Panel OKs rules to help firms hurt by tax

Tuesday, Dec. 7, 2004 | 10:55 a.m.

The Nevada Tax Commission on Monday unanimously approved temporary regulations that will allow businesses drowning in state tax debt to bail out by paying cents-on-the-dollar settlements to the Nevada Department of Taxation.

The so-called "offers in compromise" resulted from the plight of Rainbow Catering Inc., a Las Vegas company that ran up $220,000 in debt because it did not realize it had to collect state tax on part of its operations.

When Rainbow offered to borrow $50,000 to make a lump-sum settlement four years ago, it learned that Nevada, unlike the Internal Revenue Service and 18 states, had no regulations to settle debts for any amount less than what is owed.

Dino DeCianno, deputy director of the state's taxation department, told the commission during Monday's hearing, "it's time; it's due for us" to consider offers in compromise. "It's the right thing to do for taxpayers."

Carole Vilardo, president of the Nevada Taxpayers Association, during public comment, called the proposed regulations "a good first step."

The commission voted 5-0 to accept the new regulations.

Christian Gianni, attorney for Rainbow Catering, told the board the approval of the measure eventually will give "my clients some finality on this."

Nevada law allows the tax commission to write off debts that are at least five years old. Tax Commission Chairwoman Barbara Smith Campbell said a bill draft is being prepared for the 2005 Legislature to consider waiving the five-year wait so that such settlements could be processed more expediently.

Because Rainbow Catering's liability was finalized in November 2000, it must wait until next November before it can appear before the commission for its hearing -- that is, unless the Legislature eliminates the five-year clause.

Until then, by agreement between the state and Rainbow, the company is paying $250 a month -- not enough to cover the mounting interest let alone reduce the principle, but enough to keep the company out of default.

"I'm happy because I can finally see a light at the end of the tunnel for this," said Rainbow Catering owner Ed Baba.

Co-owner Tom Gehringer said he was pleased that the state acted so quickly in approving a method that would allow an offer in compromise to be considered.

The Rainbow Catering situation come to light in a March 8 Sun story detailing the company's efforts to correct what it said was an honest mistake that had put it on the brink of being forced out of business after 25 years.

The new policy allows the state to write off the losses for business owners who "will not have in the foreseeable future the money, assets or means to pay (the) liability, either in full or by a payment plan."

The commission can take into consideration medical conditions of the owner or family members, debt caused by employee misconduct and whether the owner is the victim of a "crime, natural disaster or other unforseable occurrence that significantly impacted his ability to pay his financial obligations."

Companies seeking the relief from state tax debt would have to provide "financial statements, bank records, accounting ledgers and a statement or explanation of any assets that may be acquired."

The new regulations apply only to state taxes. Federal tax debts still would have to be settled with the IRS.

State Tax Commission member John Marvel said he was satisfied that the new regulations have "the language to weed out requests that lack merit or are frivolous."

Along those lines, Tax Commission member Thomas Sheets, former chairman of the state Ethics Commission, said, "it is important how we administer this through the precedent we establish," especially for the first offers that are heard.

In March, Rainbow Catering faced a collections hearing on about $6,150 worth of aging assets from the business at 2013 S. Highland Drive that could have been liquidated to help settle the debt. Among the items on the block was the company's 1973 Ford Econoline catering van with 210,000 miles, worth $700.

The company at the time criticized what it viewed as a lack of sensitivity on the state's part and an unwillingness to meet them part way to retire the debt.

The state, however, said it had no mechanism in place to consider offers in compromise, had received no great demand for such settlements and could not show favoritism toward the catering company because that would be unfair to other taxpayers.

The debt was incurred following a 1999 state audit that determined that Rainbow owed $100,000 in state taxes for the prior eight years. Interest and penalties more than doubled the debt. Interest alone is now $1,000 a month.

Between 1978 and 1999, Rainbow Catering paid taxes to the IRS but not to the state because Nevada does not require service-only businesses to collect the 7.5 percent sales tax. The company reasoned that because it did not charge for each plate of food as a restaurant does it was not required to collect the tax.

The state, however, said the company's buffet-style food was prepared, and the sales tax applies to prepared food. Therefore the company should have charged customers sales tax on that part of the job, the tax department found.

Since that determination in 1999, Rainbow Catering has paid its current state sales taxes, which it says has amounted to $66,000. But the owners said they were unable to make a dent in the debt and needed a way out of the dilemma.

In documents filed with the Tax Commission in February 2003, Gianni argued, "there is no controlling statute or regulation that specifically prohibits the department from accepting (a) taxpayer's offer in compromise," which opened the door for creation of regulations and Monday's decision to approve them.