George Pappas says he felt under attack the minute the state’s sales tax auditor walked through the door of his Forestview Restaurant in the Town of Lancaster.
“He was just ruthless,” Pappas said.
The auditor, according to the restaurateur, appeared to have presumed Pappas was skimming money and only was seeking some way to prove it.
Though Pappas said he was able to produce all his books, records and tapes — cash register reports that itemize each day’s sales — some copies of paper sales checks for individual sales made over the previous three years were missing.
“Do you think with a thousand people coming through my doors, a couple of checks aren’t going to go missing?” Pappas asked.
Sometimes, someone rips a check out of a pad to jot down a note or a phone number. Sometimes servers accidentally go home with the guest check pads in their aprons. Sometimes they get splashed with grease or water.
But the absence of some paper guest checks meant the auditor was able to declare Pappas had “inadequate records.” That opened the door to presuming Pappas had dodged taxes and to estimating a bill for what Pappas owed.
The estimate — $250,000 — means that tax authorities had concluded that Pappas had stolen or hidden $3 million in revenue.
“If I had that kind of money, would I have debt? Wouldn’t I be living in a palace?” Pappas asked. “I’ve been working just to pay lawyers for the last six years. I can barely pay my bills. I’m living on a line of credit.”
Pappas, who will bring his case before the state’s tax appeals tribunal in September, has spent $145,000 on legal bills since his first state audit six years ago.
Michael Hallac was in the middle of renovating his Clarence Dairy Queen franchise when what he calls his “nightmare” with state tax authorities began.
Like most bars and restaurants in the state, Dairy Queen uses electronic point-of-sales systems rather than old-fashioned paper checks. But even though he had met stringent record-keeping requirements and oversight set by the Dairy Queen Corp., the absence of those paper checks opened the door for an auditor to estimate a bill of “several thousand dollars” in unpaid taxes.
He now has hooked up journal printers to every cash register to produce individual sales checks that, with today’s technology, wouldn’t otherwise be created.
The fate of the owner of one small pizzeria hangs in the balance. Though he said he is barely scratching out a living, auditors used the
same “inadequate records” claim to estimate a tax bill that, with penalties and fees, will approach $30,000. If the amount — which he is appealing — stands, it will put him out of business.
Bar and restaurant owners repeat the same story: In a climate of fear and intimidation, auditors are using unfair methods to calculate imaginary sales tax.
Instead of revising tax laws written well before the digital age, tax enforcers are exploiting them to close budget gaps and justify their own salaries, critics allege.
“It’s like ‘The Sopranos,’ but they have a badge,” said the pizzeria owner, who asked not to be named for fear of retribution. “It’s extortion.”
The state itself has admitted it aims to review every business to make sure it is paying its fair share of sales tax. It has hired 330 new auditors with the goal of raising $220 million per year.
Claims follow story
But the state’s taxpayer advocate said great strides have been made to make the process fairer and keep auditors in line. After an article in The Buffalo News detailing claims by restaurant owners who believed they were unfairly targeted, the advocate’s office was flooded by calls from restaurateurs with similar stories.
“Clearly, improvements had to be made,” said Jack Trachtenberg, deputy commissioner and taxpayer rights advocate with the state Department of Taxation and Finance.
Some major sticking points, he said, have been resolved.
Statewide, auditors have gone back to class for retraining on the proper way to conduct audits. Auditors now are required to use business records for audit evaluations even if they would be ruled “technically inadequate” by paper era standards. Estimating a tax bill using other methods, such as comparing a bar’s price markups to national averages or comparing one day’s business with the same calendar day on a previous year, should be used only as a last resort.
“The rules can be very strict and cause people unintentional slip-ups,” he said. “That shouldn’t mean we rush to dismiss records and rush into estimating. If a company has substantive records, we should use them.”
If a business owner truly has insufficient records for a complete audit, auditors now are required to use several methods to estimate the amount owed. Even then, if the owner can show evidence of why the estimate is incorrect, auditors must be ready to make adjustments, taking into account such things as a restaurant’s size, location, prices and hours.
The department also put together an extensive bulletin for the food and beverage industry, posting specifics about what records owners need to keep and outlining exactly what adequate records mean. That definition, however, still includes paper sales checks.
The state also is working with the makers of point-of-sales systems to include mechanisms in cash registers that would assure tax enforcers that unethical business owners looking to cover up tax evasion cannot manipulate those records. Arguments for requiring paper sales checks include lack of trust in electronic records.
Other than litigation, taxpayers have been able to contest unfair auditing practices only through the Bureau of Conciliation and Mediation Services. But mediators sometimes had a tendency to side with auditors rather than taxpayers.
“I raised the issue early on that the conciliatory process was not working properly,” Trachtenberg said. “Kevin Law, who was appointed director of the [mediation services] has made a lot of changes.”
Over the past six months, the system has been revamped to ensure that mediators are not beholden to auditors.
But what about the reputation many auditors in Western New York have as bullies?
“I hope that’s not happening. But if it is, we need to hear from [business owners],” Trachtenberg said. “I know some people are afraid [of retribution], but if we don’t know about it, we can’t do anything about it.”
The state has mailed business owners the names of managers and supervisors to whom they can make complaints.
Business owners also are urged to contact the taxpayer advocate’s office if they have a problem with an auditor, the audit or estimation methods. Complaints can be kept confidential at the owner’s request.
Trachtenberg — who notes that he reports to the tax commissioner, not the enforcement office and so can remain impartial — insists the results speak for themselves.
Last year, he said, the advocate’s office took in 1,921 complaints from restaurant owners. Roughly 68 percent were resolved in the taxpayer’s favor, with some or all of the relief they requested being granted.
Owners finally triumph
The Buffalo Tap Room & Grill in the Town of Tonawanda — which, despite detailed records dating back to 1984, was slapped with a$330,000 tax bill last year — eventually triumphed. The bill was dismissed, with owners Dave Panaro and Dennis Nettina paying nothing.
Hallac admitted no wrongdoing at his Dairy Queen, but settled and paid a few thousand dollars through his mediation hearing, just to get things over with. Of course, now that opens him up to state and federal income tax bills, because that few thousand dollars will be considered undeclared income.
Panaro and Nettina have led the fight against unethical tax collection practices, urging business owners to band together and leaning on lawmakers to stand up for small businesses.
That does not win back the time and money they spent fighting their own battles. And it doesn’t restore their health to what it was before the state’s hammer came down. But they hope it will spare other companies similar ordeals.
And despite the reforms Trachtenberg says are being made, the voice mail boxes of sales tax compliance consultants such as David Gross continue to fill up with messages from teary, terrified clients.
Still, the state insists progress is being made.
“Clearly, audits could have been done better,” Trachtenberg said. “And we’re working to assure they’re done better going forward.”
http://www.buffalonews.com/business/local-business/article476514.ece
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