Small business tax "ambush"

When the S.C. Department of Revenue (DOR) told B.J. Rodgers that her Charleston business, Greenery Gallery, owed $42,000 is back sales taxes, she considered filing bankruptcy for her 24-year old business. Fortunately for us, she decided to fight back.

In 2005, the General Assembly passed a package of changes to the state tax code. Much to the chagrin of some of today’s legislators, buried in the bill was an obscure provision that set DOR off on a collision course with thousands of our small businesses that have service contracts.

DOR’s brass interpreted the statute as requiring the collection of state sales tax on service contracts. In the case of B.J. Rodgers it was service contracts for watering plants belonging to other businesses. But untold types of other businesses should have been collecting sales tax on their service contracts since October 2005 according to DOR. If you have an agreement, written or not, with a client to provide a service for a flat fee, DOR wants you to pay up even if you haven’t collected the sales tax.

Instead DOR “ambushed” B.J. and other small businesses.

But while DOR started notifying other businesses of their past due “new” tax liability, it ran into a stubborn B.J. Gordon. Because B.J. decided to protest her bad news back in 2008, DOR was forced to defend its attack on unsuspecting small businesses in court. This past July, DOR got the green light from an Administrative Law Court.

But instead of trying to pay the tax on yesterday’s deadline (with money she didn’t have) or going the bankruptcy route, B.J. went public.

Katy Stech of the Charleston Post and Courier broke the story on Saturday and did a follow-up today.

Now alarmed and worried small businesses are making calls.

I’ve talked to legislators who are angry saying that the Legislature never intended for sales tax to be levied on services. Two, Senator Larry Grooms and Representative Mac Toole, have indicated that they would file legislation if necessary to correct the problem.

Legislators also need to have these questions answered.

Why didn’t DOR notify small businesses to start collecting sales tax for service work? Why do DOR employees doing audits of small businesses think that such service work should not be subject to a sales tax? Why did every other professional tax preparer B.J. asked not know about this new interpretation of sales tax law? DOR has a lot of “s'plaining” to do.

But while most legislators and all small businesses never knew about DOR’s new taxing plan, apparently Governor Sanford’s office was informed. B.J. told me in my radio interview with her yesterday that she had contacted the Governor’s office about her situation but never received a response. Yesterday, Sanford’s spokesman admitted that the office knew of the court case but, according to the newspaper report, “declined to comment because it’s still pending.”

While it is not uncommon for agencies to hide behind “pending” legal cases in order to avoid answering important questions, it shouldn’t have been difficult for the Governor’s spokesman to answer the question of whether Sanford supports a sales tax on services or not. He refused to answer that question.

This issue should never have gone to a judge. DOR is a cabinet level position meaning that its director works for Sanford. The Governor’s office knew of this situation and failed to intervene to protect B.J. specifically from an unfair situation and failed to stop DOR from creating a new tax on small business.

DOR’s “Revenue Rulings” can be changed by statute, as some legislators have indicated they will do, or by another Departmental advisory opinion. So if Governor Sanford won’t act, the Legislature will have to. In the mean time, DOR should give B.J. an extension on her $42,000 tax bill until this is cleared up.