In late 2013, the owner of Xtreme Gymnastics in Lee’s Summit received a bill of more than $200,000 from the Missouri Department of Revenue. The amount, T.J. Rehak was told, was for three years worth of sales taxes he hadn’t paid.
“I’ve been in the industry 20 years, and I’ve always been told that classes are a service,” Rehak said. “We’re providing a service because we’re teaching, and they say, ‘No. You’re providing recreation.’”
Activities considered to be amusement, entertainment and recreation are taxable under Missouri law. However, the definitions of those categories are often unclear. Rehak said he never knew the state considered his business a form of recreation.
“I didn’t collect it because we were never told to collect, and that’s the thing,” said Rehak, who reached a settlement with the department on the amount due. “A business like mine, we don’t have high profit margins. Profit margins are very slim, and we’re very labor-intensive, so we have a lot of labor costs here in this industry. So, yes, $200,000 would bankrupt me.”
To Missouri’s top two business advocacy groups, Rehak represents one of many business owners forced to deal with inconsistencies in the state’s tax code.
As the General Assembly’s September veto session approaches, the Missouri Chamber of Commerce and the Associated Industries of Missouri are focusing their lobbying efforts on three tax issues included in multiple bills rejected by Gov. Jay Nixon, including one that would help owners in situations like Rehak’s.
Notifying business owners of sales tax changes
Several vetoed bills have a provision that would require the Department of Revenue to notify sellers of any changes in the interpretation of sales tax laws. Until a seller is notified, they would not be liable to pay additional taxes.
In his veto letter, Nixon wrote that this provision would result in the loss $200 million in state and local revenue annually. He said the legislation would provide retroactive immunity to businesses for taxes the Missouri Supreme Court has already mandated be collected.
If the veto is overridden, he said, businesses paying taxes correctly may ask for refunds of taxes paid on the account of not having been notified of a tax change.
“It is one thing to require the government to provide information about recent developments in the law so that those affected can adjust their prospective conduct accordingly,” Nixon wrote, “but it is quite another to condition whether the law even applies based upon whether a person has received personal notification of the law’s existence.”
However, Rehak said the lack of notification penalizes small business owners who aren’t capable of reading and interpreting a steady stream of Supreme Court rulings and bill descriptions. Businesses sometimes find out about changes when they’re handed a bill.
“The the only way they know about it is if they’re being audited,” Rehak said. “Then they want to go back three years on you on something you’ve never collected. That’s the problem. I know the governor has said it would cost a lot of money, but to me it’s costing him a lot money not to inform. It’s kind of bad logic.”
Tracy King, vice president of governmental affairs at the Missouri Chamber of Commerce and Industry, calls the Department of Revenue’s policy “notification by audit.”
“These people didn’t realize the law had changed; they never got notification of it so they never collected the tax from the customer,” King said. “The Department is making them pay, and they’re basically shutting the doors on these small businesses.”
Gyms that teach karate, dance and gymnastics lessons are being affected right now across the state, King said. Rehak said he knows of at least three other gymnastics studios in Kansas City and one in St. Louis that have been audited and billed for unpaid sales taxes so far.
Proving innocence in tax liability disputes
Another top priority also involves the Department of Revenue. In the 1990s, the Internal Revenue Service was criticized for the way it was conducting audits. This led to Congress passing legislation that shifted the burden of proof to the IRS in tax disputes, so federal taxpayers are presumed innocent of wrongdoing until proven guilty in court, King said.
In the following years, the Chamber led efforts to make the same change at the state level with the Department of Revenue. The General Assembly passed legislation that shifted the burden of proof for taxpayers with less than 500 employees and more than $7 million in net worth.
Wording in this year’s provision, which shows up in a number of vetoed bills, would expand the shift to businesses of all sizes and tax exemption disputes.
“We’re just trying to treat taxpayers fairly and there’s no area of law, even in criminal law, where when you go to court you’re guilty and have to prove you’re innocent,” King said.
Nixon said in his veto message that this shift in burden of proof would allow for businesses to push the boundaries of tax exemptions.
“While I support eliminating the arbitrary limitation in current law that puts the burden of proof on some businesses but not others in determining tax liability,” Nixon wrote, “when it comes to someone trying to claim a tax exemption, they should at a minimum be required to show that they are entitled to it.”
Ray McCarty, president of the Associated Industries of Missouri, said he has not seen any taxpayers abusing the privilege during the last 15 years the provision has been in effect for small businesses.
Calculating taxes for multi-state businesses
The third priority of the business organizations is a bill that would clarify a new law by defining the way businesses that sell intangible goods across multiple states calculate their corporate income taxes.
Last year, the legislature passed a bill that established a third tax calculation option for these multi-state businesses: the Pure Single Sales factor, which only calculates sales a business did in Missouri, thereby avoiding double taxation and incentivizing companies to stay in the state, King said.
Depending on circumstances, businesses can also base taxable income equally on property values, sales and wages, or base taxable income on sales in the state and also 50 percent of sales sold outside of the state.
McCarty said this new calculation option was great for Missouri companies such as Anheuser-Busch that have plants based in the state, but also do the majority of their business out of state.
However, it soon became clear that the Department of Revenue didn’t interpret the new law as applying to businesses selling intangible goods, such as law firms, stock brokers and other service-based businesses.
Both AIM and the Chamber said a number of businesses classified as selling intangible goods tried to use the new calculation, but were sent letters from the Department of Revenue giving them 30 days to recalculate their taxes.
“We were just trying to clarify the law this year and make sure that all the companies could take advantage of what was passed last year,” McCarty said. “It should have been a no brainer. We don’t understand why the governor vetoed all of these bills.”
King said the new calculation option is an incentive to encourage businesses to keep operating in the state, especially at a time when Kansas is working to eliminate income taxes altogether.
In his veto letter, Nixon said this provision was unaccounted for in the budget passed by the General Assembly and would reduce state revenues from corporate income taxes by up to $15 million annually.
Focusing efforts on specific legislation
One vetoed bill contains all of the top interests of the business organizations except the notification of sales tax changes.
McCarty said Senate Bill 584 also contains a number of key tax exemptions for products and services, such as electricity used by certain industries and experimental drugs. The law would also clarify what is taxable as recreation and amusement.
As he wrote in many of his veto letters, Nixon calls this bill part of a “damaging trend” that would “pick winners and losers through the tax code.” He said this and other bills would collectively send $776 million to special interests.
McCarty said he believes the fiscal estimates to be miscalculated and exaggerated. His organization is working on its own calculations. He said Nixon’s actions are a threat and could send businesses across the border.
“I don’t think he’s trying to be a very business friendly governor at this point in his career,” McCarty said.