Swarms of Auditors to Enforce New Sales Tax

Dept. of Revenue Likely to Farm Out Audits of New Tax On Small Business

Declaration of Independence, July 4, 1776: “[The King] has sent hither swarms of Officers to harass our people, and eat out their substance.”

by Woody Jenkins, Editor

BATON ROUGE — The Louisiana Department of Revenue has several dozen auditors involved in making sure Louisianians pay all the state income taxes they are supposed to.
But, in reality, the Department leaves the audit of state personal income taxes to the federal Internal Revenue Service.  When the IRS conducts an audit of an individual and finds that more taxes are due, that usually triggers an automatic increase in the amount of state personal income taxes due.
So, instead of focusing on the state personal income tax, the Department of Revenue audits state business income tax returns.
The question is, if Gov. Jindal’s plan to abolish the state personal and corporate income tax is adopted, will the Louisiana Department of Revenue shut down its audit division and lay off everyone?
A source inside the Department laughed at that idea.  “Hardly!” he said.  All of the existing audit staff and probably many more will be needed to audit small businesses’ new monthly professional, business, and personal services tax returns.
Every business engaged in professional services, business services, and personal services will have to collect 5.88 percent of its sales in taxes, file a monthly tax return, and remit those taxes to the Department of Revenue.
“That’s a lot of tax returns every month!” the source said, “and there will be a lot of failure to report and a lot of tax avoidance.  The audit function will have to be more intense than ever, in order to make sure the tax on services is collected.”
There will undoubtedly be claims that the “underground” economy is flourishing and that more intense scrutiny is necessary, especially since state revenues will be based largely on sales tax collections.
But there’s more to consider.
Sources in the Department of Revenue say that pressure to vigorously enforce the new tax on professional, business, and personal services and the massive increase in the number of business taxpayers will probably push the department into hiring private firms to conduct audits of businesses subject to the new taxes.
If those private firms get a portion of the taxes collected, that could create ethical issues and an inherent conflict of interest.  If the private auditor makes more money by finding the taxpayer owes more, he will tend to resolve close issues against the taxpayer, instead of in accordance with the law.
Private auditors should not be working on a bounty system, because they are supposed to be objective and fair in their treatment of the taxpayer and the state.
Objectivity could be on trial in another respect.  Department of Revenue secretary Tim Barfield is pushing hard to have the department be self-sustaining — to have the department be supported by its collections, rather than general fund money.  Now sources inside the department say the drive to be self-sustaining has led the department to impose penalties and interest in cases where they have been waived in the past.
If the new $1 billion Jindal tax on business services passes the legislature, the Department of Revenue will have a field day with penalties and interest.
State law provides that filing a monthly sales tax report even one day late will subject the taxpayer to a penalty of five percent of the tax due plus interest.  An additional five percent is imposed each month the return is late up to a maximum of 25 percent.  There is no maximum on interest due, which accrues monthly.
In the case of Obamacare, most businesses sat on the sidelines, content to find out what was in the bill after it passed.
That would not be a wise approach in the case of the Jindal’s proposed 5.88 percent services tax.
If you are an architect, engineer, management consultant, veterinarian, yard man, barber, cosmetologist, designer, graphic artist, political consultant, tree service, or a host of other professional, business, or personal services, you should wake up and contact your legislator.  Otherwise, you may find “swarms of Officers” at your door, demanding 5.88 percent of your gross revenues, even if there is no “net.”