession.
Fiscal 2010 ended with a record 19,347 delinquent accounts statewide, compared with 14,557 at the end of 2000. Most fiscal 2011 tax figures will not be released until November.
The aggregate value of delinquencies increased $40 million over the past decade, and the average delinquency jumped 75 percent to $3,716, including penalties and interest.
The rise in delinquencies coincided with staffing cuts throughout the department — 35.2 percent overall and 13 percent among collections employees since 2000. Kay-Decker said it’s too soon to tell if additional staffing is needed. More likely, she said, revenue employees need to do more with less.
Bolkcom, who chairs the Iowa Senate’s Ways and Means Committee, said taxpayers have an interest in making sure the sales tax they pay is remitted to the state “so we can support public education, health care, public safety and all the things government does.”
Iowans who collect but do not remit sales taxes “are breaking the law, and we ought to have a system in place that is adequately funded to track them down and get them to pay the money,” Bolkcom said.
Reluctance to get tough
Funding may be less an issue than the department’s reluctance to “criminalize” business owners who don’t pay their taxes.
In the past two fiscal years, 34 cases of willful fraud uncovered by state auditors resulted in the offenders paying a 75 percent tax penalty. Only 14 of the thousands of long-term delinquencies in the same period were referred to county attorneys for criminal prosecution.
The department refused to identify the businesses caught cheating.
“I like to think we only have 14 (criminal referrals) because we have a lot of good people in Iowa,” Kay-Decker said.
She said they have statutory and regulatory guidelines for when to pursue criminal sanctions, and those rules leave room for discretion.
“If the Legislature decides that we should be very aggressive about how we go after these taxpayers, that would be our obligation,” Kay-Decker said.
Vos, the revenue operations administrator, said delinquency figures are not as bad as they appear, because the department inflates some tax assessments before ultimately settling for less.
He said some Iowa businesses file their returns on time but fail to pay all they owe. Others don’t file a return or pay.
“With those who failed to file and failed to pay, we … look at what has been paid in the past,” he said. “We look at the information that we have on the business, and we will assess them for more than we think they possibly can pay. If we don’t do that, people will want to just allow themselves to be assessed and then pay.
“ ... a very large proportion of it eventually gets abated because the taxpayer files the correct return. So if we assess somebody $10,000, they may actually only owe $2,000. That $10,000 assessment is an enforcement activity that says, ‘You need to come clean with us and file your return.’ ”
The assessment is an estimate, and “we’re not going to estimate low,” he said. Review of the return often results in a net adjustment of the tax, though not the interest that accompanied the punitive assessment.
“If those people would actually file their returns, it’s likely they’re going to end up paying a considerable amount less,” he said.
The value of Iowa’s long-term sales and use tax delinquencies in fiscal 2010 was $104.6 million before the department applied net adjustments of $32.7 million for late filers.
Kay-Decker was reluctant to see this collections technique shared publicly.
“That tidbit of information is not helpful because that encourages people to kick the can down the road,” Kay-Decker said. “It loses the enforcement effectiveness if they think that they are going to be assessed this higher amount, but they’re never going to have to pay that.”
Not all cases have criminal intent
About 13,000 delinquent accounts are generated every quarter, according to the Department of Revenue. A high percentage of new delinquencies are satisfied within one year.
Most of the delinquent dollars were collected from customers by merchants who made retail sales or provided services. The money never reached the state treasury for various reasons: the impact of a recessionary economy, natural disasters and health problems, as well as fraud and using sales tax to pay other bills or enhance lifestyles.
For those who fail to remit the taxes they collect, interest begins to accrue from the date the tax is due. If tax and interest are not paid within 60 days, an assessment is created.
Assessments are recorded in the appropriate county, creating a lien through which the state asserts a claim on the assets of the delinquent business and responsible party, typically the owner or top corporate executives.
The majority of the 19,437 long-term delinquencies are more than 3 months old but less than 10 years old. A 10-year statute of limitations allows the oldest delinquencies to be purged. The department can file another assessment if eventual collection is considered possible.
Last year, the department settled a 9-year-old Cedar Rapids delinquency for $100, less than one-half of 1 percent of the amount due, even though the former business owner was making payments on his debt.
Kay-Decker, Vos and Special Assistant Attorney General Donn Stanley said criminal prosecution depends on the totality of circumstances, including criminal intent, and the department’s resources.
Some delinquents might have criminal intent, Stanley said, but “there are a lot of non-criminal reasons why people go out of business and end up not being able” to pay tax and other bills.
“We can get people who can pay to pay with the tools that we have,” Vos said, citing liens, levies, garnishments and criminal charges as strong enforcement tools.
Despite its enforcement arsenal, officials admit to being virtually powerless to collect sales tax debts or to prosecute Iowa business owners who move to other states, even if they have high-paying jobs and regardless of whether they fled Iowa primarily to evade the debt.
“Collection options are limited when a responsible party moves out of state, completely severs all business ties and has no Iowa source income or assets,” said Victoria Daniels, administrator for tax policy and communications.
Revenue officials say they have three options if they believe the failure to remit taxes was fraudulent: impose a 75 percent penalty, pursue a civil case or pursue criminal prosecution.
When department officials conclude a delinquency should be referred for criminal prosecution: The referral must be made to a county attorney; the county attorney has discretion whether to file charges; and 3. if the county attorney declines to take the case, he or she may refer it to the Attorney General’s Office or do nothing.
State law devoted to the Department of Revenue, however, states: “It shall be the duty of the attorney general and of the county attorneys in their respective counties to commence and prosecute actions, prosecutions and complaints, when so directed by the director of revenue …”
Requests for specific dates of the department’s 14 criminal referrals, the counties to which the referrals were made and the amounts of the delinquencies were denied.
Linn County Attorney Jerry Vander Sanden, a local prosecutor for 28 years, said he has never seen a sales tax delinquency case referred to the county attorney’s office. Johnson County Attorney Janet Lyness said she could not recall any, either.
Vos, the state’s tax collections chief, said the Department of Revenue never will enjoy 100 percent success.
“I think if we could put collections out of business, that would be the compliance silver bullet, but it is just human nature,” he said.
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