Delinquent sales taxes nag restaurant industry

Tight margins leave small business operators with tough decisions on tax obligations

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At 6 cents on the dollar, sales tax on goods and services adds up to about $2.4 billion annually — a vital source of revenue for Iowa.

Yet every quarter, 13,000 businesses fail to remit sales tax collections in full or on time, according to the Department of Revenue. That’s 52,000 Iowa businesses a year.

Why? When times are tough and revenue falls short, some business owners are using that tax money to cover expenses.

"This isn’t your money," said Courtney Kay-Decker, director of the Department of Revenue. "You’re collecting it for us, and your duty is to remit it to us. You should not be using it for your own operations. It should never be a float for you. It’s always our money that you’re holding effectively in trust for us."

The state does not break out industry segments that accounted for an overall 17.1 percent increase from the previous year of all sales tax delinquencies in Iowa, to $84.2 million at the end of the state’s 2011 fiscal year on June 30.

But a review of hundreds of liens filed this year in Linn County alone found restaurants were 38 percent of those posted for failure to remit sales tax.

"Restaurants have a very high failure rate, especially in the first year," said Jeff Braverman, president of Hawkeye Foodservice Distribution of Coralville. His company provides restaurants with their lifeblood and counts on owners to make their payments. "Foodservice distributors are very cautious when extending credit."

Curt Pooley of Solon remembers the call from David Bailey, his former business partner, with the news that Bishop’s Inc., their Cedar Rapids-based buffet restaurant company, would be closing.

"It would have been 2007 when Dave got ahold of me, and he says, ‘Well, I’ve got to shut things down.’

"I said, ‘Why’s that?’

"He said, ‘Well, I really screwed up. I never paid any sales tax.’

"It was a good thing I was sitting down. I don’t know how in the thunder he got himself into that position."

Four years later, penalties and interest have pushed the Bishop’s sales tax delinquency past $323,000, making it the state’s third-largest such debt, according to the Department of Revenue.

Bailey and his wife, Marcia, who served as a company officer, are solely liable, revenue officials said.

They left the state more than three years ago. When reporters from The Gazette and KCRG-TV9 visited their Omaha, Neb., home in September, Bailey said they are unable to pay the debt.

"We don’t have any money," he said. "It just actually broke us, the company did."

Restaurant ownership is challenging, said Nancy Abram, a University of Iowa retail-marketing lecturer and former executive with Hardee’s.

"To really create innovations, new concepts or a new idea, you have to have creative skills," she said, "but to run a successful restaurant, you have to have nuts-and-bolts management skills."

When Hawkeye Foodservice’s best customers fall behind, Braverman’s company may require pay-as-you-go terms until the restaurant regains its financial health.

"Sometimes restaurateurs will tell us they don’t want to go back to weekly or biweekly payment terms," he said. "They say, ‘When I pay you C.O.D., it helps me manage my cash flow better.’ "

Starting an independent restaurant is difficult enough, but restarting one after the 2008 flood and in the middle of a recession is really tough, as was the case with Zins in downtown Cedar Rapids. The stream of customers after the flood did not always generate sufficient cash flow.

The Department of Revenue has recorded liens totaling $113,248 against Zins. The restaurant is on a payment plan with the state, the IRS and some vendors, co-owner Lee Belfield said.

"It doesn’t leave any money to play with, but we are getting by," he said. Failing to remit "can be a pretty punitive situation ... to put yourself into."

Co-owner Amy Wyss is no longer involved in daily restaurant operations for health reasons. Belfield said she made other choices than he would have regarding tax funds. Wyss declined to be interviewed.

For restaurant owners operating on a thin margin, it’s a temptation to use sales taxes as cash flow, but "it’s a temptation you have to resist," Belfield said.

Wyss negotiated a payment plan for the delinquent sales tax, and Belfield negotiated a plan for the delinquent IRS withholdings, he said.

Beyond restaurants

On average during each of the past five years, about 1,250 Iowa businesses failed to settle their sales tax accounts within a few months. Delinquencies numbered 21,041 as of Nov. 1.

Many delinquent businesses close. Those that remain open face liens that encumber their assets. In addition to sales taxes, owners owe penalties and interest. Their debts are posted on county websites.

In the past two years, the state has referred 14 sales tax delinquents for criminal prosecution.

Read more: Two examples of Linn County restaurant ventures that encountered tax deliquency problems.

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