Update the Comptroller s Enforcement Authority

The Comptroller should be given additional tools to collect delinquent tax revenue and to promote voluntary compliance.


Background
The Comptroller of Public Accounts administers and collects most of the taxes levied by the State of Texas. As part of this responsibility, the Comptroller audits taxpayers and enforces existing tax laws to ensure taxpayer compliance. In this way, the agen cy makes sure that the state receives all of the tax money that is legitimately due and also prevents any taxpayer from enjoying a competitive advantage by withholding tax mon ey from the state. For example, a corporation that collects tax money but uses it for other business expenses is given an unfair advantage over its competitors. Advances in technology, changes in the structure of business operations and a changing business climate make it important for the Comptroller to periodically update enforcement authority. In addition, certain exemptions amounting to tax loopholes should be reviewed for possible change.

General Provisions
Taxes paid by checks drawn on insufficient funds pose a continuing problem for the Comptroller s office. In fiscal 1992, 14,290 hot checks were paid to the Comptroller for a total of $28,263,002. 1~ Not only are agency resources used to process the checks as they are received, but additional staff time is required to deal with delinquent payments separately and to negotiate proper payment.

Some taxpayers use hot checks as a delaying tactic once enforcement procedures have begun. By writing a hot check, certain enforcement procedures may be discontinued by the Comptroller s enforcement staff until the bank notifies the Comptroller s office that the check was drawn against insufficient funds. The Comptroller should have the authority to require tax payment in certified funds, such as a cashier s check or a money order, from those taxpayers who consistently pay taxes with hot checks.

The Tax Code allows the Comptroller s office to freeze the bank accounts of delinquent taxpayers after their determination has become final. The law requires the freeze notice to go through the main bank even if the taxpayer s account is at a branch bank. This delays the freeze by several days because many banks main offices are in a different city from the branch bank. Frequently, this gives the taxpayer the chance to withdraw funds from the account.

In addition, the law requires the Comptroller to wait 15 days before funds can be taken from the bank. During this waiting period the bank is allowed to continue to assess normal bank charges such as service char ges and charges for insufficient checks. This results in a balance that is less than the initial freeze amount. If additional money is deposited during the waiting period, these deposits are not subject to the freeze, even if a balance at the time of the f reeze was insufficient to cover the delinquent tax amount. These provisions in the law result in lost tax revenue to the state.

The Comptroller generally has four years from the original due date of a tax to assess a tax liability. This statute of limitat ions protects the taxpayer from having to keep records indefinitely. However, there is an exception. The Comptroller may assess additional tax beyond four years if a taxpayer files a timely refund claim for the same period and type of tax. For example, if a taxpayer files a timely refund request for the last four years of franchise tax, then the Comptroller may assess a tax liability for the same period if one is due. Elsewhere, the law says tax refunds are governed by the same time limitation as tax assess ments. Some taxpayers (particularly in franchise tax) have been filing refund claims for more than four years after the due date, arguing that the exception for additional tax assessments nullifies the four-year limitation on refunds. The Legislature did not intend to allow refund claims to be filed in perpetuity. The law should be changed to clarify the Legislature s intent, which was only to allow the Comptroller extra time to assess liabilities whenever a taxpayer requests a refund within the four-year statute of limitations.

Amusement Tax
Operators of amusement machines pay an annual occupation tax of $30 per machine. Upon payment, a decal is issued for each machine. Operation of a machine without a decal violates state law. If a machine is operated without a tax decal, the machine can be s ealed to prevent further use. Removal of a seal also is a violation of the law. Offenses under these laws are Class B misdemeanors with fines of up to $500. In many cases, violations are not even prosecuted due to the low level of penalty involved. Revenue from the fines imposed is retained by local governments. The amount of the fines for violations should be increased to a maximum of $2,000 to encourage prosecutions of these offenses.

Hotel/Motel Tax
The hotel/motel tax law gives an exemption for a person who stays in a hotel room for at least 30 consecutive days. To qualify for the exemption, the guest, upon arrival, must notify the hotel of the intention to stay at least 30 consecutive days. There mu st be no interruption of payment during the 30-day period. The law s intent is to give an exemption to people living in rooming and boarding houses. However, this exemption is being used mostly by airlines, railroads and truck lines who lease rooms for up to a year at a time, but whose occupants do not stay in the rooms for the required 30- consecutive-day period. Repeal of this exemption is necessary to update the statute and would raise additional state revenue.

