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| Baltimore Business Journal - March 23, 2009 |
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Friday, March 20, 2009
Check your books; Maryland going after millions in = back=20 taxes
Baltimore Business Journal - by Daniel=20 J. Sernovitz Staff
Editor's Note: For more on this story,
As if the recession and credit crunch weren=E2=80=99t enough, there = is another=20 increasing economic threat to Maryland=E2=80=99s small-business owners: = state tax=20 audits.
Faced with a $1.1 billion shortfall in tax revenues, state = Comptroller Peter=20 Franchot has beefed up the technology and manpower of his office to seek = out=20 Maryland business owners and taxpayers shirking the state=E2=80=99s 6 = percent sales=20 tax.
What that means for employers is that 2009 could be filled with some=20 expensive, burdensome and surprising queries from Maryland=E2=80=99s tax = man. Most=20 vulnerable are the state=E2=80=99s small businesses, including bars, = restaurants and=20 convenience stores, and local tax experts say the audits could uncover = anywhere=20 from $100,000 to $4.5 million in unpaid taxes, interest and penalties = from a=20 single business.
For some business owners, that could be enough to put them out of = business =E2=80=94=20 a situation that smacks of a Catch-22. After all, it=E2=80=99s the = recession that has=20 put unrelenting financial strain on many Maryland businesses, = particularly the=20 small ones. That pressure can mean companies are doing less business, = selling=20 fewer goods and paying less in both sales and earned income taxes.
That drop in money going into state coffers has prompted Franchot to = increase=20 tax enforcement, potentially burdening small businesses already = operating on=20 razor-thin margins.
=E2=80=9CIn these economic times, those kinds of surprises can put a = small business=20 under,=E2=80=9D said Steve Appel, owner of Nouveau Contemporary Goods in = Baltimore.=20 =E2=80=9CMost small-business owners are really stretched = thin.=E2=80=9D
In hopes of avoiding tax audits, Appel said he has hired an = accountant and=20 financial adviser to keep his company=E2=80=99s books in line and stay = current on tax=20 codes. He said he is not worried about Maryland=E2=80=99s increased tax = enforcement.
=E2=80=9CIt doesn=E2=80=99t weigh on me at all,=E2=80=9D he said. = =E2=80=9CBut I can definitely see where=20 others might be a little concerned.=E2=80=9D
Steven Albert, director of tax services at Glass Jacobson in Owings = Mills,=20 said many businesses are unprepared for the intensified auditing effort, = which=20 has resulted in an increased number of clients reaching out to his firm = for=20 help.
The state=E2=80=99s tax code is complicated, and Albert said there = are a number of=20 parts businesses are likely to overlook. Chief among them is the = requirement=20 businesses pay taxes on items they buy from companies not based in = Maryland,=20 known as a use tax because it places the burden on the consumer instead = of the=20 seller.
Vendors from outside Maryland, including Internet merchants who = don=E2=80=99t have=20 brick-and mortar stores in the state, aren=E2=80=99t required to collect = Maryland sales=20 tax. In those cases, the Maryland business buying those goods is still=20 responsible for paying the tax.
=E2=80=9CFor many clients, this is like a foreign world to = them,=E2=80=9D Albert said. =E2=80=9CWe=20 don=E2=80=99t want anybody to be blind-sided by this liability that they = never knew they=20 had.=E2=80=9D
Some Baltimore-area businesses have opted to err on the safe side = =E2=80=94 hiring=20 professionals to alert them to tax changes, keeping accurate records and = staying=20 away from the gray areas in the state=E2=80=99s tax code. Among them is = Allie Wolf,=20 co-owner of Amaryllis, a jewelry store in Harbor East.
=E2=80=9CFor us, we=E2=80=99re so by-the-book that we would never be = concerned by an audit,=E2=80=9D=20 Wolf said. =E2=80=9CWe have a very small budget, so we just only put = things through that=20 are legitimate.=E2=80=9D
Prompted in part by the state=E2=80=99s budget woes, Franchot hired = 22 auditors and=20 revenue examiners last year to target what he characterized as a small = number of=20 tax scofflaws. Franchot has also initiated a new $90 million tax = collection=20 system to make it easier to find those businesses and individuals not = paying=20 their share. The program generated more than $3 million in January, its = first=20 month in operation.
=E2=80=9CIn tough economic times, cheating goes up, and we need even = more good=20 enforcement and good compliance. And gosh knows we need the = money,=E2=80=9D Franchot=20 said. =E2=80=9CThe theme from my office is that, whatever the taxes are = that are on the=20 books, we=E2=80=99re going to apply them fairly to people.=E2=80=9D
Over the past five years, the state has seen a 26 percent increase in = sales=20 and use tax receipts, which came to about $3.7 billion in 2008. In just = the past=20 year, Franchot said, the state collected more than $800 million in = delinquent=20 taxes.
=E2=80=9CIt=E2=80=99s a real risk they=E2=80=99re going to be audited = if they have not been already,=E2=80=9D=20 said Michael T. Dillon, president of Dillon Tax Consulting in Annapolis. = =E2=80=9CWe=E2=80=99re=20 going to see, if we haven=E2=80=99t seen it yet, an increase in the = number of audits.=20 They can only cut so much, so they=E2=80=99re going to have to make up = the rest by=20 finding new revenues.=E2=80=9D
Dillon said the cost of defending an audit or appealing its findings = can=20 reach $30,000 at least.
Even tax-exempt nonprofits are coming to the attention of state = auditors,=20 Dillon said, as many of those organizations have turned to book sales = and other=20 for-profit efforts to make up for a drop in donations and = grants.
All contents of this site =C2=A9 = American City=20 Business Journals Inc. All rights=20 reserved.
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