Editorials

Close the gap between law's intent, enforcement

October 20, 2010 12:01 AM

It's disturbing to see the gap that sometimes emerges between what state lawmakers say they intended to do and the actual application of a new law.

The latest example is the state Department of Revenue's relatively recent enforcement of a 5-year-old change to the tax code dealing with charging sales tax on service contracts.

State lawmakers say their intent was to charge sales tax on extended-warranty contracts that retailers sell on large items, such as refrigerators, laptops and washing machines. Specifically, the tax was to apply to "service maintenance contracts."

The Department of Revenue interpreted the change to mean any service contract, including those of a company providing a plant-care service for hotels, hospitals and offices. In July, an administrative law judge agreed with the department's interpretation when that company challenged a $41,000 bill for back taxes owed.

The ensuing hullabaloo over this and other audits that resulted in tax bills that totaled thousands of dollars prompted the Revenue Department last week to halt audits of businesses affected by the provision.

State Sens. Glenn McConnell and Larry Grooms say they will file legislation to clarify the tax code.

Agency officials say they stand by their interpretation, and they are supported by the Administrative Law Court ruling. All the more reason to clarify the law if that wasn't what it was intended to do.

This isn't the first time an agency has enforced a law in a far different way than lawmakers intended. Last year, the legislature had to rework a law on what information could be released about emergency medical services after the original law resulted in the release of no information at all on this critical public service.

State Sen. Harvey Peeler, the chief sponsor of the 2004 law, said it was intended to bring the state into compliance with federal patient privacy law, not to keep from the public important statistical data on emergency medical services.

Also disturbing about the sales tax on service contracts is that business owners apparently weren't notified in 2005 of such a substantive change in how they should operate. Somehow they were expected to know that they should be charging a sales tax on a service they had been providing without such a tax.

It was only after the Department of Revenue began a more aggressive tax collection effort that audited businesses were told they owed the tax.

State officials should notify businesses of such a substantive change in the law. It doesn't seem fair to collect back taxes and penalties for a change in the law that wasn't actively enforced for three years and today is being enforced through selective audits.

The agency won't say how much money it collected on the service contract clause or how many businesses are paying service-related taxes, The (Charleston) Post and Courier reports.

Surely, some mechanism for proactively notifying businesses on tax law changes affecting their operations exists, and if it doesn't, it should be put in place.

As the Post and Courier points out in its reporting, the law could trigger tax bills for thousands of unwitting service businesses across the state.

"If you never sell anything, it never dawns on you to pay sales tax," said Burnie Maybank, Columbia tax attorney and former chief of the Revenue Department.

Seemingly minor changes in the law should not turn into a big tax bill for unsuspecting businesses.

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