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For the week of June 21 through June 27, 2000

Valley firms confronted with use tax audit

For a tax that went into effect in 1965, it seems the use tax would be better known to the business community and individual taxpayers, and that education would be unnecessary. But that apparently is not so.

Express Staff Writer

The Idaho State Tax Commission has been auditing service businesses statewide—including the Wood River Valley—for the past two years, the Idaho Mountain Express has learned.

Michael Garrecht, a Boise-based audit supervisor for the tax agency, said in an interview the state is focusing on use tax levies.

According to the tax agency’s guidelines, the use tax "is a tax on goods that are put to use in Idaho."

The Idaho use tax rate is the same as the sales tax, 5 percent. Over the years, the agency has regularly audited large businesses to make sure the use tax is paid. The push to audit smaller firms followed funding by the state legislature.

Purchases typically susceptible to the use tax are office supplies and equipment bought outside the state over the Internet or from catalogs.

"If there was no use tax, buyers would be encouraged to shop out of state to avoid paying tax," the tax agency notes in a booklet of guidelines.

Service industries are defined as any industry that doesn’t sell a tangible product, according to Garrecht. These are businesses like medical practices, including veterinaries, and legal services.

The audits have been taking place over the last few years, Garrecht said, because "the state has so few people, it can only handle 1 percent of what’s out there."

Garrecht said there were several medium to small businesses, including many in the Wood River Valley, with "no contact with the state of Idaho and [that] have never explored their tax responsibilities."

The program "has really been an eye-opener for many folks unaware of how the use tax works," Garrecht said.

For a tax that went into effect in 1965, it seems the use tax would be better known to the business community and individual taxpayers, and that education would be unnecessary. But that apparently is not so. Ruth Tadlock, a sales tax specialist for the ISTC, called the managed and self audits program "half audit and half education."

In both types of audits, Tadlock said, no penalty is assessed on any tax due as a result of the audit. But, she said, the taxpayer is liable for unpaid tax and interest.

For some, signing up for an audit sounds like asking for trouble, but not to ask can mean even more trouble.

Greg Peterson, of Lallman, Feltman Peterson & Co. accountants in Ketchum, recalls one time in the mid to late 80s when the ISTC discovered a business that had not paid use taxes in excess of $100,000. The business was almost ruined after paying the amount plus a 25 percent penalty plus interest on the entire sum.

On the other hand, Peterson recalls the case of a 25-year-old business that had filed. When it was audited, the state went back seven years and found $10,000 of unpaid tax.

While this doesn’t sound like much, Peterson said that if a business never files a use tax return, there is no statute of limitations, but if a filing has errors, the business can only be audited for seven years back.

And in fact, the audit was a deal for the business Peterson gave as an example. He said the state waived penalties and said "pay the tax and we’ll call it even."

Some people in the service industry here may feel like they are being targeted because the commission has been auditing this category of business for the last two years. But the evidence is to the contrary, according to the tax agency.

First of all, the tax commission has been shorthanded, according to state auditor Garrecht. An increase in the number of auditors has allowed the state to audit and educate more businesses, he said.

Second, the audits are not new. Peterson can recall use tax audits back in the 1980s, saying he "probably had 10 to 11 clients audited."

Bill Bozzuto, of Smith, Cook & Co. in Hailey, can recall use audits from "years and years ago, when the state was auditing in a couple of places."

Third, many service businesses in the area have already gone through a use tax audit. According to Garrecht, the commission started with dentists, doctors and attorneys and is now auditing other businesses in the service category.

When asked to speculate on how the use tax law, on the books for 35 years, could be a surprise to taxpayers, Bozzuto, Robinson and Peterson offered their interpretations.

Bozzuto said, "I can’t feel real sorry for people deliberately not playing by the rules, but I have compassion for those who were unaware."

Robinson said that taxpayers who have failed to pay use taxes may have done so "out of ignorance. But this is probably not a great excuse." He advises "small business owners to call their business advisers to ask about use tax and to put in place a way of tracking and recording sales and use tax."

Peterson puts the responsibility for knowing squarely on businesses. Every business was told about the use tax when they applied to do business in Idaho.

"They’re not reading the material," he said.

Furthermore, Peterson said, accountants alert their clients about the tax.

"I’m going to speak for just about all CPAs in the valley when I say we ask our clients if they filed their use tax," he said.

And he offers this advice to business owners and individuals alike: "When somebody tells you ‘I can ship to your house and you don’t have to pay sales tax,’ they are showing their ignorance, and they’re asking you to cheat."


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