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Bill to outlaw 'sharks' would bite cities, counties

Posted June 26, 2012
Updated June 27, 2012

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— Cities and counties say lawmakers are about to take away a tool that helps them find businesses that evade local taxes.

Governments use so-called contingency audits to hire companies to look for unpaid property taxes on equipment, business license fees and other money due from companies. The auditors get paid a percentage of the money recovered, typically ranging form 10 percent to 35 percent. 

The same program allows the state Treasurer's Office to look for money that businesses owe taxpayers, such as money overpaid to utility companies that was not refunded.

Proponents of the legislation say that paying auditors based on how much they find creates a conflict of interest.

"I've gotten a large number of complaints from large and small companies that they felt contingency fee audits were being done aggressively," said Sen. Rick Gunn, R-Alamance. Gunn said contingency auditors are less willing to negotiate on accounting issues, such as how to compute the value of large pieces of equipment.

Gunn would not name any of the businesses who complained to him, but said some contingency auditors are so aggressive they're called "sharks" and "bounty hunters."

The measure, H 462, has already passed the Senate. The House Commerce Committee voted Wednesday morning to recommended that the House the Senate language.

"This prohibition stops local governments from identifying and collecting legally-owed taxes," Kelli Kukura, director of government affairs for the N.C. League of Municipalities wrote to members.

At least 52 counties and a large number of cities in the state use contingency contracts. Without them, many would not be able to confront businesses who owe taxes or should have registered to pay business licenses, Kukura and other opponents of the bill say.

The state Treasurer's Office did not respond to requests for comment. However, the office would be prohibited from signing on to contingency contracts signed by multiple states to look for unclaimed property taxpayers have lost. That money goes into the state's escheats fund and is returned to taxpayers. The interest earned on the fund helps pay for scholarships. 

Raleigh has used contingency contracts to collect more than $2 million in franchise taxes paid by utility companies since 2005, said the city's CFO Perry James. A contract Raleigh is getting ready to sign anticipates recovering $1 million in unpaid businesses license fees.

In Johnston County, Tax Administrator Pat Goddard says contingency contracts have brought in $220,000 over the past three years. She said contingency contracts allow local governments to increase compliance with local tax laws without up-front spending.

"I'm surprised the General Assembly would feel they needed to legislate that out," Goddard said.

Equipment owned by telecommunication providers, such as cell phone towers, is among the most frequently under-reported items identified by auditors in Johnston County, Goddard said.

Contingency contracts have been controversial in other states. In Alabama, taxpayers sued to stop the practice. The National Conference of State Legislatures has urged its members to abandon the practice. 

But the American Institute of Certified Public Accounts allows its members to provide audits on a contingency basis. And at least one study found that auditors who worked on contingency recovered no more than auditors who worked on a fee-for-service arrangement. 

"I always dislike when the government plays 'gotcha' games," said Rep. Harold Brubaker, R-Randolph. He said appraisers aren't allowed to charge more based on how much they value a property. Why, he asked, should auditors have an incentive to find more tax liability?

"This is some government world construction," Brubaker said. "Things don't work like this in the real world." 

Auditors say they're being unfairly portrayed.

Kirk Boone, an auditor with Tax Management Associates, says his company has been doing contingency audits for some counties since the 1990s.

"Twenty-five years later, we're still doing the same program in Cleveland County," Boone said. "Now they want to stop our business in two weeks."

Jim Turner, president of Turner Business Appraisers in Union County, said small counties often can't afford to pay his firm the $50-to-$80 per hour it would take to hire auditors. 

"The counties we work with see this as an attractive vehicle to finance these audits in this tough economy," Turner said.

But business groups say the auditors have incentives to be "inflexible" in their work. 

"The small business guy who is having to defend himself didn't budget for that either," Andy Ellen, president of the N.C. Retail Merchants Association. His group, which represents retailers ranging from stand-alone stores to national chains such as Food Lion, backs the bill.

Businesses, he said, don't object to being audited. But they want to be sure they're being treated fairly. 

"When this is done on a contingency basis, there's an inherent conflict of interest," Ellen said.

42 Comments

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  • ykm Jun 27, 2012

    zero business tax and zero deductions. No need for sharks, audits. We have such a stupid tax system.

  • gocanes09 Jun 27, 2012

    "I think that you should go reference the past articles in the Triangle Business Journal where a county finance manager (Johnson, I believe) states that they use Shark firms strictly for small business audits and do audits of larger companies directly themselves (with paid auditors)."

    Do you realize that many counties don't have a "paid auditor" on their staff, mostly due to budgetary limitations? Can you imagine the workload of 1-2 paid auditors trying to audit all of the big businesses in an entire county?

