Each year, the IRS and states alike, estimate the difference between taxes owed and taxes collected. This difference, known as the “tax gap,” has been steadily growing at both the federal and state level over the past several years. For example, the IRS estimates that the federal “tax gap” is about $385 billion. While it sounds like a large number, the IRS is able to boast about an 86% compliance rate. On the state side, similar problems exists. For instance, large states, such as California have a “tax gap” of about $10 billion. In response, the states are launching large and expensive “campaigns” in order to attempt to narrow the tax gap and generate revenue. Small businesses will undoubtedly feel the crack-down of the compliance efforts across the country.
Many states have leveraged technology to begin new automated collection systems. In order to reduce its $10 billion tax gap, California invested about $670 million over 5 years to improve its collection systems. This new technology is expected to raise about $1 billion a year in state tax revenue. Florida implemented a system that systematically sends out tax warrants (tax liens) on delinquent payers. Using this automated system, Florida sent out some 93,000 warrants in 2013, 8,000 of which were in error. The Florida Department of Revenue “proudly” sent an erroneous tax warrant to its Governor in February, 2013. BNA estimates that at least 30 states are following suit and implementing their own technology that will deter many, namely small businesses, from underreporting and not paying past due taxes.
The theme across the country over the past few years is to leverage third party reporting to reduce the state tax gap. For example, states like Florida, Tennessee, and Texas have received sales reports from beer and cigarette wholesalers as a check on retailers selling the same items. Florida recently announced it was turning to the Department of Highway safety as a cross-check on auto dealers and repair shops. Legal research companies have even been brought into the madness as it was reported that personal information from LexisNexis would be used to catch tax evaders in Georgia, Indiana, Louisiana and Massachusetts.
Other states have taken more aggressive tactics. States such as Connecticut and New York have programs to withhold retailer licenses that are necessary to engage in business. North Carolina has announced it would not allow liquor licenses to be renewed for delinquent taxpayers. Illinois took this even a step further by launching a criminal investigation campaign against gas station owners. In fact, Illinois was quick to announce it collected about $90 million from the gas station industry, which presumably is comprised of small businesses.
As technology increases, states will likely get more creative and to be expected, more aggressive in enforcing its tax laws. In addition, states are sharing information with other states in order to keep tabs on potential tax cheats. Kansas and New Mexico have led the charge to share data and New York and California went as far to form a formal alliance. As a state and local tax professional, it is our job to make sure the states are not overstepping their bounds. A clever state and local tax lawyer should always be asking, Can my state do this? Where is the states statutory authority to do this? With creative compliance tactics, states often miss critical procedural requirements, rely on information in which they are not entitled, and run afoul to state law. On the flip side, all taxpayers, particularly small businesses need to be cautious and aware that big brother is watching.
About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email JerryDonnini@Floridasalestax.com or phone at 954-642-9390..