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Questionable tactics, for sure, but little to no causation

Thursday, Feb 27, 2014

* A recent Scott Reeder column was discussed in a Senate Revenue Committee hearing yesterday. The column was about the owner of a small business that was allegedly run out of existence by the Illinois Department of Revenue. The column was headlined “Another small business closed by the Illinois Department of Revenue”

For 10 days last month, a state auditor camped out at their store – sitting at one of those tiny little children’s tables – reviewing three months of receipts.

And that’s where the problem began.

You see, Ergadoo is the sort of business that has many nonprofits as customers – schools, churches, nurseries.

Those types of organizations don’t have to pay sales taxes.

So, teachers, church secretaries and principals often come in bearing letters from the Illinois Department of Revenue declaring their organizations’ sales tax exemptions.

Susan and her husband dutifully record the transaction – along with their tax exemption number.

Sounds good, right?

Well, no. The Revenue Department says that’s not good enough.

Clause said the Revenue Department told her it’s her store’s responsibility to determine where the customer’s money comes from.

“How am I supposed to prove if someone comes in with a $20 bill and a tax-exempt letter whether that money is from a school’s petty cash fund or someplace else? I can’t. No one can,” Susan said. […]

After examining three months of transactions such as these the auditor declared that the store owed $800 in back sales taxes.

“I told the auditor the state spent more to have you here for 10 days than it will end up collecting,” Susan said.

Then the other shoe dropped.

“We were told the state would plug the findings of the audit into some sort of formula and come up with a tax bill for the last three years. We’re guessing that will be about $8,000.”

After the salaries they drew from their business that is more than the store’s profits for the last two years.

* OK, first of all, small businesses like that one don’t really report “profits.” The money made is converted into salaries and other income, and then taxes are paid on personal income.

Also, check out a statement posted on the company’s Facebook page, which wasn’t so clear

As many of you already know, in September of 2013, we opened Ergadoozy on the south end of our building. It has taken off with great success and for that we thank everyone who has come by and visited even once! We seem to be booked with parties ahead for 6 weeks and are starting to turn people away. So we are going to expand our play offerings at Ergadoozy come Spring of 2014.

Do to this, we need more room and the only place to get it is from the north end of the building, now housing Ergadoo;the educational supply and toy store. In order to make room for the Ergadoozy additions, we are now discounting the entire store of Ergadoo at 50% off. First come, first served. Anyone is welcome to shop and help clear out the space. […]

We were probably headed to this point eventually, but a recent sales tax audit by the Illinois Department of Revenue will severely change how we would have gone forward with doing business with tax exempt organizations. We would rather leave the marketplace with our good name than get caught up in the burdensome details of the state taxing system.

* It’s not good at all that IDoR was camped out at her store. And the decisions about whom to give the non-profit exemptions are, indeed, not so self-evident. A good CPA would’ve probably cleared all that up.

But, while IDoR’s allegedly excessive actions do make me quite uncomfortable, this store was going out of business anyway to make way for a new, more profitable concern. I don’t think we can directly blame the government for the closure.

- Posted by Rich Miller        

  1. - A guy... - Thursday, Feb 27, 14 @ 11:14 am:

    Ask any small businessperson about this, they’ll tell you the very same thing. There’s a repressive and regressive culture there. Small biz doesn’t hire big 5 accountants, so they’re easy to rack up for IDOR. I didn’t do business with tons of NFPs, but it was much simpler for me to pay the tax whether I collected it or not. It’s defensive medicine. You swallow your pride and chalk it up to “that’s how things work in the Prairie State”. Too bad. Thin margins at these kinds of stores and a good deal of client loyalty. You’re right Rich, the IDOR didn’t put them out of business, they just sucked the entrepreneurial spirit out of them. That’s worse.

  2. - Rich Miller - Thursday, Feb 27, 14 @ 11:21 am:

    ===they just sucked the entrepreneurial spirit out of them===

    Huh? They expanded a new business. Doesn’t sound like any loss of spirit.

  3. - Commander Norton - Thursday, Feb 27, 14 @ 11:21 am:

    Ergadoo had been struggling for years when it opened Ergadoozy. I shopped there on several occasions because they had some unique educational toys and products that were different from what you see on the shelf at Wal-Mart. But the prices were quite high; as long as I left myself enough time for shipping, I could get my kids the same products from Amazon, sometimes for half the price. I still tried to shop there from time to time to support a local business (and no, I don’t care to support Amazon), but I’m one person raising kids on a modest income.

    Ergadoozy has really taken off. I haven’t been there yet, but other Springfield moms I know swear by it. As an easy-in, easy-out indoor playplace, it’s been a sanity-saver for kids and parents during a really nasty winter that has seen students cooped up at home during six weather days off from school.