    Without quoting, your example of counties targeting small businesses doesn't make sense. If the coutnties are desperate for money, wouldn't they go after the big money first? It takes a ton of small business discoveries to equal that of 1 big business in some cases. An in house auditor can work on 1 big audit for as long as 6-12 months, and it could result in no discovery. The county wasted that salary, whereas they lose nothing with the "sharks".

  • westernwake1 Jun 27, 2012

    "I'm sorry, but you are way off base. I have intimate knowledge of how this process takes place and at no point are strictly small businesses targeted. The auditing... No business is singled out unless the county has reason to believe they aren't lising properly."

    I think that you should go reference the past articles in the Triangle Business Journal where a county finance manager (Johnson, I believe) states that they use Shark firms strictly for small business audits and do audits of larger companies directly themselves (with paid auditors). The exception to this was when cell phone tower firms were audited, they used a shark firm that specialized in cell phone towers.

    I will agree that counties only target firms where they think they can get more money. However in an environment where counties are desperate for more revenue, this means that a list including a large number of small companies are turned over to the sharks - because using sharks costs the county no money.

  • gocanes09 Jun 27, 2012

    Counties use Sharks to target small businesses - an area where the county would have a harder time getting a return using paid auditors.

    You know that business computer you purchased at CompUSA for $795 - well the manufacturers list price on that computer is $1899 - The county & Sharks expect you to pay taxes based on the list price of the computer (which it is never sold for).

    I'm sorry, but you are way off base. I have intimate knowledge of how this process takes place and at no point are strictly small businesses targeted. The auditing firm is given a list from the county ranging from a one man lawn care business to worldwide technology or pharmaceutical companies. No business is singled out unless the county has reason to believe they aren't lising properly.

    As far as your computer example, if the business keeps clean records and can provide documentation of what they paid for items, they are covered. If not, historical cost has to be used and that could involve MSRP.

  • westernwake1 Jun 27, 2012

    "I highly doubt this bill is being introduced by a Republican without influence from big business. I'd like to see your backup for the 98% number you gave." - gocanes09

    Go take a look at the Triangle Business Journal articles on Sharks over the past years - the facts & figures regarding sharks & small business can be found there.

  • westernwake1 Jun 27, 2012

    "There are MANY more big businesses skirting around paying their proper share of taxes than small businesses. A small business should have no problem proving their tax value since they won't have millions of dollars in equipment and assets." - gocanes09

    Yes, you are correct there are many more "big businesses skirting around paying their proper share of taxes than small businesses." Counties go after big businesses for property taxes directly, the counties know that using their own paid auditors for a big business will provide revenue results.

    Counties use Sharks to target small businesses - an area where the county would have a harder time getting a return using paid auditors.

    You know that business computer you purchased at CompUSA for $795 - well the manufacturers list price on that computer is $1899 - The county & Sharks expect you to pay taxes based on the list price of the computer (which it is never sold for).

  • atozca Jun 27, 2012

    worker bees have no clue... just education, lol. I totally get what you are saying westernwake1... I ran a small business for years.... hard work, little pay, long hours, very fulfilling though to be self employed.

  • westernwake1 Jun 27, 2012

    "One recent example had a Shark firms demanding that computers that were purchased for less than $1000 new - be valued at $15,000 for tax purposes." westernwake1

    'Receipts should settle that issue. You can't value equipment at more than purchase cost. Good documentation by the business of costs and disputes should settle 90% of these issues.' - babbleon

    Obviously you have dealt with the local government or sharks on a property tax issue. The shark is focussed on their commission and does everthing possible to avoid any adjustments.

    As a side note, have you ever wondered why the state's tax value for that new vehicle you purchased is always greater than the amount of money you paid for the new car?

  • gocanes09 Jun 27, 2012

    --Just as a note - Over 98% percentage of the cases where local governments hire Sharks involve small businesses where the net profit is under $100,000 per year. This is not a scenario of high-income wealthy business owners avoiding taxes - it is a case of your local coffee shop having to fire one of their three employees because they got a tax bill that says their cash register they purchased for $850 is being taxed at a value of $18,000.

    I highly doubt this bill is being introduced by a Republican without influence from big business. I'd like to see your backup for the 98% number you gave. Documentation of the purchase is all that is needed to prove otherwise in the example you gave. I promise you, there are MANY more big businesses skirting around paying their proper share of taxes than small businesses. A small business should have no problem proving their tax value since they won't have millions of dollars in equipment and assets.

  • westernwake1 Jun 27, 2012

    "However, despite it being hard, it's not the govt's fault that you missed one of their requirements" - babbleon

    This is not about a business owner missing one of the requirements. It is about you properly paying property taxes and then the government coming back a year later with a hired shark firm and stating the computer you purchased new for $1000 (and paid taxes on) is actually worth $17,000 from their audit & they want you to pay more retroactive taxes on it & every other property item in your business.

    Th behavior of Shark firms and the county governments that hire them during this economic downturn to generate more revenue is disgraceful.

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