Sales Tax
Processing late sales tax reports requires considerable resources and staff time for the Comptroller s office. Several divisions of the agency are affected by delinquent tax reports. Eventually, enforcement and collections procedures could be initiated by the agency to assure collection of taxes due the state. An additional $50 penalty for delinquent filing would encourage more timely filing and would decrease the administrative cost to the Comptroller to process the delinquencies.

Mail order sales organizations with customers in Texas are required b y state law to collect and remit sales and use taxes to the state for those items bought or used in the state. Compliance with the law has been low. This matches the experience of every other state that imposes a tax on mail order sales. The reason for the low level of compliance has been the lack of federal law supporting the state laws.

In its recent decision in Quill Corp. v. North Dakota, the U. S. Supreme Court ruled that a state may levy a sales and use tax on mail order goods, but that the U. S. Co ngress must enact legislation to determine the extent to which a state may require an out-of-state mail order seller to collect the money. Congress has not enacted this legislation. In the absence of congressional action, many mail order sales organization s have not felt compelled to comply with the law of Texas or any other state.

As of July 1991, there were eight mail-order firms voluntarily remitting use tax money to the state. Collections in calendar 1990 amounted to about $4 million. A recent estimat e of the potential amount that could be received is projected at about $130 million per year for the state. Until federal law is changed, the Comptroller should be authorized to obtain customer lists from out-of-state mail-order sales companies for auditin g purposes.

A seller should charge state and local sales taxes on taxable items sold unless the purchaser gives the seller either a resale or exemption certificate. The appropriate use of an exemption certificate is when the purchaser will use the item fo r an exempt use, or the purchaser is an exempt entity, such as a church. The resale certificate is used when the purchased item will be sold, leased or rented. If the purchaser gives a resale or exemption certificate but uses the item in a taxable manner, then the purchaser is liable for the sales taxes and should report them on the tax return. In the course of an audit of the seller, the Comptroller s office reviews the certificates for proper documentation. The agency s auditors have noticed an increase i n the number of certificates which appear to be fraudulent. Examples of questionable certificate uses include: a plumbing business giving a resale certificate for the purchase of jewelry or expensive furniture and a resale certificate with an invalid 11-di git number. In Dallas, there are businesses that do not have a sales tax permit because they claim to cater only to wholesale businesses. The agency s auditors have observed some individuals purchasing items with a resale certificate and then wearing the item out of the store. 2~ It appears the items were purchased for the purchaser s own use.

The current sales tax laws state that if a person gives a resale or exemption certificate knowing at the time of the purchase that the item is not for resale or exempt use, then they have committed a misdemeanor punishable by a fine of not more than $500. This penalty is too small for the Comptroller s office to encourage prosecution, and the penalty does not fluctuate based on the amount of sales tax involved. To enc ourage proper use of resale and exemption certificates, the statute should add penalties to reflect the amount of sales tax owed to the state.

A fraud penalty is added to the tax liability when the seller or purchaser has knowingly defrauded the State of Texas. For instance, if a taxpayer collects sales tax but does not remit the amount collected, the Comptroller adds the appropriate fraud penalt y to the tax assessment. Current law contains conflicting requirements for fraud penalties. Section 111.061 of t he Tax Code establishes a penalty of 50 percent of the tax due for all taxes. This provision is overridden for sales tax fraud cases by Section 151.502 of the Tax Code, which sets the penalty at 25 percent of the tax owed. The sales tax fraud penalty shoul d be set at 50 percent to match the penalty for the other taxes.

Exemption Policy
There is a need to modify certain sales tax exemptions to bring them in line with more advanced technology or to clarify the intent of the exemption. This would close loopholes which allow avoidance of sales tax.

Current statutes allow for drilling equipment to be purchased tax-free if the equipment is being taken out of the state for storage or use for over a year. Many pieces of equipment are being taken out of Texas long enough to meet the exemption and are th en returned for storage or use in Texas with no tax due.

An exemption now exists which allows for health club dues to be exempt from the sales tax if they are prescribed by a doctor. The intent was to allow certain procedures to be exempted if a doctor felt them to be necessary for therap eutic reasons. However, dues to health clubs providing some of the same services, were not intended to be exempt. Eliminating this exemption would bring Texas in line with IRS guidelines that do not allow for health club dues to be deducted as a medical ex pense.

