Take a Penny, Get an Audit: Confusion Over One-Cent Sales Tax Leads to Trouble

Small business owners in North Carolina don't need a reminder of the inefficiencies of the Department of Revenue--but they are getting one anyway.

According to a recent story from newsobserver.com, “Small-business owners didn't know a temporary one-cent sales tax hike had expired on July 1, when the state budget came into effect.”

Beth Stevenson, a spokeswoman for the Department of Revenue, claims that the businesses were informed in numerous ways, including four notices on its website and over 40,000 email messages, along with alerts on new tax forms.

These efforts "should have covered everyone," said Stevenson. Revenue also claims that it sent information to trade organizations such as the N.C. Retail Merchants Association to share with its members.

However, several business owners claim that it was only through the local news, word of mouth and accounting firms that they learned of the change. They maintain that the website postings, emails and tax forms were either insufficient or non-existent.

"They have my email address, but I didn't get anything," said Jim Ward, owner of Just For You card and gift shop in Goldsboro. He is frustrated that his business may now face severe financial consequences from the IRS because his store failed to make the appropriate changes.

According to newsobserver.com, “Carol Anderson owns Vaguely Reminiscent, a women's boutique in downtown Durham. She acknowledged that the sales-and-use tax forms she fills out each month indicated the tax rate would become 6.75 percent July 1. But Anderson said that's because the temporary tax was supposed to sunset. Knowing that the legislature was debating the issue, she said she expected to hear definitely from Revenue about what to do.”

"I told my employees, 'We're going to keep doing it until we get a notification,'" Anderson said. “We never did."

Anderson learned the tax rate change was official from a neighboring business, who heard about it from a customer. She's now charging the correct tax.

The non-communication has resulted in two major problems for business owners in North Carolina. First, many customers who knew of the impending change in the state's sales tax and are now complaining that stores were purposely pocketing the extra cent. This has caused several stores to go into full damage control mode (which can be costly and time consuming).

Secondly, and perhaps even more problematic than angry customers, businesses that didn’t switch over on time may face an audit from the IRS.

And all this for a one-cent change in sales tax.