Al­most $1.4 bil­lion has gone un­re­cov­ered from auto deal­ers and other busi­nesses that col­lect sales levies.

Los Angeles Times - - Front Page - Jerry Hirsch re­port­ing from LOS AN­GE­LES Marc Lif­sher re­port­ing from sacra­mento

Cal­i­for­nia is owed nearly $1.4 bil­lion by auto deal­ers, restau­rants and other busi­nesses that col­lected sales taxes from buy­ers but didn’t pass the money along to the state — a sit­u­a­tion that is ag­gra­vat­ing Cal­i­for­nia’s bud­get cri­sis.

The tab is up about 25% from a year ago and has al­most dou­bled since 2007, state records show.

That money could make a sig­nif­i­cant dent in the state’s $19-bil­lion bud­get gap. Watchdog groups say the state’s fail­ure to col­lect it is par­tic­u­larly galling be­cause much of the tax money has al­ready been paid by con­sumers — it just hasn’t been turned over by mer­chants to the state Board of Equal­iza­tion.

“All of us want peo­ple to pay the tax they legally owe be­fore law­mak­ers go look­ing to raise taxes,” said Jean Ross, ex­ec­u­tive di­rec­tor of the Cal­i­for­nia Bud­get Project, a Sacra­mento non­profit that ad­vo­cates for lower-in­come Cal­i­for­ni­ans. She said the Board of Equal­iza­tion “needs to be more ag­gres­sive” in col­lect­ing from delin­quent mer­chants.

Jon Coupal, pres­i­dent of the anti-tax Howard Jarvis Tax­pay­ers Assn., said part of the prob­lem is the state’s an­ti­quated col­lec­tion meth­ods.

“You would think there is an ef­fi­cient way to col­lect those taxes at time of sale,” he said.

Con­sumers pay sales taxes at the time of pur­chase, but mer­chants re­mit those taxes to the state on a


monthly or quar­terly sched­ule. The money can go un­col­lected when a re­tailer goes out of busi­ness or is oth­er­wise un­able — or un­will­ing — to turn it over.

Board of Equal­iza­tion of­fi­cials blame the ris­ing tide of un­col­lected taxes on the sour econ­omy, which has pushed more busi­nesses into bank­ruptcy. But they also com­plain that the Leg­is­la­ture has been re­luc­tant to put sub­stan­tially more re­sources into tax col­lec­tion ef­forts.

“Money, technology and peo­ple” are what’s needed so Cal­i­for­nia tax col­lec­tors can crack down on sales-tax scofflaws, par­tic­u­larly used car deal­ers, said Betty Yee, chair­woman of the Board of Equal­iza­tion, which col­lected $39.9 bil­lion in sales and use taxes last fis­cal year.

Big­ger bud­gets would pay for new com­puter sys­tems that could keep bet­ter track of tax delin­quents, Yee said. She also wants more money to hire tax col­lec­tors, who Yee said bring in $4 in new rev­enue for ev­ery $1 spent on salary and ben­e­fits.

The to­tal of un­col­lected sales-and use-tax rev­enue — in­clud­ing un­paid penal­ties and in­ter­est — stood at $1.4 bil­lion as of June 30, ac­cord­ing to the Board of Equal­iza­tion fig­ures ob­tained by The Times. Much of that money was paid by con­sumers but not turned over to the state by re­tail­ers, al­though it also in­cludes some trans­ac­tions in which the debt is in dis­pute.

About a third of the largest de­faults come from auto deal­ers and re­lated busi­nesses, ac­cord­ing to a Times re­view of state records.

One of those is Big Val­ley Chrysler Jeep Dodge of Van Nuys, which owes the state about $1.2 mil­lion, ac­cord­ing to the Board of Equal­iza­tion.

Owner Howard Sellz said he closed his Big Val­ley new­car deal­er­ship, but he’s still in busi­ness — sell­ing used cars and pro­vid­ing re­pairs from the 3-acre lot where he used to sell new Chryslers.

He said he couldn’t pay the sales tax he had al­ready col­lected be­cause that money was mixed in with the rev­enue from car sales and was not se­questered in a tax­only ac­count.

