I previously blogged about the state of Rhodes Island’s aggressive pursuit of small businesses who have collected but failed to remit state sales taxes.
In this companion post, I illustrate how theft of state funds laws unfairly punish average, well-intentioned small business owners while letting the swindlers go free.
An Example
Let’s take the hypothetical case of two small businesses: EMCA and ACME.
- EMCA does not include sales tax on the invoices it gives its customers but adds 6.5% (Florida basic rate) to the total shown due. It doesn’t file sales tax returns and it doesn’t remit anything to the state.
- ACME partially complies with the law. It includes sales tax on a separate line of each invoice it gives to its customers and collects the sales taxes for the state. ACME files its sales tax returns but does not pay over all of the taxes it collects from its customers because it uses some of the money to pay its business expenses.
ACME complied with 2/3rds of the law yet its owners will likely face criminal prosecution for the theft of state funds.
ECMA complied with none of the state tax laws and although it will be charged by the state with the sales tax it failed to collect from its customers (the state assumes sales tax wasn’t collected if its not separately shown on the invoice), its owners will not face criminal prosecution.
This is unfair and results in states prosecuting basically innocent small business owners and letting the truly crooked ones go free.
Getting Away With It
The owners of ECMA are Machiavellian. They premeditated their theft of state funds. They knew the law and structured the theft in such a way so as to avoid any chance of criminal prosecution.
What’s worse, these scoundrels usually don’t have to pay a single dime to the state. That’s because the sales tax is deemed not to have been collected making the uncollected sales tax a corporate debt.
Business owners generally cannot be held liable for the debts of the corporation (or LLC). So the knaves close down their businesses and start them up again using another entity.
ACME’s owners, on the other hand, acted in good faith from the outset and at least intended to comply with the law. They only used the state’s funds when it became necessary to keep their business going.
Decent people like ACME’s owners get prosecuted by the state every day while thieves like ECMA’s owners whistle their way to the bank.
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