Some business groups and the Tennessee Department of Revenue appear on a collision course over a new tax enforcement program as the 2016 legislative session gets underway.
Revenue Commissioner Richard Roberts says the Revenue Accountability Program (RAP), implemented under a 2012 law applying only to beer and tobacco sales, has worked well, and he intends to proceed with implementing the expansion — known as “Phase II” — that covers 23 categories of products.
RAP is intended to ensure, he says, that retailers accurately report their sales and the resulting taxes. Under the program, wholesalers must provide a list of products they send to retailers. The department then matches that list with a retailer’s report to the department to see if all sales taxes due have been remitted to the state.
In 28 months of RAP-Phase I, Roberts says $57 million of tax cheating has been discovered in beer and cigarette sales and added to the coffers of state and local governments.
In audits to check the accuracy of RAP findings, wherein revenue staff go to a retail establishment and count cigarette packs and six-packs of beer, the RAP reports were not only validated, but an extra $3 million in taxes due were discovered, Roberts and Deputy Commissioner David Gerregano said.
That’s all well and good, say representatives of two broad-based business organizations — they, too, are all for catching dishonest retailers.
Rob Ikard, president of the Tennessee Grocers and Convenience Store Association, and Jim Brown, executive director of the National Federation of Independent Business in Tennessee, also say they appreciate department’s revision of its original rules proposed for implementing Phase II.
But Brown said RAP is the “wrong vehicle” for catching tax dodgers and far too big a grant of authority to governmental bureaucrats.
Ikard said grocers and convenience store operators have a “deep philosophical problem” with RAP despite the “more gentle direction” taken by the rule revisions. “There is no modifying of the program that will be acceptable to our members,” he said.
The repeal bill, as yet unfiled, will jettison Phase II and call for a rollback of sorts on Phase I, he says.
The 2012 bill — and the 2015 expansion — were implemented without going through the regular rule-making process, which calls for a period of public comment and other procedures. Given explicit authority by statute, the department apparently felt that unnecessary.
Brown says attorneys have also questioned whether RAP violates a provision of the Tennessee Constitution forbidding the Legislature from delegating its lawmaking authority to the executive branch. The 2015 RAP statute does, indeed, grant broad discretion to the revenue commissioner to expand reporting requirements to any and all retail sales without further legislative action.
The department disagrees with that notion, naturally.
Deputy Commissioner Gerregano argues that the 1947 statute that first imposed a state sales tax explicitly requires businesses to keep records and make them available to the revenue department on request.
Brown, Ikard and others in the business community, however, see the department’s actions as an unwarranted intrusion into business affairs that should, at the least, have more safeguards rather than being left to what Ikard calls “whims of the Department of Revenue.”
The rules imply “guilty until proven innocent” in that businesses must show why a discrepancy exists between retail sales and wholesale purchases to avoid a tax assessment and penalty, Ikard said.
Brown said the state’s requirements add to the costs of doing business, raises the risk of proprietary information being disclosed and involves unnecessary secrecy since the algorithm used in meshing data is undisclosed.
The commissioner disputes all those contentions: For the majority of businesses, there’s no new cost because data already kept is being provided and some wholesalers comply by simply sending everything — including uncovered products — that are sold to each retailer. Further, the department accommodates individual entities in cases where a substantial inconvenience exists. It’s already a felony to disclose proprietary information. The algorithm used in Phase I is publicly available and the Phase II version will be, too, after working out the kinks. And so on.
Indeed, the commissioner professed himself perplexed at the opposition.
The matter is getting some national attention in accounting, business and legal circles.
Nashville tax lawyer Brett Carter, writing in a December issue of the national publication State Tax Notes, criticized RAP on several fronts and questioned its legal validity. Carter says RAP goes further than any other state has gone in similar tax enforcement oversight efforts.
His concluding comment: “Wholesalers making sales in neighboring states should pay close attention to how this fight plays out in Tennessee. If a state as politically red as the Volunteer State can pass this kind of anti-business legislation, any state can use it as an example of how they can RAP it up and take it.”
(Note: This is a slightly revised version of an article written for the Knoxville Business Journal (HERE), posted belatedly after a reader request.)