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Department of Revenue Initiatives
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FY09 House 2 Budget Recommendation:
Issues in Brief
Deval L. Patrick, Governor
Timothy P. Murray, Lt. Governor
The Governor's budget includes enhanced revenue and enforcement policies that are expected to generate $166M in new revenue. The proposals improve the enforcement of tobacco taxes, redeploy resources to increase revenue, and escalate penalties against individual tax delinquents.
Tobacco Tax Enforcement Proposals
Enhanced Enforcement of the Cigarette Excise Tax
Tobacco stamps are used to show payment of cigarette excise taxes. The Department of Revenue (DOR) sells stamps to stampers who then affix the stamps on cigarettes before they can be sold in stores. The current stamp technology is easy to counterfeit and therefore ineffective. As a result, the state loses millions of dollars when cigarettes are smuggled into the state and sold with counterfeit stamps. New technology has created encrypted stamping methods that allow the stamp to be tracked from the time it is sold to a stamper through the sale of the product at the retail level. Utilizing this encryption will enable DOR to track cigarette packs throughout distribution to ensure proper tax collection. DOR estimates that this initiative will yield approximately $12 million in fiscal year 2009.
Currently, cigars and smoking tobacco are taxed in Massachusetts at the retail level and the law does not require the licensing of dealers in cigars or smoking tobacco. Therefore, DOR's processing of tax returns is unnecessarily time-consuming and makes collection efforts difficult. DOR loses millions of dollars of tax revenue each year due to retailers' filing inaccurate cigar excise returns or failing to file these returns at all. Imposing taxes at the whole sale level and requiring the licensing of wholesalers will result in better enforcement. DOR estimates that revenue will increase by $11 million from this proposal.
Collecting sales taxes from the state's many local cigarette retailers poses a challenge for the Department of Revenue. Retailers may be unlicensed or under-report their sales of cigarettes, making it difficult for DOR to audit, enforce, and collect cigarette sales taxes. For fiscal year 2009, DOR will require wholesalers to partially charge and collect the sales tax from retailers of cigarettes. Because the number of wholesalers is significantly less than the number of retailers, collections and enforcement activities can be simplified. With this change, DOR estimates that tobacco tax revenue will increase by $10 million in fiscal year 2009.
Working Collaboratively to Enforce State Laws
Misclassification of employees by employers has resulted in millions of dollars in lost tax revenue. Some employers are not following state laws and are inappropriately hiring workers as independent contractors instead of as full time employees. This practice is advantageous for employers since they do not have to pay withholding taxes and are able to avoid paying benefits such as health care or worker's compensation.
The Attorney General's Office (AG), along with DOR, the Department of Industrial Accidents (DIA), and the Division of Unemployment Assistance (DUA) will fully implement a statewide initiative to address this ongoing problem and launch a visible campaign to enforce employee classification laws. Through increased public awareness of this problem, and resulting voluntary compliance by employers, $30 million in revenues is expected to be generated. The initiative is modeled after a similar program implemented in New York.
Redeploying Resources to Increase Revenue
The Department of Revenue imposes liens on the property of taxpayers who do not pay their outstanding state tax liabilities. The current statute of limitations on liened liabilities is ten years. Through special projects in this area and making the statute of limitations consistent for non-liened liabilities (increased from six to ten years), DOR expects to collect $6 million in fiscal year 2009.
Increasing Penalties on Tax Delinquents
Under current law, DOR has the authority to charge penalties against taxpayers who fail to file returns or make payments in a timely manner. Failure to pay an amount reported on a return and failure to pay a deficiency assessment within 30 days of notice each generates a penalty of .5% per month on unpaid balances. This change would increase the late payment penalty to 1% per month, not to exceed 25% of the unpaid tax, resulting in accelerated fiscal year 2009 collections of $12 million.
Under current law, failure to pay a notice of assessment of unpaid taxes results in a one-time demand notice charge for late payment of $5. This change would increase the demand charge for late payment from $5 to an amount not to exceed $30, resulting in increased collections of $4 million in fiscal year 2009.
This change allows the Registry of Motor Vehicles to suspend a driver's license/vehicle registration for nonpayment of taxes upon notification from DOR. Revocation will be integrated into the existing collections process. Evaders will be given at least 30 days notice of any proposed action. The threat of revocations will create a strong incentive for tax evaders to make payments to the Commonwealth. DOR currently has the authority to revoke the driver's licenses of non-custodial parents who owe past due child support and this tool has been a strong incentive for delinquents to come into compliance. Similar authority for tax administration is estimated to generate $7 million in additional delinquent tax collections in fiscal year 2009.
These changes would allow the Commissioner to require nonresident real property owners who sell or transfer property to make estimated payments on their tax liability by the closing date. These changes also provide for a lien to arise with regard to property being sold or transferred if any required estimated payment is not made. DOR estimates additional tax collections of $2 million in fiscal year 2009 as a result of these changes.
Improving the Effectiveness of Tax Exemptions
This change revokes sales and use tax exemptions for aircraft and replacement parts for aircraft enacted by Section 17, Chapter 203 of the Acts of 2001. The current exemption applies to all types of aircraft, including personal and corporate planes, as well as those used for commercial passenger service. In some instances, the exemption has resulted in the loss of the entire sales or use tax on an aircraft to another jurisdiction. It also gives the Commissioner of Revenue authority to impose tax in situations where an aircraft is placed in an LLC or corporation for state tax avoidance purposes. DOR estimates that the proposal will result in a $9M increase in tax revenue.
This change would eliminate the exemption for household insect sprays and lawn chemicals except when purchased by farmers and licensed applicators, increasing tax revenue by almost $3 million. Pesticides may cause health and environmental problems, and their use should not be encouraged through a broad tax exemption.
Additional Enforcement Personnel ($60 million)
In fiscal year 2008, the Commonwealth invested in 87 additional staff members at DOR to promote better compliance with tax laws and improve collection efforts. The full return on the investment will be realized in fiscal year 2009 as DOR estimates the new staff will generate $60 million in additional revenue for the General Fund.
|Summary: Revenue Gained from DOR Initiatives|
|Tobacco Excise and Sales Tax Enforcement|
|Cigarette Excise Tax Enforcement||$12M|
|Collecting Cigars Excise Tax at the Wholesale Level||$11M|
|Prepaid Sales Tax on Cigarettes||$10M|
|Working Collaboratively to Enforce State Laws|
|Enhanced Compliance on Real Estate Sales|
|Withholding Real Estate Tax||$2M|
|Increasing Penalties on Tax Delinquents|
|Driver's License and Registration Revocation||$7M|
|Eliminating Tax Exemptions|
|Aircraft and Parts Sales Tax Exemption||$9M|
|Pesticides Sales Tax Exemption||$3M|
|Improved Enforcement of Tax Code|
|New Department of Revenue Hires||$60M|
|Recording Tax Liens||$6M|
Prepared by the Executive Office for Administration and Finance • Rooms 373 & 272 • State House
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