MONTPELIER, Vt. (AP) - Dentist Frank Illuzzi was stunned when Vermont
tax collectors began demanding a 6 percent sales tax on the value of
toothbrushes and floss he hands out to patients. Senior care facility
operator Jay Grimes was similarly surprised to get a $350,000 bill
slapping a 9 percent restaurant tax on the meals served to residents in
the dining room. Landscaper Richard "Buckwheat" Lowe got $18,000 in
bills taxing him for the first time ever on the mulch he sells.
Vermont is among a handful of cash-strapped states getting more
aggressive about collecting every tax owed - hiring more collectors,
hounding scofflaws and exploiting corners of their tax laws that haven't
been enforced in years. It's an effort to avoid what politicians from
both parties are dead set against: raising taxes.
"You don't want to raise taxes until you're very sure the taxes that
people are supposed to pay are being paid," said Rep. Janet Ancel,
chairwoman of Vermont's House Ways and Means Committee.
Under adamant no-new-tax Democratic Gov. Peter Shumlin, Vermont has
added about 10 new tax compliance auditors and has stepped up efforts to
scour records in rural areas, and add greater scrutiny to businesses
ranging from auctioneers to Internet-based cloud-computing services.
But for all its aggressiveness, Vermont's results have been mixed.
The state reaped about $57 million during the 12 months that ended in
June, up from about $50 million five years earlier - a net gain of $7
million. That's a tiny fraction of the state's $1.3 billion general
fund, but it has helped lawmakers close a budget gap that at the
beginning of this year was projected to be $46 million.
Other states have had much more success.
Idaho hired 48
temporary auditors and collectors in fiscal 2011 as part of Gov. C.L.
"Butch" Otter's effort to boost revenues without raising taxes and
narrow the so-called "tax gap" - the amount of taxes in the state that
are due but go unpaid, either by error or by intent.
The added staff brought in more than $26.3 million, more than double
the original estimate of $11.5 million. All the positions were made
permanent this fiscal year.
Idaho's additional tax receipts are
just a sliver of its roughly $2.7 billion budget, but they helped the
state post a budget surplus for the first year since the Great Recession
began in 2008, money that helped give state workers their first raises
in five years.
Oklahoma added about 30 people to its tax collection staff since 2010
in an effort to help close a $900 million budget shortfall. The state
collected nearly $35 million in delinquent taxes during the 12 months
that ended in June, and overall sales tax revenues jumped by about $159
million from the first 10 months of fiscal 2011 to the same period in
fiscal 2012.
States have a variety of strategies for following up when audits find
tax scofflaws. One tactic in California is public shaming: The state
publishes lists of individuals and businesses behind on income or sales
taxes.
Others take a kinder approach. New York responded to the recent
recession by stepping up its program to forgive parts of back payments
due from taxpayers in economic distress.
Gale Garriott, executive
director of the Federation of Tax Administrators, a Washington-based
group that tracks state tax policy, said the handful of states that have
taken a tough approach by hiring more auditors have generally been
rewarded with more revenue.
"The return on investment is quite good. They bring in several times more than their salaries," he said.
Vermont's
get-tough approach, however, is measured in hard feelings as well as
dollars. Some aggrieved taxpayers have been contacting lawmakers, and
debates in which legislators try to rein in what some see as an
overzealous tax department have become a regular occurrence.
Illuzzi, a Brattleboro dentist, complained to his brother, state Sen.
Vincent Illuzzi, about the demands for sales tax on the free
toothbrushes, toothpaste and floss he gave out.
He won an
amendment to a tax bill just before the Legislature adjourned in early
May - a bill Shumlin later signed into law - that exempts the dental
goods from the sales tax.
"Some dentist wants to give a kid a toothbrush and they want to tax it. That's outrageous," the senator said.
A
similar legislative change came after The Gables at East Mountain, an
independent living community for seniors near Rutland, was hit with a
$350,000 back-tax bill dating back eight years, with the state saying
the meals it served should have subject to the 9 percent state meals tax
for restaurants.
Lawmakers protested that the Gables' dining room wasn't like a
restaurant, because it served residents of the facility, and people
aren't taxed when they eat at home.
As lawmakers changed the law affecting the Gables going into the future, the state canceled its past tax bill.
"We were obviously flabbergasted to get a tax bill like this the week
before Christmas," said Grimes, executive director at the Gables. "It
was absolutely crazy."
But Grimes said he was pleased with the outcome after local legislators intervened.
Lowe, the landscaper, hasn't been so lucky. He operated his
landscaping business for nearly all of its 36 years with the
understanding that bark mulch, soil additives and similar products he
sells were exempt from Vermont's 6 percent sales tax.
That changed in 2006, but no one told him, Lowe said, until he got
past-due tax bills for $18,000 last year, which he is now fighting.
"You don't just change the taxes and laws and not tell somebody," he said.
Steve Jones, owner of the Metowee Mill Nursery in Dorset, said he
also missed the 2006 tax law changes that removed the agricultural
exemption from sales tax for several of the products he sells. Vermont's
tax department sent out a letter at the time talking about changes
affecting beer and footwear, he said, nothing about garden products.
He said he didn't realize there was a tax until he got a letter
demanding $41,000 in back taxes, interest and penalties in December.
"Just educate me, tell me. I want to pay my fair share," said Jones, who is appealing the bill.
State Tax Commissioner Mary Peterson acknowledged some taxpayers
might be confused about the changes, and she said her agency is working
on improving how it educates the public about tax policy. But she also
defended the tougher tax collections.
"It certainly is your responsibility when you have a business to be keeping up on the rules," she said.
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