State tax collectors had a nasty surprise for some small business owners | Hilton Head Island Packet

When South Carolina lawmakers pushed the state Revenue Department to crack down on tax dodgers, they didn't realize just how far the agency would go. Pressed to find cash for the state's draining bank account, tax collectors put the heat on small business.

Agency officials quietly and in scattered fashion began billing a handful of audited companies for work that is thought to be tax-free. They cited a little-known tax code provision.

Targeted business owners who were stuck with crippling bills called it a witchhunt.

But revenue officials reversed course late Thursday, halting audits on businesses affected by the clause.

The move followed a week of outrage from elected officials and business leaders who read a report about North Charleston businesswoman B.J. Rodgers, whose plant-watering company was hit with service-related tax charges. It led hundreds of small business owners across the state to realize they, too, could be hit with similar fines and back taxes for years of their work.

"This thing has just erupted," said Frank Knapp of the South Carolina Small Business Chamber of Commerce.

Accountants began calling their business clients, urging them to start charging sales tax for their services. Confused business owners called their state lawmakers, who scrambled to figure out what went wrong.

The Legislature never gave a mandate to collect taxes on services. The 2005 law change was meant to tax extended-warranty contracts that retailers sell on appliances.

But lately, the General Assembly has tried to juggle falling tax collections by funneling extra cash into the revenue department, whose top officials promised to bring in millions of dollars of unpaid taxes with a bigger auditing staff.

Rep. Mac Toole, R-West Columbia, said reinterpreting tax policy wasn't the intent.

"Everything about this was wrong," he said. "It shows a lack of knowledge and insensitivity toward people who are trying to run businesses."

Revenue Department spokeswoman Adrienne Fairwell denied that agency wrongly changed its auditing practices.

"We don't feel like we're under pressure," she said.

Still, top lawmakers are fuming that they turned to small businesses -- the South Carolina economy's sacred cow -- during a time of such widespread economic hardship. Republican lawmakers, including Sen. Larry Grooms of Bonneau, Senate Pro Tem Glenn McConnell of Charleston, and House Majority Leader Kenny Bingham of Cayce, are drafting legislation that would clarify the tax code.

They even considered calling a special session to fix the matter.

It's unclear how far the Revenue Department efforts went. The agency won't say how much money it collected on the service contract clause or how many businesses are paying service-related taxes.

It's also unknown how many businesses began paying service tax charges voluntarily after the law changed. Bingham suspects his own engineering firm was hit with service tax-related charges in recent years for technical support on computer programs he used.

"You can isolate businesses one by one at a time, and you can create this whole new tax wave that was unintended," he said.

Some audited businesses simply paid up.

Charleston photographer Gary Coleman paid nearly $7,000 after department officials told him he should have taxed the time he spent shooting pictures at corporate events.

An attorney told him it would cost more to fight the issue, so he gave up along with a handful of his colleagues who were also audited.

"Nobody fought it because we're all little guys," he said.

Then tax collectors audited Rodgers, whose Greenery Gallery Inc. waters potted tropical plants placed in hotels, hospitals and offices.

Department officials said she should have been charging sales tax on the hours her 16 employees spent routing hoses through commercial buildings and picking dead leaves off plants. The bill topped $41,000.

She fought the charges in court but lost in July.

Months later, tax collectors audited Lexington-based Medical Application Repair and Sales, which repairs medical equipment like anesthesiology machines and refrigerator-like steam machines that sterilize surgical tools.

It employs 10 people.

Owner David Watson was ordered to pay $69,985.23 for three years of back taxes, penalties and interest. Enraged, he confronted department officials at a meeting earlier this week.

"I told them, 'With all the stress you brought on with me, if I have heart attack and die, you and you and you are responsible," he said, noting that he pointed an angry finger at each person sitting across the table. "You don 't know how much sleep I've lost thinking that somebody is going to take money from our company that grows and hires more people."

Next week, Watson should get notice from department officials telling him that his audit is on hold. Still, he voiced lingering concerns.

"We need to be very careful what we do with small businesses in South Carolina," he said. "We're struggling enough in this state."