Revenue rip-off: State missing out on sales tax

(WISH Photo, file)
(WISH Photo, file)

INDIANAPOLIS (WISH) — Millions of dollars in Indiana tax revenue may be missing. I-Team 8 found the money is being stolen from taxpayers and used to line the pockets of business owners across the state.

It’s a revenue rip-off that could be costing you.

PADDED POCKETS

Sales taxes make up more of Indiana’s monthly revenue than any other kind of tax. In FY2013, the state collected nearly $7 billion from sales taxes, making up more than one-third of its total revenue. Click here to see a breakdown of Indiana revenue collection.

But, a two-month long I-Team 8 investigation found that number should have been much larger.

It’s all because of a breakdown in transactions. Consumers pay state sales tax on most products at the cash register, and that money is then collected by retailers.

“We call them trust taxes in our world, because we entrust to the business that responsibility. Any tax that we ask a business to collect is an agreement between the State of Indiana and that business. And, the agreement is this: you can do business in Indiana. The only thing we require of you is that you collect a 7 percent sales tax, report it to us, and on a periodic basis — normally monthly — remit it to us,” said Indiana Department of Revenue spokesman Robert Dittmer.

A series of I-Team 8 investigations last year found confusing state tax codes were causing some Indiana retailers to charge sales tax on a long list of products that are tax exempt.  That caused the state to cash in on tax funding it wasn’t entitled to.

But, I-Team 8 discovered the state is also being shorted by some retailers who are padding their own pockets with tax money, and getting away with it.

“What we don’t want to see businesses do is run their business or make their profit on the 7 percent sales tax,” Dittmer said. “That’s the state’s money to fund schools and roads, and so on. That’s not their money.”

BROKEN TRUST

When sales taxes aren’t remitted accurately or timely, the Department of Revenue sends out a late payment notice. It’s a bill for overdue funds, mailed within 10 days of a missed due date.

Dittmer says most retailers quickly get the message.

“Most people do,” Dittmer nodded. “It [may be] an inadvertent error, or it might be a cash flow issue where they need a couple days to make the payment. The reasons are across the board.”

But, some retailers don’t respond.

If the bills keep piling up, the state steps things up by sending the bill to a collections agency. The state currently holds an exclusive contract with Indianapolis-based Premiere Credit of North America to perform those services.

However, not every delinquent account ends up on Premiere’s radar. Others may result in a tax warrant.

TAX WARRANTS GROWING

“By the very nature of the term warrant, it does, I think, cause folks to perk their ears up a bit and pay attention,” said Hamilton County Sheriff Mark Bowen.

Bowen’s deputies are part of a growing number of law enforcement officers statewide who are now cashing in on delinquent sales tax collection.

“We are not going to be coming and arresting them if they’re not current on their taxes. But, it does give us some options. The sheriff does have the option to go out and levy businesses and collect those taxes right out of the cash till of those businesses if we deem it necessary. We don’t often go to those lengths, but we certainly can. And, we have assisted the Department of Revenue on a few occasions where we’ve closed businesses down,” Bowen said.

And, officers are given strong motivation to succeed.

“10 percent of what’s collected by the department goes toward the pension plans for the officers. So, we do have some vested interest in it,” Bowen said.

Collection agencies are also legally allowed to take 10 percent, and it comes as an additional penalty to the full amount of back taxes owed, Dittmer said.

Because of that financial incentive, the volume of warrants now being served in Hamilton County is nearing an all-time high.

Last year alone, Hamilton County served more than 13,500 tax warrants, bringing its five year total to nearly 60,000 tax warrants served. Other metro counties reported similar figures — including Boone County, where nearly 56,000 warrants were served and Johnson County, where nearly 28,000 warrants were served over the last five years.

But, the far more impressive figures come from counties with a more dense population of businesses, like Lake, Tippecanoe and Marion counties.

Two years ago, the Marion County Sheriff’s Office served more than 80,000 tax warrants in a single year, bringing a five-year total to more than 368,000. Multiple warrants may be issued for the same business as delinquent taxes grow, a spokesperson said, but the rates now add up to more than 3,500 warrants per deputy, per year.

For Sheriff Bowen, the rising numbers are a concern.

“It does signify a problem,” he said. “We all are required to pay our taxes, and, these are folks that aren’t. It’s important that we are following up to collect the revenue the state is owed.”

COLLECTION CLOSE-OUT

Some of the rapidly rising rates may be due to a single problem: retailers that shut down.

“We do run into a lot of folks now who don’t properly close out their businesses if they go out of business. We’re getting more [and more] tax warrants for businesses that are no longer in operation. We try to track those businesses. And, we’re in a unique position to do that. We’re more familiar with the communities,” Bowen said.

But, lag times can grow quickly, even as the number of warrants issued rises. And, that may be complicated by incomplete data.

“If they report [sales tax collection] incorrectly, we generally don’t know that until the end of the year,” Dittmer said.

Revenue inspectors can perform a trend analysis to identify anomalies and patterns, however, he added.

“If you remit a certain amount every month and then that amount drops drastically, our system flags that. There may be adequate reasons. There may not be. But, it tells us we should look closer,” Dittmer said.

And, Dittmer says that system is largely successful.

“We’re going to collect $100 million in sales tax from delinquent accounts this year,” he said. Click here to see a breakdown of Indiana sales tax collections over the last 5 years.

It’s an impressive number, representing about 1 percent of the state’s total sales tax collection per year.

But, I-Team 8 found those collections come with a catch.

NOWHERE TO BE FOUND

Turns out, the Indiana Department of Revenue has no idea how much sales tax revenue it’s actually owed.

“We couldn’t even possibly tell you how much [money is missing], because many of these [delinquent sales tax accounts] are actually closed businesses. Businesses go out of business every day. But, not all of them tell us when they do,” Dittmer said.

When that happens, many businesses fail to “settle up” with the state.

That’s a problem, because the state isn’t able to calculate what its true revenue should be.

“Some may owe thousands, some may not owe the state anything” Dittmer said. “If they’re a closed business and they filed right up until the point they closed, but they never bothered to file that form to tell us they’re closed, we don’t know they’re closed. If we don’t know that business is closed, we’re going to assume that you’re still collecting retail sales tax.”

But, the state does know how many business owe, and the list is growing at an alarming rate.

REVOKED RETAILERS

In 2010, Indiana legislators passed a law requiring the Department of Revenue to publish the names and addresses of all Indiana businesses who have had their business license — known as a Registered Retail Merchant Certificate, or RRMC — revoked due to delinquent retail sales tax debt.

It now includes more than 36,000 businesses, likely representing millions of dollars in outstanding sales tax debt. It is lost revenue that could help offset other taxes assessed statewide.

The list is now updated weekly, Dittmer said. And, retailers on it shouldn’t be surprised.

“If the business really exists, they’re aware of it,” he said. “Because, we have an agent, accompanied by a deputy sheriff, go out and talk to the owner or manager on site and deliver a document that has to be posted in their window or on their door.”

But, even if the business has vanished, Dittmer says the state never stops trying to get its money back.

“They are on the list because we revoked an RRMC. There is no provision to taking it off the list just because they don’t exist. There is no statute of limitations on debt to the state. [Closing a business down] doesn’t protect you. It doesn’t protect you at all,” he said.

Which leads to a critical question: what is the state doing to track the money down?

Friday night at 11, I-Team 8 will push to find out, putting the list of revoked RRMC’s to the test. Find out why some lawmakers are now asking how well Indiana’s tax laws are being enforced, and why some are calling for new actions to be taken to keep this revenue rip-off from growing.

Search Expired RRMC list as of 1/30/2014

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