The state taxman is looking for three new tools to help him collect his bills, but N.C. legislators are offering him no more than lukewarm support.
“I would hope we would slow this train down until we can work out the mechanics of what you’re trying to do because it appears to be very confusing,” said Rep. William Wainwright, D-Craven, the Democratic nominee for House speaker pro tem.
Wainwright offered those comments recently to Charlie Helms, director of the N.C. Department of Revenue’s Collections Division. Wainwright’s reaction followed Helms’ presentation of three ideas designed to help North Carolina collect more unpaid taxes.
Only one of those ideas generated interest among members of the state Revenue Laws Study Committee. The committee agreed to draft a bill that would allow revenue officers to seize “real” property from delinquent taxpayers.
Helms explained this change would expand an existing law. “The [revenue] secretary may issue a tax warrant to any revenue officer to seize and sell the personal property of delinquent taxpayers,” he said. “We typically use this authority to close businesses that are significantly behind in paying taxes collected from the public through the sales tax or withheld from employee pay.”
Last year, revenue officers used 187 tax warrants to collect $3.9 million, Helms said. But he said the current program has limited effectiveness in some cases.
“Over the last two years, we have run into several situations involving businesses that had little personal property or inventory that the business actually owned, but that owned substantial real property,” Helms said, such as the building housing the business or other investment properties.
The Revenue Department can go after real property now, only with the help of local sheriff’s departments. The new proposal would bypass local law enforcement agencies to allow the revenue officer to seize and sell the property himself.
“Sometimes we back off of seizure sales if we are able to negotiate acceptable repayment terms with the debtor taxpayer,” Helms said. “The law does not provide these tools to the local sheriff’s offices.”
No member of the Revenue Laws Study Committee endorsed the plan, but the group agreed to move forward with a draft bill that could head to the legislature in the weeks ahead.
Lawmakers gave no sign of his support for Helms’ second idea: withholding state business licenses from delinquent taxpayers.
Helms explained that a 2006 law forcing potential lottery vendors to pay their tax debts netted about $1 million for the state. “We would like to extend this capability to alcoholic beverage sales permits, real estate licenses, and other licenses and permits issued by the state,” he said. “This would send a simple message: If you want the benefits of conducting a business licensed with the state, you must comply with our laws.”
Lawmakers showed no sign of interest in advancing that proposal. They also balked at Helms’ third idea: allowing the state to transfer tax debts from individuals to limited liability corporations or other closely held corporations.
Some tax debtors are using these corporations to shield their wages from the taxman, Helms said. “We’re seeing an increase in individual taxpayers establishing LLCs mainly set up for the purpose of avoiding garnishment.”
This practice has cropped up in trades or professions such as brick masonry, Helms said. It frustrates the state’s ability to divert up to 10 percent of a tax debtor’s wages to his tax bill. “The debtor taxpayer basically says [to his employer], ‘Look, don’t pay me personally any more,’” Helms said. “‘I want you to instead pay my LLC or my small, closely held corporation.’”
If the LLC refuses to garnish the debtor’s wages, the state has a hard time collecting the taxes, Helms said. That’s why the Revenue Department would like to have the authority to transfer individual tax debts to the corporations.
The idea drew mixed response. “They are avoiding taxes, and it’s not right that they’re avoiding taxes,” said Rep. Paul Luebke, D-Durham. “The question I have is you have to have some language that clearly indicates [the avoidance is] purposeful. How do you know when someone is really trying to avoid taxes?”
Other lawmakers shared more doubts about the idea. “You have said the individual is the ‘defendant,’ and you would like to make the LLC the ‘defendant,’ but I’ve got a huge problem with that if there are two or three folks involved and there’s an LLC because we’re calling them ‘defendants’ when they’re not — or shouldn’t have to be,” said Rep. W.A. “Winkie” Wilkins, D-Person.
The full committee took no action on the proposal.
The General Assembly already has given the Revenue Department collection tools, technology upgrades, collection assistance fees, and more staff in recent years to boost collections, Helms said.
“I can’t tell you the number of times I’ve heard over the years, I don’t mind paying my taxes as long as everyone else pays theirs,” he said. “By supporting a strong enforcement program, you are instilling confidence in the honest taxpaying citizens of this state, that they will not be asked to subsidize the noncompliance of others.”
Mitch Kokai is an associate editor of Carolina Journal.