    I agree with you, Rich; this isn’t a business that got shut down by the overbearing state; this is a company that made a smart business decision. I hope for their sake that their success continues as the weather warms and families choose to spend more time outside. The planned Springfield “Kidzeum” children’s museum will also be competition for them, I’m sure. But no, the owners of Ergadoo shouldn’t be blaming the state or big government for their situation. That’s ridiculous.

  4. - Rahm's Middle Finger - Thursday, Feb 27, 14 @ 11:23 am:

    Thank you once again for exposing IPI/ INN propaganda. They didn’t even call the DoR for a comment. These pieces aren’t new stories, they have a singular purpose. To discredit all government.

    Keep up the good work!

  5. - Excessively Rabid - Thursday, Feb 27, 14 @ 11:38 am:

    Let me play the Devil’s advocate here a little bit. We all love to complain about the big bad revenue authorities, but there are plenty of people, including mom-and-pop “job creators,” who can and do cheat the authorities, and the rest of us who have to pick up their tab, blind. So even though we don’t like to hear about the tactics, how else are you going to catch such people? Or would you rather just base tax collection on trust?

  6. - Liandro - Thursday, Feb 27, 14 @ 11:58 am:

    Valid points Rich. The timeline seems to back up Reader’s point, though. Ergadoo was in business for over a decade and a half, correct? Then they started up a new, non-competing (except for space, arguably) off-shoot concept that was also successful. Possibly the owners were sick of the struggles of Ergadoo’s business and/or business model, possibly they were just being entrepreneurial, who knows. But clearly they had a choice to keep their existing business and move it, sell it, or grow it.

    They decided it wasn’t worth it to keep that business alive. Revenue/profit was undoubtedly the biggest factor (I would assume), but that doesn’t negate the frustration of dealing with the state as a factor. If they say that the prospect of having to deal with newly-complicated audits, regulation, and record-keeping affected their decision to kill the business (instead of move/sell/keep)–well, that seems to make sense to me.

    They had a long-standing business that was getting more and more frustrating to run. They have a more enjoyable (and profitable?) new business venture that they wanted space for. Instead of keeping both businesses via moving one or the other, they killed one.

  7. - Tom Joad - Thursday, Feb 27, 14 @ 11:58 am:

    Another hack job by Scott Reader. He only talks to one side then writes a story. Does he really have a degree in journalism? If so, it should be revoked.

  8. - Liandro - Thursday, Feb 27, 14 @ 12:00 pm:

    Commander Norton also makes a good point about increasing (especially online) competition for Ergadoo’s business model. That’s one of the reasons that various local Chamber’s support a national push to equally tax online sales.

  9. - A guy... - Thursday, Feb 27, 14 @ 12:05 pm:

    Rich, thoughtfully…they could have 2 thriving businesses. Now they have one which appears to perhaps be a service where sales tax may be less of an issue. I don’t know most of the details, but it appears like they’re doing business in a building they already own or neither might be possible. That’s the stacked deck that faces potential business people here. When they heard “$8000 potential fine”, this one went away. Hope they are very successful with the other one. To bad they had to decide at all.

  10. - Bigtwich - Thursday, Feb 27, 14 @ 12:22 pm:

    –The money made is converted into salaries and other income, and then taxes are paid on personal income.–

    Sounds like DOR was of the opinion they underpaid sales tax in the amount of $8,000. That should come from the business.

  11. - MyTwoCents - Thursday, Feb 27, 14 @ 12:33 pm:

    A guy…if you read what was posted they closed the store to expand the gym into the space that was at least partially occupied by the store.

  12. - BIG R. Ph. - Thursday, Feb 27, 14 @ 12:43 pm:

    Just because you are standing at the edge of the cliff does not mean that you are jumping off. IDOR just gave them the final shove. In business you can put up with a lot of “stuff” but it in the end it comes down to the “One bad day” theory. All business owners have them but we are all just “one bad day” away from saying screw it.

    I have been through two of these sales tax type audits. The first one was when Blago first took over and we were “lucky” enough that they only went back 2 & 1/2 years instead of the 7 years that they could have. Luckily we only had to pay $100,000 even though the State at the time owed me over $1 million.

    These are the kinds of actions that the bureaucrats just don’t understand. This is why the State (and country) are screwed up!

  13. - downstate hack - Thursday, Feb 27, 14 @ 12:45 pm:

    Eight days for an auditor at a business to collect $800. No wonder Illinois is broke.

  14. - Newsclown - Thursday, Feb 27, 14 @ 12:51 pm:

    Another example of “Advertorial” writing disguising itself as journalism. I can’t thank the USSC enough for the rulings that enabled the funding of these.

