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Tax crackdown going awry

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What could have been a firm but smooth implementation of a toughened tax policy has turned into a muddled mess.

Many small vendors have been taken by surprise by state tax officials fining them for failing to show sales receipts on sales subject to the state’s general excise tax. It’s largely a "cash economy" that has long operated in a laid-back, neighborly environment. And it is an environment in which the state’s new Special Enforcement Unit should have dispensed one-time warnings more freely than the zero-tolerance fines that it has.

The chaos caused by the crackdown led to the abrupt cancellation of the 36th annual Mayor’s Craft and Country Fair Saturday at Blaisdell Exhibition Hall, a popular event that many community groups look forward to and for which they prepare months in advance. But yesterday, Mayor Peter Carlisle apologetically called the fair’s cancellation a mistake and is looking to reschedule it. Also yesterday, a meeting at Makiki Park between state tax officials and vendors, which really should have happened earlier, spiraled downward, with some frustrated vendors turned away from the "closed" gathering with no answers.

All this confusion stems from the new Special Enforcement Unit, formed by the state Tax Department due to a new law signed by Gov. Linda Lingle in June 2009 to provide it with resources to seek compliance by cash-based businesses that have not reported or have under-reported their incomes. Those include vendors and small businesses selling things from homes, parking lots and craft fairs, some of which don’t even have GET licenses. Together, the revenue could be considerable, so the law is reasonable.

But, its implementation is a woefully different story. Communication pipelines via handicraft guilds and craft-fair organizers could have been better tapped to spread the word. A robust ramp-up warning period by the new tax-enforcement unit would have sent vendors the clear message that records that they had routinely not kept would be swiftly required or they would be fined.

The unit’s five investigators and field auditor spent the last three months checking out restaurants, gas stations, contractors, farmers markets and shopping centers on the Big Island, Maui and Oahu. They have investigated storefronts, vendors and mom-and-pop businesses. Next are bed-and-breakfast operations, said Tax Director Stanley Shiraki.

Vendors appear to have been treated harshly. Sakhone and Griffin Twigg, owners of the 2-acre West Valley Farms in Waianae, told the Star-Advertiser’s Dan Nakaso that, when approached by a state agent, they showed proof of their GET license but could not produce receipts. They were fined $670, and then quickly bought two new sales machines for $200 to produce duplicate receipts for them and their customers.

The Twiggs had asked the agent for a warning and promised compliance the following week, but were told, "Ignorance of the law is no excuse" — and the agent is right. However, decades of selling goods at informal settings without being forced to keep duplicate receipts should require that warnings be issued before a crackdown. There is responsibility for all taxpayers to be akamai about the rules, yes — but ignorance of the law is not the same as willfully ignoring the law.

The agents have issued 88 citations totaling about $36,000 in fines, of which $11,000 has been collected. It’s no wonder that small-time vendors have responded angrily, yelling at agents and heeding a customer who told vendors not to give information to agents; he was fined $2,000 for doing so.

As the state struggles to balance its budget, it understandably is seeking ways to collect taxes that are owed. But heavy-handedness in surprising people with fines for not having changed their longtime ways to conform with a little-known policy change was the wrong way to implement it. And it has wrought some very chaotic results.

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