State is Late on Tax Refunds: Small Businesses Are Owed $38.8 Million in Collected Deposits.

By Darrell Smith, The Sacramento Bee, Calif.

Jan. 18–The state’s tax collectors owe nearly $40 million to thousands of small businesses statewide, a Board of Equalization investigation has revealed.

That’s more than double the amount anticipated by the south state board member who first blew the whistle on delayed refunds of tax deposits late last year.

“The system has to be changed. This is the right thing to do,” said board member Michelle Steel, whose inquiry in November helped launch the statewide probe. “It’s shocking — $38 million? When the government owes this much money to taxpayers, they should return it. I think we can do better.”

The tax deposits, ranging from $2,000 to $50,000, are required of many small California businesses during their first three years in operation, as collateral against tax bills and delinquencies.

If the business owner has a clean tax record after the first three years, the deposit must be refunded.

A copy of the Board of Equalization’s internal investigation shows that as of December 2007, more than 2,000 deposit accounts statewide, totaling $38.8 million, were eligible to be released. Of those, 54 business accounts were owed refunds of $492,100 in the Northern California region, outside the Bay Area.

Steel, whose inquiry in November led to a $4.2 million refund among more than 600 business owners in her district, is now demanding the immediate release of all overdue tax deposits, adding that some businesses have waited up to four years for their refunds.

Meanwhile, BOE officials have denied dragging their feet on returning deposits.

“We’re looking at the process. If it’s broken, we’ll take all steps possible to fix it,” said spokeswoman Anita Gore on Thursday.

Indeed, the BOE’s report includes an “action plan” to improve the security deposit program.

Gore said that only about 3 percent of California taxpayers are required to pay the deposit, calling the tardy refunds “minimal” for an agency that collects $53 billion in tax revenue each year.

But BOE board member Bill Leonard, who represents the district that includes Sacramento and a wide swath of Northern California, excluding the Bay Area, called for more accountability.

“The rumors we had heard were true. It’s hundreds, even thousands of businesses. Where does the buck stop?” Leonard said.

At a Feb. 1 BOE staff meeting, he and Steel plan to ask for reforms, including streamlined, computerized reviews of deposit accounts, and a payment system that automatically returns money to businesses that have passed the three-year threshold.

Steel also hopes to expand a pilot program that she recently initiated in her Southern California district, where reviews of security deposit accounts are conducted monthly, instead of every six months as with the BOE’s current reviews. Steel’s office also opened a toll-free help line — (866) 910-9558 — for any business owner with refund questions.

“This is real money to real people,” Steel said. “Whether it’s one penny or $100,000, these people deserve to get paid.”

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