Thousands pay federal income tax, but skip state income taxes.
AUGUSTA – Maine businesses and individuals that skirt compliance with state tax laws will do so at their risk in years ahead. Several initiatives in the proposed state supplemental budget are aimed at bolstering enforcement of the tax laws and the collection of millions of additional tax dollars.

“These are very important to reducing the structural budget gap,” said Finance Commissioner Becky Wyke. “They start up slow, and they essentially pay for themselves and a little bit more in the first year. But once we get going on those audit initiatives, the (budget year) ’06 and (budget year) ’07 estimates are higher.”

Lawmakers are struggling to pass a $156 million supplemental budget that closes the budget shortfall for the current budget. But, the “structural gap,” which is the projected difference between expected revenues and expected expenditures, is over $900 million. Cuts and revenue raisers in the proposed budget would reduce that gap by over $200 million.

The four enforcement efforts are expected to bring in nearly $5 million for the budget year that starts in July. The initiatives aim at catching non-filers of personal income tax, revenue lost by non-reporting of real estate transfers, abuse of the sales tax process and the first time audit of insurance tax revenues.

Revenues from the insurance premium tax have skyrocketed in the last few years, from about $20 million a year to more than $70 million expected this year. And, unlike the corporate income tax, the premiums tax has not been subject to any audits, until the last year.

Jerome Gerard, acting director of Maine Revenue Services, took two of the 10 staff members assigned to auditing corporate income tax returns and shifted them to auditing the insurance premium tax returns. He told lawmakers the result has been an eye-opener.

“The first round of assessments came in at about $9 million, “Gerard said. “We have a recent offer (on an audit) of about $2.2 million and we feel pretty comfortable that the revenue generation is going to be pretty good on an ongoing basis.”
Tax-free’ purchases
The budget also seeks to stop what Gerard believes is a widespread practice of using a sales tax certificate, which allows a business to buy products that it sells without paying a sales tax on the products, for personal purchases to avoid paying any sales tax.

“We have over 63,000 sales and use tax accounts,” he said, “Over 10,000 accounts are dormant. What we found is that many of those folks that keep their sales and use tax account going is that they are out buying items tax-free.”

Gerard said other states have faced the same problem and the proposal to strengthen enforcement of Maine’s law is based on Florida and Louisiana laws. He said the new provisions would require the products that a business resells be listed on the sales tax certificate instead of the current certificate, which simply exempts a holder from paying sales taxes on a product intended for resale.

It is not just companies and businesses that are targeted by the enforcement efforts. Thousands of Mainers who file a return with the Internal Revenue Service do not file a state income tax return. The state believes it is losing a substantial amount of revenue and the budget provides for an analyst to comb federal computerized tax records to find Mainers that are not paying state taxes.
Lost revenues
Another audit effort is aimed at catching real estate transactions that are not being reported and also cost the state lost revenue. It is expected to raise $850,000 in budget year 2005.

But, Maine Chamber of Commerce Vice president, Chris Hall said the state has to be careful in how aggressive it gets in collecting revenue from all taxpayers, but particularly businesses.

“Aggressive enforcement of the tax laws really cuts two ways. Nobody wants a business to get away with cheating because that means everybody else pays more,” he said. “However, we certainly do not want people harassed to the point where they think they are not wanted in this state.”

Whatever the final version of the budget is passed by lawmakers when they return to work April 27, it’s expected that the increased enforcement initiatives will be included.