'Mary Kay Tax' Mugs Small Businesses

JULY 27, 2011

By KATY GRIMES

Call it the Mary Kay Tax. It hits small businesses — such as Mary Kay and Avon distributors — with heavy administrative costs, while bringing a pittance to the state treasury.

It’s a tax program the Legislature passed in 2009 to help balance the budget. Then it was signed into law by then-Gov. Arnold Schwarzenegger. But it has been a colossal failure as well as absurdly expensive. Despite the failure and added expense, the program is not getting the ax.

AB X4-18 created the Board of Equalization’s Qualified Purchaser Program 
to collect use taxes from the smallest business owners who were not usually registered for sales and use-tax purposes.

But the taxes collected in the ensuing two years are 80 percent below projections. Adding insult to injury, the program is costing taxpayers an additional $10 million a year to administer, while adding 137 state employees.

The program is aimed at collecting out-of-state sales taxes by requiring small businesses which earn $100,000 or more in gross revenue to pay a use tax on purchases bought from out-of-state or Internet sellers. Technically, all California residents and businesses are supposed to pay sales taxes on out-of-state purchases, such as items bought tax-free on Amazon.com. But few such taxes are paid. And it would be impossible for the state to collect a few dollars here and there from people buying the occasional book or DVD online.

Larger businesses were supposed to be another matter because they’re bigger targets. But that turned out not to be the case.

BOE Changes

Despite the dismal collection numbers and the expansion of a state agency during the worst economic crisis in state history, the program is not being shelved. Because the tax was passed by the Legislature, only the Legislature can repeal it. But all is not lost. The BOE can make changes to the program.

The 2009 law requires business owners who receive only $100,000 in gross annual receipts to register with the State Board of Equalization to remit a “use tax.” But the $100,000 threshold is not the amount of income going into the business owner’s pocket. That $100,000 is the total amount of money earned by the business. Owners say that most of that money goes right back into the business to pay expenses, employees and vendors.

The motive for the tax was typical of the California Legislature. It was created to help balance the state’s budget. In these inflationary days in this expensive state, a $100,000-a-year business could be just one or two people.

The program has registered 500,000 California small business owners, targeting sole practitioners such as doctors and dentists, tax preparers and CPA’s, as well as contractors, lawyers, real estate agents and even Avon and Mary Kay cosmetics representatives.

Most of the BOE registrations have been “involuntary.” According to BOE Board Member George Runner, a former Republican state senator, this means that if BOE employees determine that an individual meets the definition of a “qualified purchaser,” the business owner is automatically registered to pay the tax.

Runner held a press conference Monday at the offices of the National Federation of Independent Business. He said that, because so few qualified purchasers have filed use tax returns with the BOE, the agency staff decided to send out 305,000 “delinquent” notices. The notices identified the small business owners as “tax delinquents,” and threatening them with “estimated use tax determinations.” According to Runner, this was done by BOE staff, without the knowledge of BOE board members.

Board members found out about the delinquent-notice mailings when more than 175,000 angry small business owners immediately flooded the agency with phone calls. The BOE legal department was consulted and quickly determined that there was no way to estimate use taxes. According to Runner, this was ample proof that the program should be drastically modified.

Runner said that most people are understandably confused about the use tax. Many area small business owners have had to hire CPAs just to navigate through the new tax process. Most small businesses do not have accounting departments. Even those with accounting departments say that accounting staff is spending far too much time on the cumbersome and confusing tax reporting.

Compliance Costs

“The average qualified purchaser pays almost as much to their accountant to comply with this program as they pay in use tax, resulting in much more of a burden upon businesses than benefit to the state,” Runner said. “It costs taxpayers an average of $75 for their accountant to prepare the BOE return, even though many owe far less than this amount.”

Expected to generate $264 million in the two years since the law was passed, instead the program has collected only $56 million in taxes. But it has cost a total of $23 million in additional BOE administrative costs. Add in businesses’ tax-preparation costs, which are tax-deductible, and the state well could be losing more in revenue than it gains from this program.

NFIB Executive Director John Kabateck said that his organization represents 20,000 small California businesses and 350,000 across the country. As anti-business laws continue to be imposed on California’s businesses by government bureaucracies, the game of “gotcha” government policies are fast becoming “we’re going to get you,” Kabateck said.

“Small businesses have been closing at a clip,” said Kabateck. “And there are now 2.2 million Californians unemployed.”

Kabateck said that the average small business owner spends countless hours doing paperwork costing at least $48.72 per hour, $400.00 per day and $2,000.00 per week, thanks to taxing agencies like the BOE.

Joining the conference by phone, Republican Sen. Bob Dutton, R-Rancho Cucamonga, said he received one of the notices from the BOE in which he too was considered a qualified purchaser. As owner of a small business which was no longer active, “I was one of the first 175,000 calls made to the BOE when I received the surprise letter,” Dutton said. He said his delinquent tax notice was on a real estate commission he received five or six years ago. The tax letter helped Dutton decide to formally terminate the inactive corporation this year.

Runner said that passing the qualified purchaser program was not only unnecessary and redundant. But, prior to the creation of the Qualified Purchaser Program, there were already two different ways for Californians to report use tax: (1) BOE Form 79b and (2) a dedicated line on state income tax forms.

A Carlsbad CPA reported to Runner that, of the 50 to 100 returns he has handled, only one or two have had any tax due.

Summing up the sentiment from the small business community, a Fresno business owner wrote: “I am a small business providing care to the developmentally disabled. I do not make purchases from out of state entities. I buy locally…. It seems like a lot of energy is wasted trying to get a few dollars from a business like mine.”