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Source link: http://archive.mises.org/12892/dining-out-on-tax-discrimination/

Dining Out on Tax Discrimination

June 4, 2010 by

Tim Carman of the Washington City Paper reports that regional celebrity chef Roberto Donna received a five-year, suspended prison sentence after pleading guilty to felony embezzlement. The “victim” is Arlington County Treasurer Frank O’Leary, who claimed Donna owes over $150,000 in collected meal taxes from his now-closed Bebo Trattoria restaurant in Arlington’s Crystal City neighborhood:

In an interview this afternoon, the county treasurer laid out Arlington’s long campaign to get Donna to pay his meals tax. The problems started, O’Leary says, right from the moment Bebo opened its doors in October 2006. Donna would file his meals-tax reports every month to the county’s Commissioner of Revenue, his signature dutifully attached.

“Mr. Donna faithfully filed,” O’Leary adds, “but he never bothered to give us any money.”

This pattern continued until Bebo closed in April 2009, notes Kim Rucker, the county’s deputy treasurer. The treasurer’s office tried to get Donna to comply with the law, O’Leary says.

“When we went after him to collect, we found it extremely difficult because he was very crafty,” O’Leary says. “He rented all the equipment in his restaurant, so we couldn’t go and seize equipment. He didn’t have a readily identifiable bank account in Virginia, so we couldn’t seize his bank account. He didn’t own a car. At one point, we found that he was essentially paying the waiters by just taking money out of the register at the end of the evening and giving it to them.”

The chief tax collector would even spend time with Donna, O’Leary adds, trying to convince the chef to cough up the money. “They’d have a very nice conversation, but the end result was we were getting nowhere. So finally we said, ‘OK, no more nice guy.’”

O’Leary compared Donna to an armed robber:

Some kid walks into the 7-Eleven and knocks it over and gets 10 years in the slammer. Roberto steals money from us month after month after month, and it didn’t look like anything bad was going to happen. Well, guess what? Now Roberto knows better.

The difference, however, is the 7-Eleven robber commits aggression: he intentionally acted to deprive the 7-Eleven of its property. Donna’s situation isn’t so cut-and-dry. The state — through Treasurer O’Leary — is the aggressor; the victims are customers of Donna’s former restaurant compelled to pay tribute — the meals tax — to the state; Donna is coerced by the state to collect and remit said tribute. Except Donna collected and didn’t remit.

So Donna isn’t an armed robber, but he’s not quite an innocent victim either. He essentially pocketed the tribute money for himself. It’s a bit of a grey area: He neither initiated the aggression nor attempted to rectify the injustice (say, by refusing to charge customers the meals tax). I’d say that while the state’s criminal prosecution was unjust, Donna also took a stupid risk for no good reason.

That reason, one assumes, is that Donna had cash-flow problems with his now-failed restaurant. The meals tax was likely a contributing factor — though, having once ate at the restaurant in question, I’d say there were many other factors — and this speaks to the real problem: the discriminatory, regressive nature of the meals tax.

First let’s define the tax. In Virginia, where Donna’s restaurant operated, there’s a statewide 5 percent sales tax on all purchases (4 percent for the state, 1 percent for the city or county); localities then levy an additional tax specifically on “prepared foods” and restaurant meals. For example, in Arlington County it’s 4 percent — bringing the total sales tax to 9 percent. This is actually a median rate: a 2006 report found that Virginia localities had “the top seven meal taxes in the country,” topped by an 11.5 percent rate in four cities.

The meals tax is wildly popular with local governments, which often levy them as a substitute for raising property taxes. The meals tax shifts the burden of supporting the welfare state from property owners to small businesses. And since the restaurants collect the tax, the customer-taxpayer never interacts directly with the government, which helps local officials avoid accountability.

Curiously, Virginia law allows city and town councils to levy the meals tax without voter support, but counties must put the tax before a referendum. This doesn’t sit well with county bureaucrats who want more money, as Michael Martz of the Richmond Times-Dispatch noted earlier this year:

[The Town of Ashland] collected more than $1.8 million last year from the 5 percent [meals] tax. The Town Council bumped it up a penny on the dollar in 2004 after a public hearing but no voter referendum.

Henrico County Manager Virgil R. Hazelett wishes he had the same option. He had to delay dozens of projects for new schools, libraries, roads, and parks and recreation after Henrico voters rejected a 5 percent meals tax that was to pay for the $349.3 million in bonds they approved at the same time in 2005.

Hazelett is among the chorus of officials from Virginia counties calling again for the same authority as cities and towns to levy taxes on meals without a voter referendum. The House of Delegates already has killed the idea once this year but is about to take up an even broader proposal that cleared the Senate in the first half of the session.

“We’re always looking for additional revenue sources, especially for infrastructure,” Hazelett said. “With the way the county is growing and developing, we’re going to need it.”

