DOR expected to call off tax dogs

Two phone conversations last evening and one this morning indicate that the South Carolina Department of Revenue (DOR) will suspend its controversial sales tax ruling on contract services until the Legislature addresses the issue next year.

The controversy exploded upon news last weekend that DOR was trying to collect back sales taxes from certain small businesses that had never been informed to collect the tax. B.J. Rodgers of Greenery Gallery in Charleston faced a $42,000 sales tax assessment deadline earlier this week.

The issue went viral with this blog on the issue being sent to thousands of small businesses across the state and to the media.

Angry small businesses began contacting their legislators and DOR. Rep. Mac Toole of Lexington County engaged DOR personnel in a series of conversations expressing his and other top House members’ displeasure of the DOR ambush of small businesses. The issue was serious enough for the discussions even to include a possible special legislative session if DOR didn’t take action now to suspend its efforts to collect the tax.

While we wait for official word from DOR, we need to thank Mr. Toole for his quick and vigorous actions to defend small businesses.

But even if DOR finally does the right thing, there are some questions that need to be explored.

Why did DOR take so long to interpret a 2005 tax law to mean that businesses providing service contracts should be collecting sales tax? Apparently this decision was made sometime after 2005, probably 2008.

The word is that some bright person advanced the idea that DOR was missing a lot of sales tax if the 2005 was interpreted in a special way. The possibility of “found” revenue was important to DOR because the General Assembly had instructed DOR to increase tax revenue by $100 million after legislators were told that a lot of regular sales tax was not being collected.

But DOR needed to test out this new revenue generating plan. B.J. Rodgers became DOR’s guinea pig. When an Administrative Law Judge ruled in DOR’s favor recently saying that B.J. owed $42,000 in back sales taxes she had not collected, DOR was off to the races trying to collect from other small businesses.

So where is Governor Mark Sanford, who oversees DOR, in this story? Apparently still AWOL according to sources. I’m sure he’ll try to take credit for protecting small businesses from this taxing situation—one that happened right under his nose by his DOR.

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.