Sales Tax Slice: Tax Amnesty Programs: A Win-Win for Both Taxpayers and Revenue Departments?

Tax amnesty programs, offered occasionally by state revenue departments, are often a big relief to taxpayers.  They are beneficial to taxpayers because for a short period of time, most tax amnesty programs offer a waiver of penalties, interest, or both, on past due tax liabilities, giving taxpayers a chance to get back on track.

Penalties for past due sales and use tax liabilities vary by state, but usually include an additional monetary amount that is equal to a certain percentage of the tax due.  The benefits of amnesty programs are shared by revenue departments as millions of dollars in unpaid tax liabilities are recovered during the amnesty period. 

“Both parties [the taxpayer and revenue department] probably feel like they are winning,” said Greg Albrecht, Chief Economist for the Louisiana Legislative Fiscal Office, to Bloomberg BNA.  “The goal of the revenue department is to get money now, and not later, and the goal of the taxpayer is to pay cheaper.”

Massachusetts is offering a tax amnesty program lasting for two months, beginning Sept. 1, 2014 and ending Oct. 31, 2014. Governor Patrick Deval signed legislation in July (HB 4001), authorizing the Commissioner of Revenue to establish the program.  The program applies to tax years or periods stated on a Notice of Assessment issued by the Commissioner on or before July 1, 2014 and is open to businesses with existing sales and use tax liabilities, including sales tax on telecommunications services, meals tax and materialman’s sales tax. 

Eligibility for the amnesty program is limited, however, to taxpayers that are issued a tax amnesty notice stating that they qualify. The Commissioner is authorized to waive unpaid penalties so long as the taxpayer paid both the deficient amount of tax as well as interest owed on the outstanding tax bill.  The penalty assessed for past due sales and use tax in Massachusetts is equal to 1 percent of the amount of tax owed for every month in which the tax goes unpaid, but not to exceed 25 percent of the amount of tax to be paid.

According to an amnesty report issued by the Massachusetts Department of Revenue in 2010, after a similar amnesty program was held, the state collected over $18 million in backed sales and use taxes, while taxpayers avoided over $4 million in penalties.  

Louisiana will also offer a tax amnesty program beginning Oct. 15, 2014, which is the second phase of a three part amnesty program that began in 2013. Louisiana’s “Fresh Start” amnesty programwill run for 30 days, ending on Nov. 14, 2014. Only tax balances due prior to Jan. 1, 2014 are eligible for amnesty.

Louisiana’s tax amnesty program offers an even bigger benefit to delinquent taxpayers by waiving not only penalties, but also half of the interest owed on the unpaid liability. Sales and use tax penalties in Louisiana are equal to the lesser of 5 percent of the tax due for each 30-day period in which the tax remains unpaid, or 25 percent of the tax due. Taxpayers must pay all past due tax or enter into an installment agreement for all past due tax to receive the benefit.

The program applies to all taxes administered by the Louisiana Department of Revenue, except motor fuels taxes.  During the first phase of the amnesty program, held in 2013, the Louisiana Department of Revenue collected over $25 million in unpaid sales tax. 

Albrecht says state revenue departments should be wary though of offering tax amnesty programs too frequently, “What you don’t want to happen is to affect taxpayer behavior. You don’t want amnesty efforts to teach taxpayers that they don’t have to comply.”

Amnesty programs do have their limits, as they are not offered to all taxpayers, including those who are the subject of a tax-related criminal prosecution. In Massachusetts, a taxpayer that has already entered into a settlement agreement with the Commissioner is also not eligible for the program.

Continue the conversation on Bloomberg BNA’s State Tax Group’s LinkedIn page: Do you think tax amnesty programs are a win-win for both taxpayers and state revenue departments? 

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