“We were pay­ing bills at the time and we were pay­ing ven­dors and that’s how we got be­hind,” Sellz said. “You mul­ti­ply the tax by three months and it adds up.”

Sellz said he would re­mit the taxes when he sold the car lot.

At least one other per­son on the list of tax delin­quents — Mo­hammed Sule­man, iden­ti­fied as op­er­at­ing Auto Ware­house in San Le­an­dro — also con­tin­ues to hold a li­cense to sell ve­hi­cles in Cal­i­for­nia. He owes al­most $800,000, ac­cord­ing to the state. Sule­man could not be reached for com­ment.

There is no re­quire­ment for mer­chants to set aside the sales tax dol­lars they col­lect, Board of Equal­iza­tion spokes­woman Anita Gore said. Re­tail­ers are sim­ply re­quired to take the amount they have col­lected and send it to the state ei­ther monthly or quar­terly, depend­ing on their size and pay­ment plan.

Board of­fi­cials are con­sid­er­ing ways to im­prove col­lec­tions from auto deal­ers. But Yee said re­quir­ing deal­ers to iso­late sales taxes in sep­a­rate ac­counts would be tough to en­force.

“A bet­ter op­tion” would be to set up a “daily re­mit­tance” sys­tem jointly with the Cal­i­for­nia Depart­ment of Mo­tor Ve­hi­cles, she said. DMV com­put­ers would track a car’s ve­hi­cle iden­ti­fi­ca­tion num­ber when it changes hands and make sure the tax gets col­lected im­me­di­ately upon reg­is­tra­tion of the ve­hi­cle.

But the DMV would need new fund­ing to up­grade its data pro­cess­ing sys­tem, Yee said.

An­other ap­proach, now be­ing stud­ied, Yee said, would re­quire whole­sale auto auc­tion­eers to col­lect the tax when they sell the ve­hi­cle to used-car deal­ers.

Un­til some change is made, re­tail­ers have plenty of lee­way in pay­ing sales tax as long as they meet cur­rent dead­lines. If they don’t pay, they typ­i­cally get no­ti­fied of the delin­quency within about 30 days. They are also sub­ject to fines for missing pay­ments.

Sen. Denise Ducheny (DSan Diego), chair­woman of the state Se­nate Bud­get Com­mit­tee, said she would sup­port crack­ing down on car deal­ers that have col­lected sales tax from buy­ers but haven’t passed it along.

“They are pay­ing the tax, so why isn’t it be­ing re­mit­ted” to the state? she said.

Peter Welch, pres­i­dent of the Cal­i­for­nia New Car Deal­ers Assn., said there was no need for new laws to col­lect taxes. Most deal­ers pay the taxes promptly, and ex­ist­ing laws are ad­e­quate to go af­ter those who fail to com­ply, he said.

“If you shorten the time you have to re­mit sales taxes, that has a huge ef­fect on the cash flow of deal­ers,” he said. “Ninety-nine per­cent of the deal­ers are all pay­ing their sales tax on time, and I would hate to see them pe­nal­ized by hav­ing to front all of that money ev­ery day.”

Cal­i­for­nia at­tempts to re­cover un­paid sales taxes by mail­ing notices and con­tact­ing the tax debtor, Gore said. If that doesn’t work, the agency at­tempts to seize as­sets such as bank ac­counts and credit card re­ceipts.

In 2007, the state be­gan putting out quar­terly news re­leases nam­ing the 250 largest debtors in an ef­fort to em­bar­rass scofflaws. Of­fi­cials credit that ef­fort with get­ting re­tail­ers to pay $4 mil­lion in taxes.

Bruce McNall, for­mer owner of the Los An­ge­les Kings hockey team, is on the lat­est list. The state says McNall owes $7.6 mil­lion in use tax, for horses he pur­chased out of state and brought to Cal­i­for­nia for his rac­ing sta­ble.

But R. Todd Neil­son, the court-ap­pointed bank­ruptcy trustee for McNall, said the case was set­tled for $250,000 as part of his 1994 bank­ruptcy and that McNall should not be on the list.

Board of Equal­iza­tion of­fi­cials don’t com­ment on spe­cific cases but said delin­quent tax­pay­ers are no­ti­fied 30 days be­fore the in­for­ma­tion is made pub­lic.

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