Sadly for Hazelett that “broader” measure — which would have removed the 4 percent cap on the meals tax and eliminated the referendum requirement — failed to pass the Virginia House.

While localities are quick to pull the meals-tax trigger, there’s little concern for the restaurants conscripted to serve as unpaid tax collectors. Dave McNair of the Charlottesville-based newspaper The Hook reported last July that the economic crash exacerbated the strain of this double duty on local restaurants:

“Having to pay the city cash semi-annually really affects cash flow, causing or creating the need for more cash on hand or loans,” says Mas chef/owner Tomas Rahal. “This is especially unwelcome because [restaurants] are already feeling the pinch from decreasing sales and expensive leases.”

Oxo was a seemingly popular Water Street restaurant until it closed last year because, in large part, the owners got behind on their meals and sales tax bills. Across the street, gourmet Italian restaurant La Cucina closed in 2007, and while owners Franky and Meridith Benincasa were rewarded by selling their building, they had some parting words.

“Unfortunately, it’s going to be hard for small restaurants to make it in Charlottesville in the next few years,” Ms. Benincasa told the Hook. “Rents are so high, and buildings are so expensive, that only chains or restaurant groups can afford to move in.”

And when that happens, city officials inevitably complain about the death of small, local businesses — and blame the chains for displacing “Main Street.” This cognitive dissonance comes from the belief that the meals tax only burden visiting tourists — i.e., people who don’t pay local property taxes — and the affluent. But as the Hook noted, “shops that sell stuffed animals only collect sales tax. But restaurant meals get hit with both sales and meals tax.” It never occurs to any locality that discriminating against an entire group of businesses by imposing double the tax burden might somehow harm these businesses.

Consider the recent uproar over Rand Paul’s statements on the Civil Rights Act. It angers many folks to even suggest the state permit private businesses to discriminate against customers in any way; yet we openly accept state discrimination against businesses simply because it’s a source of easy revenue for the political class.

On this issue, the U.S. is even behind the European socialists, as Steven Erlanger reported for the New York Times last July:

Restaurants, bars and cafes are an important lobby in France, and they have been suffering, especially the smaller bar-cafes, which are continuing to close. In 1960, France had 200,000 cafes, according to the National Federation of Cafes, Brasseries and Discothèques. Now there are 38,600, with more than 2,000 closing last year alone.

Beginning Wednesday, after years of pleas from French presidents, the European Union will allow member states to drop the value-added tax on restaurant meals to 5.5 percent from 19.6 percent. The former is the rate that governs sandwich shops and fast-food restaurants, like the much-despised and much-patronized McDonald’s, which is making money during the economic crisis and is rolling out a series of coffee bars to compete with Starbucks and more traditional cafes.

Restaurant owners complained that they were being discriminated against and that they were losing ever more business to fast-food shops and sandwich places. The cheaper establishments have been thriving in French cities, given the increasing propensity of workers to grab something near the office rather than indulge in the fabled hours-long boozy lunch. And the unions complained that salaries were too low and that no one was hiring.

The drop in taxes is expected to cost the French budget about $3.3 billion. But that, in turn, is supposed to create 40,000 new restaurant jobs, half of them for younger people, by 2011.

The alternative to ending tax discrimination against restaurants is the path traveled by the Arlington County treasurer. Roberto Donna may be a lousy businessman, but he’s not alone in his inability to keep up with the sales and meals tax. The treasurer lists dozens of delinquent restaurants, and Frank O’Leary said he’s lobbying the local prosecutor to criminally charge as many of them as possible: “Our thought is that we’ll start at the top and go after the biggest fish first and just work our way down the list.”

{ 8 comments }

Dave Albin June 4, 2010 at 10:07 pm

I wonder if Mr. Donna will be getting paid for collecting taxes for the great Commonwealth of Virginia? Maybe that could offset some or all of what he owes. He has to get paid at least the minimum wage, doesn’t he? :)

Shay June 4, 2010 at 10:13 pm

I wish I could have someone convicted of embezzlement when they didn’t pay me back. Or heck, convicted of embezzlement because they didn’t pay me money I simply decided that they owed me.

Guard June 5, 2010 at 6:36 pm

I love this guy!

Vanmind June 6, 2010 at 10:39 am

Yeah, collecting taxes from diners and then pocketing the money is definitely fraud. The other stuff, heroic.

Mac June 7, 2010 at 5:27 pm

this guy’s got guts

bravo!

Laverne Crisostomo October 22, 2010 at 2:05 pm

It’s very nice blog

TaxRefundGuarantee January 4, 2011 at 1:42 pm

I am seriously going to start using all of that! Thank you so much, I am not even kidding! There is nothing that I hate more than coming up with content all the time to barely keep our real estate blog up. It’s just so time consuming – so thanks again!

Kristi Riley January 21, 2011 at 5:38 pm

Wow, really great article. Very helpful and informative! Great read, thanks!

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