State squeezes retailers for overdue sales taxes

Retailers that fall behind on sales tax payments land on 'cybershame' list

You could call it the Cyberspace Hall of Shame. Or the Big Squeeze.Faced with falling revenues, Indiana is trying to embarrass retail merchants who have fallen behind on their sales taxes by publishing their names on a state Web site, available for public viewing.

The list includes nearly 26,000 retailers, from pizza shops to tanning salons, which have fallen behind on their sales taxes and no longer have a valid state merchant's certificate. The goal is to get the businesses to pay their back taxes and get their names off the list.

It's one of the many tactics the financially strapped state has turned to in recent months to collect more money it says is overdue. Like many other states, Indiana has seen its revenues fall sharply in recent years, forcing it to cut programs and lay off employees.

So far, the list has attracted plenty of attention since it was launched in January. Within a few days, the site generated more than 300,000 visits, constituting more than two-thirds of the entire state government Web site traffic.

The list includes the name and addresses of merchants behind in sales tax payments, but not the amounts they owe.

The element of shame apparently has prompted some retailers to start paying up. In the past three months, more than 500 retailers have paid $1.1 million in overdue sales taxes, said Stephanie McFarland, a spokeswoman for the revenue department.

"This is one more tool we are using to collect what is due to the state," she said.

Indiana isn't the first state to use this tactic. Many states publish various lists of deadbeats on a wide range of taxes. At least 15 states publish some kind of "cybershame" list, according to the Federation of Tax Administrators, a trade association based in Washington, D.C.

Those states have recovered tens of millions of dollars in back taxes as a result of the lists, the association said.

"It's an effective tool, to the extent you want to avoid being embarrassed," said James Eads, the association's executive director.

Publishing lists of delinquent taxpayers, he added, is much cheaper than sending tax collectors out into the field to knock on doors.State Sen. Luke Kenley, R-Noblesville, who chairs the Senate Appropriations Committee, said he doesn't have a problem with putting names of delinquent taxpayers online.

"In order to comply with the law, we need to remit our taxes," Kenley said. "If we don't, whether it's in good times or bad times, I think it's appropriate to take measures to insure that people pay their tax obligations."

Under state law, retailers collect 7 percent sales tax for goods and services, and are required to forward that money to the state, generally once a month. But in hard times, some merchants fall behind on the payments, sometimes using the cash to pay other bills. Then they can fall so deep into tax delinquency it's tough to settle their bills.

Some tax experts said publishing such lists raises privacy issues, especially if the information might be outdated or inaccurate.

"I really have mixed feelings about it," said Leandra Lederman, professor of tax law at Indiana University's Maurer School of Law in Bloomington. "Yes, it's human nature to want to avoid being embarrassed. But should your taxes be everyone's business? And if the information isn't accurate, then you're embarrassing people for no good reason."

The revenue department says the list is updated once a month and strives to be accurate. But some retailers on the list said they had no idea such a list even existed, and said they thought their sales taxes were paid on time and in full.

"I thought my taxes were up-to-date," said Deborah Parks, owner of Deborah Parks Interior Design in Indianapolis. "I'll look into it and rectify it if it's not. It would have been nice if the state had called me first to straighten this out."

Jane Macy, owner of Morristown Flower Basket in Shelby County, also was surprised to be on the list. "If I'm behind on taxes, I didn't know about it," she said.

The Department of Revenue said it sends at least two notices to businesses before their merchant's certificate is about to expire. Merchants who operate with an expired certificate are subject to a Class B misdemeanor, which can result in a fine or jail time.

All merchants are required to post a valid certificate in their shops or offices, and renew them every two years. If they are up to date in paying their sales taxes, the certificate is automatically renewed. If they fall behind, the state doesn't send them a new certificate until they settle up.The state's list includes numerous businesses that have closed, gone into bankruptcy or sold their operations, according to a random check of more than 30 businesses by The Indianapolis Star.

For example, Archibald Candy Corp. is listed as the owner of 20 Fannie May candy shops in Indiana that are behind on sales tax. But Chicago-based Archibald went bankrupt in 2002. The Fannie May brand and many of the stores were later bought by Utah-based Alpine Confections.

Another company, Fiesta Hair Fashions, is listed as the owner of 58 stores delinquent in paying sales taxes. But the company has sold its assets to Regis Corporation of Minneapolis, which kept the Fiesta name.

"Regis Corporation is up to date on all taxes with the state of Indiana," said company spokeswoman Susan Evans.

Some companies flatly deny they are delinquent on their taxes. Glacier Water, a retailer of water filtration and treatment systems based in Vista, Calif., is listed as delinquent on almost 60 locations around Indiana. But the company said it is up-to-date on its taxes, and blamed the listing on a "clerical error."

The list also includes numerous companies with disconnected telephones and inactive Web sites, a sign that many small businesses have closed during the economic downturn of recent years.

The state said that any retailer that closes its doors is supposed to notify it by filing a form. Otherwise, the state will continue to send estimated bills. If a business closes but still owes back sales taxes, the state will continue to try to collect them.

She said the state has publicized the program extensively but acknowledged that it could take some time before business owners understand the changes.

"The list is up," she said. "We've obviously been communicating about it through the news media."

Nationally, the cybershame lists are catching popularity, but they are most effective when targeting business owners who consider themselves a pillar of society, not the true deadbeats, some say.

"If you're going to church on Sunday and the Rotary Club on Wednesday and the PTA meeting on Thursday, you don't want people to know you're delinquent on your taxes. You're probably going to pay up," said Eads, the head of the Federation of Tax Administrators.

He added: "The challenge is shaming people who just don't care."