Certain companies that provide non-taxable transportation are using a loophole in the law allowing them to avoid paying sales tax on a large portion of their fees for other services. For example, some companies which provide for parking and storage of a motor vehicle and transportation of the customer to an airport terminal are allocating the majority of the fee for transportation, which is not taxable. This allows for substantial avoidance of sales tax liability.

Current law provides a sales tax exemption on occasional sales by persons who do not hold a sales tax permit. Some permitted taxpayers are seeking non-permitted taxpayers to make purchases tax-free because the non-permitted seller is allowed to claim the occasional sales exemption. The purchaser who holds a sales tax permit should be required to pay the use tax on the purchases made through an occasional sale.


Recommendations
A. The Comptroller should have the authority to require the payment of taxes with certified funds for those taxpayers who continually make payments with checks drawn on insufficient funds.

Taxpayers who chronically pay taxes with hot checks create an administrative burden for the state. This authority should be extended to all taxes collected by the Comptroller.

B. Branch banks should be allowed to accept freezes before the main bank receives notification. The Comptroller should be allowed to levy a bank account immediately by eliminating the 15-day waiting period, and the freeze should apply to subsequent deposits.

These modifications to the law would enhance enforcement activities and provide tax revenue gains.

C. The current provision for statute of limitations should be modified to clearly show the provision refers to a refund request.

This modification would make it clearer to taxpayers when they should file their refund requests.

D. The penalties for violating amusement machine laws should be increased to encourage prosecution for these offenses. The penalty should be increased from the current range of $ 5 to $500 for each violation to $50 to $2,000 for each violation.

Current penalties are so low that most amusement machine offenses are not prosecuted.

E. The Legislature would eliminate the hotel/motel tax exemption for those persons staying in a rented room for 30 consecutive days or more.

Repealing this provision will close a loophole allowing avoidance of the hotel/motel tax by certain companies.

F. The Comptroller should have the authority to impose a $50 penalty in addition to other penalties and interest for delinquent sales tax returns, including both those filed late and those not returned.

This would encourage timely filing and would relieve an administrative burden on the Comptroller s office.

G. The Comptroller should have the authority to obtain customer lists from companies selling into Texas that do not have substantial nexus with the state. The legislation should also state that these customer lists are confidential and not subject to the Open Records Act.

The Comptroller needs an additional tool to encourage compliance with the existing state law.

H. The punishments for intentionally or knowingly falsifying a resale or exemption certificate should range from a Class C misdemeanor if the sales tax amount is less than $20 to a felony of the second degree if the amount involved is $20,000 or more.

Current penalties are so low that offenses have not been prosecuted.

I. The sales tax fraud penalty should be repealed. The general fraud penalty of 50 percent would then apply.

This would make the sales tax fraud penalty consistent with the other tax penalties and would help deter sales tax fraud.

J. Texas should modify or eliminate sales tax exemptions on the following:

Eliminate the exemption for drilling equipment that is taken out of the state but then is subsequently brought back into Texas for storage or use.
Repeal the exemption on health club dues with a doctor s prescription.
Require companies providing non-taxable transportation to collect and remit sales taxes for any other services provided.
Require a permitted taxpayer to be responsible for sales tax for purchases which would have otherwise qualified as an occasional sale.

The effective date of these changes to state law should be October 1, 1993.


Implications
Implementing these recommendations would increase the effectiveness of the Comptroller in the enforcement and collection of taxes authorized under current law. Currently, the Comptroller assumes most of the burden for encouraging compliance with exist ing law for these taxes. These changes would increase the penalties assessed and would effectively shift some of the burden to the taxpayer in the event of non-compliance. The cumulative effect of these recommendations would encourage timely filing and pay ment of taxes owed, would reduce the administrative cost to the Comptroller s office from processing delinquent and unpaid taxes and would close some loopholes.


Fiscal Impact
The savings for these tax law changes would be $44.7 million for the biennium. There would be no significant administrative cost to the Comptroller s office. The assumed effective date is October 1, 1993.

Gain to the
Fiscal General Revenue Change in
Year Fund 001 FTEs

1994 $29,475,000 0
1995 30,271,000 0
1996 31,187,000 0
1997 32,159,000 0
1998 33,188,000 0



Endnotes
1 Interview with Nancy Fasilino, Supervisor, Revenue Accounting Division, Comptroller of Public Accounts.
2 Interview with Julia Crutchfield, Auditor, Comptroller of Public Accounts, December 29, 1992.