State moves to bolster tax enforcement

AUGUSTA – Maine businesses and individuals that skirt compliance with state tax laws will do so at their risk in years ahead. Several initiatives in the proposed state supplemental budget are aimed at bolstering enforcement of the tax laws and collection of millions of additional tax dollars.

“These are very important to reducing the structural budget gap,” Maine Finance Commissioner Becky Wyke said earlier this month during a media briefing. “They start up slow and they essentially pay for themselves and a little bit more in the first year. But once we get going on those audit initiatives, the [budget year] ’06 and [budget year] ’07 estimates are higher.”

Lawmakers are struggling to pass a $156 million supplemental budget that closes the budget shortfall for the current budget. But, the “structural gap,” which is the projected difference between expected revenues and expected expenditures, exceeds $900. Cuts and revenue raisers in the proposed budget would reduce that gap by more than $200 million.

The four enforcement efforts are expected to bring in nearly $5 million for the budget year that starts in July. The initiatives aim at catching nonfilers of the personal income tax, revenue lost by nonreporting of real estate transfers, abuse of the sales tax process and the first-time audit of insurance tax revenues.

Revenues from the insurance premium tax have skyrocketed in the last few years, from about $20 million a year to more than $70 million expected this year. And unlike the corporate income tax, the premiums tax has not been subject to any audits until the last year.

“I don’t think that an income line like the insurance premiums tax, that brings in 70, 80 or 90 million dollars a year should go unaudited, “said Jerome Gerard, acting director of Maine Revenue Services.

He took two of the 10 staff members assigned to auditing corporate income tax returns and shifted them to auditing the insurance premium tax returns. He told lawmakers the result has been an eye-opener.

“The first round of assessments came in at about $9 million,” Gerard said earlier this month. “We have a recent offer [on an audit] of about $2.2 million and we feel pretty comfortable that the revenue generation is going to be pretty good on an ongoing basis.”

The budget also seeks to stop what Gerard believes is a widespread practice of using a sales tax certificate, which allows a business to buy products that it sells without paying a sales tax on the products, for personal purchases to avoid paying any sales tax.

“We have over 63,000 sales and use tax accounts,” he said, “Over 10,000 accounts are dormant. What we found is that many of those folks that keep their sales and use tax account going is that they are out buying items tax free.”

Gerard said other states have faced the same problem and the proposal to strengthen enforcement of Maine’s law is based on both Florida and Louisiana laws.

He said the new provisions would require the products that a business resells be listed on the sales tax certificate instead of the current certificate which simply exempts a holder from paying sales taxes on a product intended for resale.

“This has worked well in Florida, and we think it will work well here,” he said.

The business community is concerned about the effort. David Clough, Maine director of the National Federation of Independent Businesses, said the state already has a bad reputation with many small businesses for its tax collection efforts.

“If people are misusing their sales tax certificates, yes, the state has a legitimate reason to look into that,” he said last week. “But they have to be judicious in how they approach this so they don’t create more resentment toward state government.”

Chris Hall, vice president of the Maine Chamber of Commerce, agreed state tax officials have alienated a lot of businesses.

“We don’t want tax cheats out there, but we want people treated fairly,” he said last week.

It is not just companies and businesses that are targeted by the enforcement efforts. Thousands of Mainers that file a return with the U.S. Internal Revenue Service do not file a state income tax return. The state believes it is losing a substantial amount of revenue and the budget provides for an analyst to comb federal computerized tax records to find Mainers who are not paying state taxes.

“We expect that will generate $750,000 the first year,” state Budget Officer Keith Todd told lawmakers earlier in April.

Another audit effort is aimed at catching real estate transactions that are not being reported and also cost the state lost revenue. It is expected to raise $850,000 in budget year 2005.

“This effort is going to focus on the discovery of unfilled income tax returns and underreported tax “Todd said.

Lawmakers did discuss just how far they could go in bolstering tax enforcement. In most cases, an agent is generating several times their salary in revenue, depending on tax they are assigned to audit.

“I think there is a limit, but I am not sure we are at it yet,” Rep. Peter Mills, R-Cornville, a member of the Appropriations Committee, said earlier this month.” I think many of us want to see how this works over the next year.”

The Chamber’s Hall said the state has to be careful in how aggressive they get in collecting revenue from all taxpayers, but particularly businesses.

“Aggressive enforcement of the tax laws really cuts two ways. Nobody wants a business to get away with cheating because that means everybody else pays more,” he said. “However, we certainly do not want people harassed to the point where they think they are not wanted in this state.”

Whatever the final version of the budget is passed by lawmakers when they return to work April 27, it’s expected that the increased enforcement initiatives will be included.