That extra 7 percent consumers pay for retail purchases hasn’t gone toward its intended use at a couple hundred businesses in Howard County.
About 200 retail businesses were operating illegally in Howard County as of last week because they had not paid all their sales tax, so the state refused to renew their merchant’s permits, according to the Indiana Department of Revenue.
The businesses, some of which are now closed, account for about 8 percent of the approximately 2,500 in the county that are registered with the state tax-collecting agency. Court records show some businesses have tax warrants dating back more than 10 years.
Department spokeswoman Stephanie McFarland said the approximately 200 merchants owe about $1.3 million in money they were not supposed to touch.
About 26,000 businesses owe about $72 million statewide, she said.
Those figures only include businesses that have owed for so long that they have lost their permits and they are operating illegally. McFarland said the state does not track by county the total number of sales tax owed, which would include businesses that still have valid merchant’s permits but have not yet come to their renewal deadline.
The total amount of sales tax owed could be significantly more, she said.
“Sales tax is not something that comes out of the business’ pocket,” McFarland said. “It’s what you and I pay with the understanding that the business will turn it over to the state. The tax is supposed to be set aside in some type of escrow-nature account.”
Sales tax is Indiana’s largest source of revenue, accounting for about 48 percent of the state’s budget, according to the Indiana State Budget Agency.
McFarland noted that sales tax revenues help pay for many government-funded programs that have taken financial hits, such as the education budget, which took a $300 million cut this year.
“I think the biggest thing, honestly, is that this is money that consumers have already given to the businesses to pay for teachers, Medicaid, corrections,” she said. “Then those programs are at risk of becoming unfunded.”
The Law and Process
Merchant’s permits used to last the lifetime of a business, but the state became stricter a few years ago.
The Department of Revenue used to periodically bill delinquent businesses and give them more than a year of notifications before the state would seek help from a collection agency.
The Indiana General Assembly in 2006 mandated permits would only last two years, requiring renewals by owners.
Along with sending a bill every month to tax delinquent businesses, the state will not renew their permits until they pay off their debts.
The Department of Revenue will use a tax warrant to collect the owed money, with penalties and interest, if businesses go too long without paying.
McFarland said the department begins notifying businesses 60 days before their renewal deadlines that they will lose their permits if they don’t pay up.
Once a business with delinquent taxes misses its renewal deadline, it is operating illegally.
If the business keeps operating without paying its taxes and renewing its permit, after a few months, the Department of Revenue prominently posts a sign at the business letting its customers know it is breaking the law.
About 10 businesses in Indiana have advanced to the sign stage this year, McFarland said. One of which was now-defunct Northern Tanning Salon in Kokomo.
The sign tells passers-by that the business has lost its merchant’s permit because it did not pay its sales tax. Operating a business without a valid merchant’s permit in Indiana is a Class B misdemeanor, a conviction for which can result in up to 180 days in jail and maximum fine of $1,000.
Schools
About half the state’s budget goes toward K-12 schools, according to the State Budget Agency.
That means if the businesses that lost their permits paid their sales tax debts and the state returned all the money to Howard County, the five school corporations in the county would have had another $650,000 to share.
That money could have helped Kokomo-Center School Corp. avoid some of its cutbacks, said corporation spokesman Dave Barnes.
“Sales tax or any taxes people are going to pay, yeah, it’s going to affect us because we’re one of those entities where the funding comes from the state,” he said.
KCS, like all state funding recipients, receives sales tax money as part of a pool of all state revenues, such as income tax or property tax.
It’s all money that KCS needs, Barnes said, as it absorbs its share of the state’s $300 million cutback to the education budget.
“The last couple years, all our employees have paid more insurance. Nobody got a raise, nobody. And everybody along the line, including class aides to administrators, lost vacation days and those kinds of things,” he said.
The school board in June approved the layoff of 20 faculty members. Most of them were young teachers who were at the lower end of the pay scale, Barnes said.
If the teachers all had annual salaries of $30,000, for example, $650,000 would pay for almost 22 salaries for a year.
Medicaid
Another one of the many areas affected by businesses not paying sales tax is Medicaid, McFarland said.
The program, which uses state money to match federal funding to help people with low incomes afford health care, has seen strain over the last few years as unemployment has led to increased demand but budgets have decreased.
Marcus Farlow, a spokesman for the Indiana Family and Social Services Administration, the agency that oversees Medicaid in the state, said the program accounts for about 13 percent of the state’s total budget.
Like schools and other state-funded programs, the funding allocations Medicaid receives come from a combination of all sources of revenue.
The demand for services has caused Medicaid to grow 18 percent, Farlow said.
“In order to fund that, we’ve made some cuts: a 5 percent hospital cut, we’ve capped enrollment in certain programs,” he said.
The diminished sales tax revenue isn’t helping the situation, McFarland said.
Thomas Cook, the chief financial officer for Howard Regional Health System, said the Kokomo non-profit hospital moves the costs elsewhere when Medicaid doesn’t cover all of a patient’s hospital bills.
“In this state, we have not seen a rate increase in Medicaid since the early ’90s,” Cook said. “The state pays out more [total] money because more people are eligible for Medicaid. ... It puts a lot of pressure on the state to pay their portion. Sales and state income tax are all part of the state and how it funds.”
The hospital won’t turn away any of its Medicaid patients, more than half of whom are women in labor, because the government funding won’t cover all of their bills, Cook said.
If the Medicaid money falls short of the total bill — for example, it pays $1,000 of a $5,000 bill — Howard Regional would pay the remainder, he said. The hospital absorbs those costs or passes them on to other patients.
At Kokomo-based non-profit Bona Vista Program’s Inc., more Medicaid money could mean the organization could serve more clients, hundreds of whom receive the government assistance, said Bona Vista president Jill Dunn.
The non-profit has taken cuts of up to 15 percent at the administrative level, and its leaders have been speaking with government officials about keeping the incoming Medicaid it has from decreasing further, she said.
“We’ve stretched about as far as we can stretch,” she said.
Some programs have waiting lists that people have been on for a couple of years. If the state received the sales tax it was owed, the extra Medicaid money Bona Vista could receive would mean it could hire more staff and decrease the wait times, Dunn said.
“We’d be able to bring more infants and toddlers into services and serve more adults,” she said. “... It’s not just Howard County and Miami County. We have parents in Cass County wanting to know when their sons and daughters will be getting services.”
• Daniel Human is the Kokomo Tribune business reporter. He can be reached at 765-454-8570 or at daniel.human@kokomotribune.com.
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