The Record-Keeping Tax

I offer as the irritating story of the day, this one on sales tax audits of restaurants in New York.

The state also recently started using desk audits, in which they use third-party information to scrutinize whether businesses may be making more money than they're reporting. For example, the state can look at how many pizza boxes a vendor has sold to a pizzeria and if the number of boxes is more than the number of pizzas the company said it sold, the state can look closer to find whether tax evasion is the source of the discrepancy.

"If the state went through a normal audit process and determined that we owed money, we wouldn't fight it. We're not opposed to paying taxes," said Panaro.

Instead, he said he was told all of his paperwork checked out, but he didn't meet the state's standards for keeping "adequate records." The restaurant had failed to keep every paper copy of each guest's order receipt for the entire three-year period. That opened the door for the auditor to use "indirect audit methods" to estimate what he thought the restaurant owed.

The method of estimation the state used was to observe the restaurant's sales for a day, then compare it with the same date on a previous year. The previous year's reported sales were 25 percent lower, so the auditor took that percentage and multiplied it over each day's sales of the three-year period, deciding the restaurant did enough unreported business to owe an additional $330,000 in sales tax....

Joe Giafaglione, owner of Bar Bill Tavern in East Aurora, has been audited twice in the past four years. His purchase of ground hamburger raised suspicion when it was found there were no hamburgers on the menu (it was being used as an ingredient in chili).

"It's totally ridiculous the way they come up with figures without any evidence," said Giafaglione. "They say they need 20 [documents], so you give them 19 and they say, "Ah, you don't have that? Well, now we'll have to estimate.'"š"

A similar situation occurred with our company a number of years ago on a contract where some of the work had to be done using Davis-Bacon type mandated wage rates.  These rates, for those who have never seen them, come in two parts.  They might say, for example, that the minimum for such and such a job is $12.10 per hour plus $3.07 per hour cash instead of fringe benefits for a total of $15.17.

Using these figures, we gave folks an offer letter saying you will be paid $12.10 base pay plus $3.07 fringe for a total of $15.17 an hour.  Then on the paycheck, they just got one line for their total hours times $15.17.  Well, said the Department of Labor in an audit, you are not paying them the fringe, you are just paying the base pay -- we only see one number on the pay check.  So you owe $3.07 times 20,000 or so hours, pay up.

Well, I was pretty surprised.  I said it was pretty clear I was paying the fringe - why in the heck else would I pay someone an oddball wage like $15.17 that just so happened to be equal to the sum of base plus fringe.  You can see the calculation in each offer letter.  No dice, they said, the law requires that the payments have to be broken out on the pay stub.

This was back in my younger, naive days, when I thought the "expert" auditors actually knew the law.  Now I know they are sometimes just making stuff up, but I was smart enough at the time to ask them to show me the legal requirement that these two payments be broken out on the pay stub -- show me something in writing.  Nothing was forthcoming.   My attorney later educated me that there is hierarchy of quality to what might be in writing:

This is where I began to learn about the hierarchy of labor law. As I understand it (and remember, I am not a lawyer) it is something like this, from strongest to weakest:

  1. The actual statute as written by Congress, e.g. the Fair Labor Standards Act
  2. Court rulings and precedents
  3. Approved regulations what have been through the public comment and approval process
  4. Formal DOL rulings
  5. Internal DOL guidelines and manuals
  6. Informal DOL rules of thumb

Numbers 1, 2, and 3 have a lot of legal force. Five and six may or may not "“ they represent the DOL's opinion, but that opinion has not been vetted by a regulatory hearing or court decision. These get overturned by courts all the time.

When the DOL tells you can or can't do something, they likely will say it with equal authority if it comes from 1 or 6. For example, in this case, the DOL said with total authority that the wage and fringe have to be split on the paycheck.

Anyway, I read the actual law myself.  The only mention of anything even related to this was the need for adequate record-keeping to prove we had foll0wed the rules.  I searched as far as I could through labor department regulations online and found no more detail.  So I argued that unless they could produce something different, my position was that the offer letter plus the pay stub was adequate record keeping.

Eventually, the DOL let the issue drop - petulantly, they never actually dropped the claim, just told me they were choosing not to go to court against me at that time.  Of course I am only a glutton for so much punishment, so in the future we split the payments out on the pay stub.  It creates more work doing payroll, but what is government for, after all?

PS, if its helpful, I have a three part series on my interactions with the Department of Labor beginning here.

  • http://paperinbox.wordpress.com Dan

    to quote Rand

    ". . . Non-objective law is the most effective weapon of human enslavement: its victims become its enforcers and enslave themselves."

    When it comes down to it the law stated that your records needed to be "adequate". This means that the law can be enforced according to the bureaucrat's whim. Those who are in the protection of their good graces have nothing to fear. Those who are not (like perhaps companies that question whether their definition of adequate is accurate) will have things like this enforced against them at every opportunity.

    Not that it was not true already, but now that you stood up to them, they will find new opportunities to find some undefined rule to enforce against you. These people are very small and can only show their power by wielding it.

  • http://space4commerce.blogspot.com Brian Dunbar

    Question.

    Assume I've got an idea that could - with a lot of work - turn into a profitable small business. It would - with a lot of hard work - make me as much or more than I could earn working for a corporation.

    Why on God's Green Earth would I subject myself to the supervision, oversight, and nosey-parkerism of folks like your buddies at the DOL, or the auditors in the State of New York? Are the rewards worth it?

    Brian

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  • anon

    In theory, the value added tax is a great idea. Ask any economist -- in a perfect world, it is doesn't distort the market much, etc.

    In implementation, well....Mr. Giafaglione has gotten a taste of how it will be enforced.

  • frankania

    Mr. Dunbar, The payoff comes in satisfaction. In my 70 years, I have worked in dozens of salaried jobs, but when I started my first business at age 30, (making less than my salary at IBM) I realized I was waking up each morning with energy and joy. No more "blue-mondays"; no more pining for vacations; in control and enjoying the challenge.
    Just figure out ways to foil the busybody govt., and do what you want.

  • http://evilredscandi.blogspot.com Evil Red Scandi

    Brian - as someone who is currently doing this with *two* businesses, my answer is Yes, Yes, and Yes - if you really love your idea.

    You will work harder than you thought was possible. And then a bit later you will look back on working that hard and think about how easy it was now that you're *really* working hard. You'll look at people complaining about working 80-hour weeks and sneer at what pathetic little wimps they are. As one entrepreneurial friend told me - the trick is to not work 16 hours a day, 7 days a week. It's much better to work 18 2/3 hours a day 6 days a week. A dark sense of humor is a must.

    However, what it comes down to is that there are exactly two ways to lead a productive life - working for your own dream or working for somebody else's. There's infinitely more satisfaction and joy to be had working for your own dream. It's truly amazing how hard you can run and not feel tired of it.

  • http://evilredscandi.blogspot.com Evil Red Scandi

    Also, I should mention that if you have a good plan and you do it right, you do get to slow down after awhile :-)

    Having a good plan cannot be overemphasized.