States get more aggressive on taxes

Collectors hired to boost revenues; auditors target millions in unpaid cash

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MONTPELIER, Vt. — Dentist Frank Illuzzi was stunned when Vermont tax collectors began demanding a 6 percent sales tax on the value of toothbrushes and floss he hands out to patients. Senior care facility operator Jay Grimes was similarly surprised to get a $350,000 bill slapping a 9 percent restaurant tax on the meals served to residents in the dining room.

Vermont is among a handful of cash-strapped states getting more aggressive about collecting every tax owed - hiring more collectors, hounding scofflaws and using corners of tax laws that haven’t been enforced in years. It’s an effort to avoid what politicians from both parties are dead set against: raising taxes.

“You don’t want to raise taxes until you’re very sure the taxes that people are supposed to pay are being paid,” said state Rep. Janet Ancel, chairman of Vermont’s House Ways and Means Committee.

Under Gov. Peter Shumlin, a Democrat, Vermont has added about 10 new tax compliance auditors and has stepped up efforts to scour records in rural areas, and add greater scrutiny to businesses ranging from auctioneers to Internet-based cloud-computing services.

But for all its aggressiveness, Vermont’s results have been mixed. The state reaped about $57 million during the 12 months that ended in June, up from about $50 million five years earlier - a net gain of $7 million. That’s a tiny fraction of the state’s $1.3 billion general fund, but it has helped lawmakers close a budget gap that at the beginning of this year was projected to be $46 million.

Other states have had much more success.

Idaho hired 48 temporary auditors and collectors in fiscal 2011 as part of an effort by Gov. C.L. “Butch” Otter, a Republican, to boost revenues without raising taxes and narrow the so-called “tax gap” - the amount of taxes in the state that are due but go unpaid, either by error or by intent. The added staff brought in more than $26.3 million, more than double the original estimate of $11.5 million. All the positions were made permanent this fiscal year.

Idaho’s additional tax receipts are just a sliver of its roughly $2.7 billion budget, but they helped the state post a budget surplus for the first year since the Great Recession began in 2008, money that helped give state workers their first raises in five years.

Gale Garriott, executive director of the Federation of Tax Administrators, a Washington-based group that tracks state tax policy, said the handful of states that have taken a tough approach by hiring more auditors have generally been rewarded with more revenue.

“The return on investment is quite good. They bring in several times more than their salaries,” he said.

Vermont’s get-tough approach, however, is measured in hard feelings as well as dollars. Some aggrieved taxpayers have been contacting lawmakers, and debates in which legislators try to rein in what some see as an overzealous tax department have become a regular occurrence.

Dr. Illuzzi, a Brattleboro dentist, complained to his brother, state Sen. Vincent Illuzzi, a Republican, about the demands for sales tax on the free toothbrushes, toothpaste and floss he gave out. He won an amendment to a tax bill just before the Legislature adjourned in early May - a bill Mr. Shumlin later signed into law - that exempts the dental goods from the sales tax.

“Some dentist wants to give a kid a toothbrush and they want to tax it. That’s outrageous,” the senator said.

A similar legislative change came after the Gables at East Mountain, an independent living community for seniors near Rutland, was hit with a $350,000 back-tax bill dating back eight years, with the state saying the meals it served should have been subject to the 9 percent state meals tax for restaurants.

Lawmakers protested that the Gables’ dining room wasn’t like a restaurant, because it served residents of the facility, and people aren’t taxed when they eat at home. As lawmakers changed the law affecting the Gables going into the future, the state canceled its past tax bill.

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