Off the Cuff: Government Scrutiny of Your Business: Part 1 of 2

SHOP MANAGEMENT

Off the Cuff: Government Scrutiny of Your Business: Part 1 of 2

August 27, 2010
By Mark L. Venit, MBA, Contributing Writer

What a year: tough for many, great for some, routine for others. But we’ve made it to autumn, which — for most companies in decorated appareldom — is a good season for boosting custom sales from commercial accounts, schools and school-related accounts, and organizations. And for companies in the preprint sector of our industry, orders from retailers for back-to-school shoppers, along with the rest of the population, are already in hand or in motion. All things considered, we’re getting back into the usual groove.

With enough things to deal with when running a business in a challenging economy, most industry firms are nonetheless looking forward to the coming season. About the last thing you need is “the gummint” (read: the government, any government) looking over your shoulder any more than “they” already do. But with city, state and federal revenues suffering attrition in this challenging economy, government tax authorities are boosting their efforts at collecting whatever they can. Your business is, of course, a target — not because you’ve done anything wrong, but just because you may have forgotten to send in some more money, overlooked some detail or filed something late.

Forgive me, please, for passing along some unpleasant news from the field. Sometime in the next year or the next few months, there’s a good likelihood that one or more of the following three realities will face owners of apparel graphics firms:

1. You will be visited by a friendly representative from a local, state or provincial sales tax agency.
The sales tax folks know every trick in the book that businesspeople use to avoid paying sales tax — legal and otherwise — and they know exactly where to look for a score. There's nothing you or I can think of that they haven’t already experienced and figured out in our attempts to foil them in their quest for a squeeze.

Remember that employee sale or flea market event you conducted to get rid of misprints and overruns? How ’bout the close-out guy who paid you cash? What about the sales you made to commercial accounts that inadvertently never sent in their resale certificate numbers? Did you religiously charge sales tax to your close friends who placed custom orders? Did you buy supplies or equipment from out-of-state vendors and “forgot" to assess yourself the Use Tax? In some states and provinces, sales tax is supposed to be applied to rent you receive from companies who lease space under your roof, to equipment leases or to other transactions you didn't realize are taxable. Did you know that in many states, the amount you charge for shipping or delivery is taxable?

You can bank on being audited for sales tax compliance sooner or later. Cleaning up your act now will save a small fortune in cash and heartache. If you do get “selected” for a sales tax audit, call your accountant immediately. Consider hiring a sales tax audit consultant (usually former auditors, themselves); it’ll prove to be a smart investment, albeit a painful one. If you learn how to handle this kind of audit and know what you’re prepared to “give” (in money) the agent for his trouble, you’ll get off relatively easily and affordably. If you don’t know or play too dumb, the tax dude may see his effort as “sport” — and you are “meat!”

2. You will be visited by an IRS or Revenue Canada agent, or by a representative of some other local, state or provincial revenue authority.
How to deal with IRS and Revenue Canada agents when they send you a friendly note or come a-callin’ is a no-brainer: You need competent advice and help from a pro — your accountant, a tax consultant, possibly an attorney and maybe a priest. Are your books in order? Even if you’re quite confident of your position, you certainly know that different agents interpret things differently on different days.

Is the issue profits? Questionable deductions? Is it payroll tax? Is it defining who is an employee vs. who is an independent contractor, or who is safely classified as “casual labor?” Will the “I’m-from-the-government-and-I’m-here-to-help-you” gent or lady agree with your way of defining things?

Hey, it’s not “personal.” The tax guy just wants to make sure you render unto Caesar what is Caesar’s.

3. An event precipitated by or exacerbated by a disgruntled or injured employee will occur. And should this involve an employee who’s “paid under the table” or without having proper legal status (regarding citizenship), the impact of the event is likely to have even greater consequences.
During the past year it seems I’ve heard from more clients than usual sharing tales of woe with regard to the aforementioned realities. There are rarely happy endings in any of these cases, only settlements of greater or lesser cost, financially speaking, and greater or lesser degrees of emotional stress.

In case you haven’t read or heard about what’s going on, there’s increasing interest in small businesses by tax enforcement authorities, safety and health inspectors and, in a few cases, trade union folks.

The latter two categories shouldn’t scare you too much. The OSHA-type inspectors have proven in recent years to be rather accommodating, reasonable and non-belligerent. Some are downright friendly and often very helpful. That’s because our elected officials have learned over time that overzealous bureaucrats can cost losses in jobs and tax revenues, as well as discourage economic investment from potential employers. Blessedly, our elected officials have tightened the reins on harassment-oriented OSHA employees. Nevertheless, for some unlucky companies, there’s the distinct possibility of having your books, operations and business premises scrutinized by a state or federal Occupational Health and Safety Administration official.

For a client in The Big Apple, it was a recent visit by a professional union organizer hoping to score a company with only 22 hourly employees that caused this entrepreneur a giant headache. Be aware that major national unions have earmarked tens of millions of dollars to boost membership among their ranks.

In Part 2, we’ll look more closely at taxation issues vis-à-vis outside sales representatives, paying commissions, what happens when an employee not on the books gets injured on the job and a few other issues that could cost you a fortune — or your whole business.

Mark L. Venit, MBA, is president of Apparel Graphics Institute LLC, Ocean Pines, Md., which provides management and marketing consulting and proprietary research to apparel graphics companies throughout the Americas and Europe. He also is the chairman of ShopWorks Software LLC, a provider of industry-specific business software. Venit teaches pricing, strategic marketing, salesmanship and other business management topics at the Imprinted Sportswear Shows. His newest book, “The Business of T-Shirts: A Roadmap for Successfully Marketing and Selling Decorated Apparel,” will be available in October. You can contact him at markvenit@cs.com.

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