Tax Lawyer's Blog

Andrew Morse of Anchor Rising reports that Rhodes Island taxing authorities visited more than 1200 small businesses this week telling them that if they don’t pay their delinquent sales taxes the state will shut them down.

Rhodes Island had initially sent out 3,949 letters to small businesses demanding payment of past due sales taxes. This resulted in the payment of $3,072,500 in delinquent sales tax payments.

But 1,248 of those small businesses failed to pay or make arrangements to pay their overdue taxes.

Here’s what Morse thinks:

It’s easy to have a knee-jerk anti-tax reaction and the commentary on the story is widely against the state tax collectors. No surprise: who likes taxes? And we shouldn’t be surprised that bureaucrats show little or no empathy or compassion to those conscripted to do the government’s dirty work. 

However, you have to think that some of these small businesses collected sales tax on behalf of the state and they actually haven’t passed that back as required. Like it or not–and I don’t–government dictates that business has to do the tax collecting (sales and income) for them.

I agree.

Collected sales taxes like federal payroll taxes that are withheld from employees’ pay never belong to the business. Instead, they are held in trust for the government until they are remitted.

Florida – the state I practice in – criminally pursues small business owners who have caused their businesses to collect, but not remit sales taxes. It does this under the state’s theft of state funds statute.

But this creates an anomaly: Taxpayers are actually better off not collecting the sales tax from their customers than they are collecting it and failing to remit it to the state.

I explain this anomaly in more detail in a companion post: Illustration: Theft of State Funds Anomaly.

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