Some States Asking the Tax Man to Get Tougher

MONTPELIER, Vt. (AP) -- Dentist Frank Illuzzi was stunned when Vermont tax collectors began demanding a 6 percent sales tax on the value of toothbrushes and floss he hands out to patients. Senior care facility operator Jay Grimes was similarly surprised to get a $350,000 bill slapping a 9 percent restaurant tax on the meals served to residents in the dining room. Landscaper Richard "Buckwheat" Lowe got $18,000 in bills taxing him for the first time ever on the mulch he sells.

Vermont is among a handful of cash-strapped states getting more aggressive about collecting every tax owed - hiring more collectors, hounding scofflaws and exploiting corners of their tax laws that haven't been enforced in years. It's an effort to avoid what politicians from both parties are dead set against: raising taxes.

"You don't want to raise taxes until you're very sure the taxes that people are supposed to pay are being paid," said Rep. Janet Ancel, chairwoman of Vermont's House Ways and Means Committee.

Under adamant no-new-tax Democratic Gov. Peter Shumlin, Vermont has added about 10 new tax compliance auditors and has stepped up efforts to scour records in rural areas, and add greater scrutiny to businesses ranging from auctioneers to Internet-based cloud-computing services.

But for all its aggressiveness, Vermont's results have been mixed. The state reaped about $57 million during the 12 months that ended in June, up from about $50 million five years earlier - a net gain of $7 million. That's a tiny fraction of the state's $1.3 billion general fund, but it has helped lawmakers close a budget gap that at the beginning of this year was projected to be $46 million.

Other states have had much more success.

Idaho hired 48 temporary auditors and collectors in fiscal 2011 as part of Gov. C.L. "Butch" Otter's effort to boost revenues without raising taxes and narrow the so-called "tax gap" - the amount of taxes in the state that are due but go unpaid, either by error or by intent.

The added staff brought in more than $26.3 million, more than double the original estimate of $11.5 million. All the positions were made permanent this fiscal year.

Idaho's additional tax receipts are just a sliver of its roughly $2.7 billion budget, but they helped the state post a budget surplus for the first year since the Great Recession began in 2008, money that helped give state workers their first raises in five years.

Oklahoma added about 30 people to its tax collection staff since 2010 in an effort to help close a $900 million budget shortfall. The state collected nearly $35 million in delinquent taxes during the 12 months that ended in June, and overall sales tax revenues jumped by about $159 million from the first 10 months of fiscal 2011 to the same period in fiscal 2012.

States have a variety of strategies for following up when audits find tax scofflaws. One tactic in California is public shaming: The state publishes lists of individuals and businesses behind on income or sales taxes.

Others take a kinder approach. New York responded to the recent recession by stepping up its program to forgive parts of back payments due from taxpayers in economic distress.

Gale Garriott, executive director of the Federation of Tax Administrators, a Washington-based group that tracks state tax policy, said the handful of states that have taken a tough approach by hiring more auditors have generally been rewarded with more revenue.

"The return on investment is quite good. They bring in several times more than their salaries," he said.

Vermont's get-tough approach, however, is measured in hard feelings as well as dollars. Some aggrieved taxpayers have been contacting lawmakers, and debates in which legislators try to rein in what some see as an overzealous tax department have become a regular occurrence.

Illuzzi, a Brattleboro dentist, complained to his brother, state Sen. Vincent Illuzzi, about the demands for sales tax on the free toothbrushes, toothpaste and floss he gave out.

He won an amendment to a tax bill just before the Legislature adjourned in early May - a bill Shumlin later signed into law - that exempts the dental goods from the sales tax.

"Some dentist wants to give a kid a toothbrush and they want to tax it. That's outrageous," the senator said.

A similar legislative change came after The Gables at East Mountain, an independent living community for seniors near Rutland, was hit with a $350,000 back-tax bill dating back eight years, with the state saying the meals it served should have subject to the 9 percent state meals tax for restaurants.

Lawmakers protested that the Gables' dining room wasn't like a restaurant, because it served residents of the facility, and people aren't taxed when they eat at home.

As lawmakers changed the law affecting the Gables going into the future, the state canceled its past tax bill.

"We were obviously flabbergasted to get a tax bill like this the week before Christmas," said Grimes, executive director at the Gables. "It was absolutely crazy."

But Grimes said he was pleased with the outcome after local legislators intervened.

Lowe, the landscaper, hasn't been so lucky. He operated his landscaping business for nearly all of its 36 years with the understanding that bark mulch, soil additives and similar products he sells were exempt from Vermont's 6 percent sales tax.

That changed in 2006, but no one told him, Lowe said, until he got past-due tax bills for $18,000 last year, which he is now fighting.

"You don't just change the taxes and laws and not tell somebody," he said.

Steve Jones, owner of the Metowee Mill Nursery in Dorset, said he also missed the 2006 tax law changes that removed the agricultural exemption from sales tax for several of the products he sells. Vermont's tax department sent out a letter at the time talking about changes affecting beer and footwear, he said, nothing about garden products.

He said he didn't realize there was a tax until he got a letter demanding $41,000 in back taxes, interest and penalties in December.

"Just educate me, tell me. I want to pay my fair share," said Jones, who is appealing the bill.

State Tax Commissioner Mary Peterson acknowledged some taxpayers might be confused about the changes, and she said her agency is working on improving how it educates the public about tax policy. But she also defended the tougher tax collections.

"It certainly is your responsibility when you have a business to be keeping up on the rules," she said.

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Associated Press Writers John Miller in Boise, Idaho; Sean Murphy in Oklahoma City; Judy Lin in Sacramento, Calif.; and Michael Virtanen in Albany, N.Y., contributed to this report.

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