The American Tax System is based on voluntary compliance with existing tax laws. As long as most taxable entities, be they individuals or companies, perceive that every one else is paying their share of the tax burden, they will pay their share and the entire system is functional.
If, however, entities paying the tax perceive that other entities that should pay taxes are not paying them, we have the beginning of a
potentially serious problem.
Unless vigorous efforts are made to collect the taxes due from those who
do not pay them, others will begin to wonder why they are paying. It
becomes a question of fairness.
Some who are wondering why they pay their taxes will eventually stop
wondering if they should pay, and simply follow the lead of the group
not paying. They would likewise stop paying their tax burden.
Pretty soon you could have the majority of taxpaying entities simply not
paying. When this happens, the amount of resources the taxing entities
have for enforcement could possibly be overwhelmed.
To carry this one step further, since there are no perceived penalties
for not paying this particular tax, entities not paying a particular tax
could and possibly would stop paying other forms of voluntary taxes.
Pretty soon, tax revenue sources would dry up, and the taxing entities
would have a real problem. Not enough money to collect the delinquent
tax, and not enough money to run the government. Then what?
Yes, I know, it’s a nice tale but it would never happen. Most
entities pay their taxes when due. Or do they?
Let’s take a look at one segment of our taxpaying entities, the Employee
Leasing or Professional Employer Organizations (PEO) and their GET
burden.
The PEO’s acquire employees from existing client companies and place
them on their own payroll. The PEO then becomes responsible for, among
other things, paying the Employers FICA, Medicare, State and Federal
Unemployment Taxes. Also paid are the mandated benefits, which are Workes’
Comp, TDI and Health Insurance. The PEO bills the client for theses
amounts. The client then reimburses the Employee Leasing or PEO
Companies for these expenses. The PEO now becomes liable for the 4 pecent GET
on these amounts.
By the very act of the PEO providing these services for their clients,
the Tax Department gains big time. Instead of hundreds or thousands of
employers filing or paying for themselves, the state now collects their
payroll taxes from only a handful of companies. These consolidated tax
deposits, since they are large dollar amounts, they are due sooner than
they would have been due if left for each individual client to pay.
Instead of hundreds or thousands of separate tax deposits and hundreds
or thousands of tax filings, the state now gets only a handful of them.
Using a “consolidator’ is an efficient and less expensive way to get
things done.
The PEO’s in most cases normally do their tax filings electronically.
So what do we have? We have economies of scale for the taxing
agencies. Tax deposits are paid quicker and more efficiently. In
effect, the state saves money by having these “consolidator” companies
acting as their tax collectors.
As payback, the state charges the PEO a 4 pecent GET on all of these items.
That’s right; they charge a tax on payroll tax. Is it just or fair to
charge a tax on a tax?
They also charge the PEO a 4 percent GET on the Workers’ Comp, TDI, and Health
Insurance Premiums paid. Is it just or fair to pay a tax on
pass-through costs?
Not only does the state benefit from the PEO arrangement, hundreds or
thousands of small businesses also benefit. These small companies may
not have the expertise or the manpower to spend on all of these
compliance and payroll related measures. The PEO keeps them in
compliance while allowing them to grow their business.
Other industries, like the hotel industry, are exempt from the 4 pecent GET on
pass-through expenses, but the PEO has no exemption. Is this just or
fair?
There are at least two ways to alleviate this tax on tax, and to
alleviate tax on pass through costs.
One is the legislative route. Legislation has been proposed to
eliminate the 4 percent GET on pass through costs for PEO’s annually for at
least the last six sessions. Every year the legislation disappeared
somewhere in the legislative process.
The second is a state Tax Department ruling. The state Tax Department
has the authority, and the ability to put an end to this 4 percent GET on
pass-through items by the simple process of rule making. It has not
done so.
As you read this, you should be aware that many employee leasing or PEO
companies are not paying the required 4 percent GET. Many have not paid this
tax for extended periods of time. Some have not paid in over 10 years.
The state Tax Department knows this. Not only does it have knowledge of
this, but it has known about it for over 10 years. These companies
are still in operation today.
No penalties have been collected from these companies that are not in
compliance.
Also, out-of-state companies have begun providing PEO services. They
are not paying this tax either. These companies are extremely easy for
the state Tax Department to locate. All they have to do is look at the
W-2 filings that out-of-state companies provide.
No perceived enforcement of these tax violators has been accomplished.
Some local companies are beginning to say, “well if my competitors are
not paying this tax, why should I pay it?”
It becomes not only a question of compliance with existing tax rulings,
but a question of fairness. Why are companies that comply
with the tax being punished monetarily by their compliance?
Is it fair to allow some entities to violate the tax laws repeatedly and
with impunity, while expecting others to comply with the tax laws?
Can the next step of noncompliance be just around the corner?
Will entities stop paying other types of tax also?
”’Jack Schneider is chairman of the Board of Directors of the Grassroot Institute of Hawaii and vice president of Small Business Hawaii. Reach him via email at:”’ mailto:jschn@lava.net
”’This editorial is intended to provoke thought, discussion and an examination of issues. It does not reflect official policy of the Grassroot Institute of Hawaii. See the GRIH Web site at:”’ https://www.grassrootinstitute.org/
”’HawaiiReporter.com reports the real news, and prints all editorials submitted, even if they do not represent the viewpoint of the editors, as long as they are written clearly. Send editorials to”’ mailto:Malia@HawaiiReporter.com