Either warn businesses about tax changes or give them a pass, Missouri lawmakers propose

The day the state government handed him a six-figure bill is still etched in T.J. Rehak’s memory.

“I nearly fell out of my chair.”

He’s owned Xtreme Gymnastics in Lee’s Summit for a decade and has been in the business for 21 years. In all that time, he never charged sales tax on membership fees. He didn’t think he had to.

Unbeknownst to him, the Missouri Supreme Court ruled in 2008 that fitness clubs were places of “amusement, entertainment or recreation” and thus the fees they charged were subject to the sales tax.

Rehak said he was unaware of the court’s ruling until October 2012, when he was visited by an auditor from the Missouri Department of Revenue informing him the then-4-year-old court decision applied to his business. And he had to pay up.

“They wanted four years of back taxes,” he said. “If I’d known, of course, I would have already paid.”

Rehak has become the poster child for a phenomenon lawmakers and business groups see as far too common. They say many Missouri businesses have been blindsided by evolving interpretations of which services are subject to state sales taxes.

Small businesses can’t be expected to keep up with vague court decisions and far-too-frequent changes to the state’s tax law, proponents say. Earlier this month, for example, the state Supreme Court ruled items like cranes, asphalt and steel beams are not exempt from the state’s sales tax.

Sen. Will Kraus, a Lee’s Summit Republican, has sponsored legislation that would mandate that the state Department of Revenue tell businesses if tax rules have changed before punishing them for not paying.

If they aren’t notified, the proposed change would exempt them from back taxes owed.

“That’s a fair way to do business,” Kraus said. “The idea of notification by audit has to stop.”

If it passes, Missouri would be unique in the nation in mandating this type of prior notice. Kraus got the legislation across the finish line last year, but it was ultimately vetoed by Gov. Jay Nixon, a Democrat.

Mandating notification before enforcing the tax code would “turn on its head the long-standing principle of our democracy that individuals are presumed to know the law,” Nixon said.

The state, he said, doesn’t have to send notice of new criminal laws to potential criminals before they can be prosecuted.

“This kind of governmental paternalism is unprecedented,” Nixon said in a letter to lawmakers explaining his veto.

According to Nixon, the legislation would also prove difficult and expensive for state tax collectors to implement.

Missouri doesn’t track the items sold by every business in the state. So anytime there is a change in sales tax policy, no matter how small, all 140,000 businesses that pay sales or use tax would have to be notified.

The estimated annual cost is projected at $450,000, although proponents say it could be done far more cheaply.

Chuck Pierce, a lobbyist for the Missouri Society of Certified Public Accountants, told the Missouri Senate’s Ways and Means Committee on Thursday that although there would be additional cost to the state to implement the notification bill, new sales taxes collected would surely offset that.

“If a taxpayer gets notified that they owe a tax, they comply,” he said. “There’s no way to measure what’s currently being lost by businesses not paying a tax.”

Nixon counters that the legislation could cost the state millions of dollars by providing a legal loophole for businesses to avoid paying taxes. Businesses who get notice of tax policy changes could receive “retroactive immunity” for taxes that they should have already been collecting.

The legislation would create “no shortage of work for tax attorneys and consultants,” Nixon said.

Pierce was joined in support of the bill by the Missouri Chamber of Commerce and Industry, Associated Industries of Missouri, the Missouri Retailers Association, the Missouri Grocers Association and the National Federation of Independent Business.

For gymnastics-studio owner Rehak, the drama surrounding his taxes is finally over. After contesting the decision for two years, he said he recently settled with the state. But he’s still determined to see the law changed.

“There are a few other gyms in the area that haven’t been audited, so they don’t charge sales tax,” he said. “I’ve had customers who’ve gotten mad because our fees are higher than our competitors because we charge sales tax. That’s a disadvantage to us.”

Last year, the bill sailed through both the House and Senate. But it fell 14 votes short in the House of the two-thirds majority needed to override Nixon’s veto. This year, the bill was among the first to get a public hearing in a Senate committee.

This story was originally published January 25, 2015 at 9:32 PM with the headline "Either warn businesses about tax changes or give them a pass, Missouri lawmakers propose."