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The Daly News: The $75,000 Mistake

A NUMBER OF YEARS AGO, Special Events Magazine ran an article titled "The $58,000 Mistake." The article was about a situation my company found itself in regarding California tax issues. I feel compelled to share with all of you the outcome of this case.

I was involved for more than nine years in this battle with California's State Board of Equalization. I since have figured out why "you can't fight city hall" became a saying. A battle very costly in legal and accounting fees has indeed been lost.

Here is a quick review of the case: Before 1987, John Daly Inc. charged sales tax on all material items as well as on the labor to install such items. After numerous complaints from customers about paying tax on the installation labor, I consulted with the Board of Equalization about the need to charge this tax. I had many conversations with several board members, but they all agreed that if I were to line-item the invoices and show the installation labor separate from all other charges, and still charge tax on labor used for fabrication of props and floral arrangements, then it would not be necessary to charge tax on the labor for installation. I was told this over the phone, but I never requested this decision in writing.

Big mistake! Never do anything with a government agency by word of mouth. Always get it in writing.

After that, I started to break out invoices and did not charge tax on the installation labor. The good news is that only two years later I was audited. At that time, the board told me I should be charging the tax. The bill for taxes not charged was nearly $50,000, and with penalties and interest it came to more than $58,000. The fight began.

Before the board would even grant me a hearing, I had to pay the money in full. Next we began hearing after hearing, and rejection after rejection of my arguments.

The final hearing was in January. The board ruled that we were denied reimbursement because our customers are not buying individual props or decorations. They are buying a total look, and that means we have to use all of the things that make up the final design and fabricate them into that look.

Another problem brought up was that we had not charged sales tax to resale customers, such as caterers. We would provide floral and fabric decorations to them, and they would resell them, charging the end-user tax. Our catering clients told us they were resale clients. But we did not get resale number cards filled out; rather, we wrote their numbers on the order forms.

This was not acceptable to the board. In California, you must have a resale card on file and be able to present that card as evidence. If not, you are liable for the tax plus the penalties and interest accrued for nonpayment. The companies I had dealt with have since gone out of business.

In the end, this case cost $75,000, a great deal of time and, more important, negative energy. If I had it to do over again, I would have gotten everything in writing. Failing that, I would have paid the tax, moaned and groaned for a month or so and had it behind me, rather than let it follow me for nine years.

If there is anything I ever can do to help any of you with a similar case, please contact me, and I will do my best to help with any information I have garnered from this experience.

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