Tuesday, June 9, 2009

If Cash is Really King, Then Off with Their Heads

Many businesses like getting paid in cash and many of their customers know it. There are obvious advantages including avoiding the added costs associated with accepting a charge card. Another reason, commonly known but rarely stated, for favoring cash is that it makes it easier to evade taxes. That is why some merchants will give customers discounts off the stated price or not charge sales taxes. It is a practice that I have observed for many years.

There are periodic crackdowns and this is one of those times. The evidence I point to are a number of jewelers in New York charged with evading hundred of thousands of dollars in sales taxes on cash jewelry sales in the million. This is probably overestimating of the dollar amounts of sales, but the jewelers were easily caught when prosecutors sent in undercover agents as customers to purchase jewelry for cash and no sales tax was collected on the sales.

A couple of arithmetical assumptions and a review of sales records were the basis for determining the amount of the alleged sales tax avoided. The jewelers can be convicted of a crime and could end up paying a significant amount in sales taxes, fines, and penalties, as well as being subject to additional liability for income tax evasion.

In these tough times, I expect more prosecutors to adopt a similar approach and go after the underground economy. Tax collections are down, and W-2 earners and those who are unemployed probably aren’t as eager to look the other way, so the political environment is ripe for these easily constructed stings and the resulting news conferences. I wonder if a prosecutor or two will even go after a tax preparer who signs a return for one of these businesses caught in a sting.

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