State's tax vice tightens

It's the tax man's job to collect taxes. But some Wisconsin businesses are grumbling that he's starting to enjoy his job a little too much.

Under Gov. Jim Doyle, the Department of Revenue has continued to push for Wisconsin to join the Streamlined Sales Tax initiative. It has reached a series of settlements with state banks over claims they had been moving holdings to other states to avoid Wisconsin's corporate taxes and decided to appeal a court ruling that a custom software package ordered by one company was not subject to the state's sales tax.

Revenue Secretary Roger Ervin has also made some noise about what he calls the state's "tax gap," a chasm of some $2 billion to $6 billion between what the state believes it's really owed and what it collects each year.

Those efforts have prompted complaints from businesses that the Department of Revenue has become more aggressive in its interpretations of state tax laws in an attempt to squeeze more revenue out of taxpayers.

Jeff Schoepke, director of tax and corporate policy for Wisconsin Manufacturers & Commerce, said some feel the agency is overstepping its authority and trying to create new ways to raise taxes without the approval of lawmakers.

"There's a mentality at the Department of Revenue where they want to get as much as they possibly can out of the taxpayer," he said.

Seeks fair tax collections

But Ervin said many of the efforts are a sign of an agency trying to work toward an accurate and fair tax collection system. That includes trying to catch up with a market that is constantly changing and finding a way to do things better.

His agency is in the process of trying to pinpoint the state's tax gap, which he says will eventually lead to proposals to overhaul the state's tax laws.

The agency also recently announced it has joined a multistate effort to give taxpayers who have used exotic tax shelters the opportunity to come clean without penalty by Oct. 1. Ervin said taxpayers can expect the state to start cracking down harder on those illegal shelters once the deadline expires.

"We have to make sure that we are accurately collecting everything that we're supposed to be collecting and making sure it's collected in the most equitable way possible," Ervin said.

Efforts to join the Streamlined Sales Tax agreement pre-date Doyle's time as governor. The initiative is part of an effort to make it easier to collect the sales tax on catalog and Internet sales, taxes that taxpayers are asked to figure on their annual returns; few do.

Lawmakers remain hesitant

So far, lawmakers have been hesitant to embrace the changes, which are an attempt by the states to get around a U.S. Supreme Court decision that found they cannot assess sales taxes on companies that don't have a presence within their borders.

The agreement calls for states to adopt uniform rules on what products and services are subject to the sales tax. The deal is designed to get companies to then agree to collect taxes on sales in those states.

It also would mean another $4.8 million in sales tax revenue for the state for the 2007-09 budget.

Schoepke said some WMC members are concerned about the state giving up autonomy over what goods are subject to the sales tax. That includes custom software, an issue that is now before the state Supreme Court.

A state appeals court recently ruled that a software package for Menasha Corp. was not subject to Wisconsin's sales tax. Legislative budget analysts once put the potential cost of that decision at $350 million through mid-2007 between lost sales tax revenue, refunds for past collections and interest.

The state decided to appeal that decision, another move that Schoepke said shows Revenue is intent on creating new authority to collect more taxes.

Levels playing field

But to many businesses, the Streamlined Sales Tax initiative is imperative to level the playing field with the Internet for bricks-and-mortar stores.

Chris Tackett, president and CEO of the Wisconsin Merchants Federation, said the project is particularly important to small jewelers, who face competition from multiple cable channels that ship products directly to Wisconsin consumers without bothering to collect the sales tax. The initiative would help change that, he says. But it also would overturn the appeals court ruling in the Menasha Corp. case, something he fears makes it easier to lawmakers to oppose approve joining the project.

"Their job is to collect taxes, and sometimes they're better at it than we want them to be," he said of the Revenue Department.

Wisconsin banks have been particularly unhappy with the job Revenue has done over the last four years.

Settlements reached

Since 2003, when the state began cracking down on banks that moved assets out of state to avoid Wisconsin corporate taxes, the Department of Revenue has reached settlements with 181 banks totaling $42.6 million.

The banking industry complains many of its members had received permission from the department to move some assets out of state. But that stance changed once Doyle took office, they say.

Kurt Bauer, president and CEO of the Wisconsin Bankers Association, said there are about 10 banks that have yet to enter into an agreement with the department and at least one is interested in pursuing a lawsuit. WBA has a defense fund of more than $300,000 to support such an effort.

"Wisconsin businesses need a consistent regulatory environment that reflects both current law and legislative intent," he said. "To borrow a phrase more commonly used during judicial confirmations, Wisconsin needs a tax regulator that abides by a 'strict construction' of the law, not an agency that legislates by audit."

Business groups have also expressed concerns over Doyle's proposed gross receipts tax on oil companies, fearing it could set a precedent to go after other industries, as well as efforts to apply the sales tax to temporary employment services.

Democrats, who control the state Senate, have also proposed this year implementing combined reporting for the state's corporate tax, which would result in a hike of an estimated $90 million.

Ervin said since taking over as secretary in January, he's found the banking industry to be cooperative on the agency's "clarified" position. He hasn't run into any "rogue agents" or found any evidence of the other "silly" allegations leveled at the department.

Instead, he believes the agency is following the law and insists it is respectful of the business community, which he calls the "backbone of this state." He also says the agency's efforts to examine Wisconsin's tax laws are designed to clear up ambiguities in the market, which saves businesses money by offering clarity.

"We have to ensure that people aren't paying more than they should pay and those who aren't paying what they should are paying their fair share," Ervin said. "It's really about better ways to achieve a solid and well-managed system."

JR Ross is the editor at WisPolitics.com.