  15. - Joe M - Thursday, Feb 27, 14 @ 1:00 pm:

    I would like to hear the DOR’s version of the story.

  16. - Rich Miller - Thursday, Feb 27, 14 @ 1:07 pm:

    ===I would like to hear the DOR’s version of the story. ===

    I asked. They can’t comment on specific cases. They can’t even confirm audits.

  17. - And the horse he rode in on! - Thursday, Feb 27, 14 @ 1:15 pm:

    Thanks Rich for always keeping us alerted to the never ending examples of biased journalism such as those pontificated Mr. Reeder.

  18. - Living in Machiaville - Thursday, Feb 27, 14 @ 1:19 pm:

    This is not uncommon. I hear from small businesses all over the state who have experienced similar IDOR audits. Some of which have the same outcome as Ergadoo. Not many actually go out of business but it’s costly and upsets the conduct of day-to-day operations while an auditor is encamped. Commenters may not like IPI or Reeder but he’s not making unfair or inaccurate accusations about IDOR auditors. They most certainly do this.

  19. - Ahoy! - Thursday, Feb 27, 14 @ 1:23 pm:

    Scott Reeder and the IPI needs to be more honest (I don’t even read their articles anymore because I can’t trust them) and DOR needs to be more rational and not scare businesses out of having tax-exempt organizations as customers.

    Also, spending 10 days at a small business like that just going over sales tax receipts is a huge management failure.

  20. - Eugene - Thursday, Feb 27, 14 @ 1:35 pm:

    Good post, Rich. Reality: the state needs to do audits or there would be no compliance. Some people are going to be the unlucky ones who get audited. Could the state do a better job of targeting audits? Probably - maybe start with the 2/3 of Illinois corporations that pay no income tax at all. As for a business closing down because of an $800 bill for back taxes and fines? Extremely unlikely, especially since payment plans are generally available. And in this case, they were clearly going to convert the space to the other business anyway.

  21. - Arthur Andersen - Thursday, Feb 27, 14 @ 2:52 pm:

    FWIW, local teevee carried this story as well. The tone and tenor were almost identical to Reeder’s-”Hard-working ex-teachers run out of business by the evil State.” The story there did not mention the cash cow next door.
    I’m just wondering if the owners are trying a little PR payback to the DOR after what they suffered. Could be wrong.

  22. - downstate hack - Thursday, Feb 27, 14 @ 2:53 pm:

    “Clause said the Revenue Department told her it’s her store’s responsibility to determine where the customer’s money comes from.”

    This is disturbing. The small business collected the tax exemption number as required, but the DOR now wants them to do the impossible. Unrealistic and not fair. And an extrampolated payment of $8,000 for earlier years is even more outrageous.

  23. - Raymond - Thursday, Feb 27, 14 @ 3:24 pm:

    Reeder has something of a love affair with Ergadoozy because, apparently in his mind, it embodies a free market initiative in stark contrast with the forthcoming Kidzeum (a public/private partnership).

    Reeder wrote a valentine to Ergadoozy just a couple months ago. So, this latest column is nothing more than another plug.

    I guess when Reeder isn’t busy trashing teachers and other public workers, or spreading the gospel of Our Lord Jesus Christ, then he’s throwing some free advertising to his favorite local business.

  24. - Sunshine - Thursday, Feb 27, 14 @ 4:30 pm:

    Ergadoozy is a great kid’s place! Been there with the grandkids and their friends and they love it.

    Too bad about the tax man. One needs to always watch their back….and their record keeping.

  25. - Democrat Grrrl - Thursday, Feb 27, 14 @ 4:30 pm:

    Classic Scott Reeder “reporting.” A hack with an agenda to push.

  26. - Frosty-The Snowman - Thursday, Feb 27, 14 @ 5:47 pm:

    I believe Pat Quinn and the guys down in Springfield are smarter than we think. Pat is leaving these “roadblocks” in place for businessmen in Illinois in order so they can “improve their ability to learn to deal with adversity.” There is no question about it. When another Illinois business throws in the towel and leaves this state for Texas or Indiana, that business has been “honed” to a fine edge. They know what “real governmental roadblocks” are. They can deal with anything that their competition overseas (or in the USA) can throw at them. They owe it all to Pat and the boys down in Springfield. Pat probably gets a dozen “thank you” cards each week mailed from Texas and Indiana by these ex-Illinois businesses. Not to mention the “Thank You” cards from the governors of surrounding states.

  27. - Liandro - Thursday, Feb 27, 14 @ 7:36 pm:

    - Democrat Grrrl - Thursday, Feb 27, 14 @ 4:30 pm:

    “Classic Scott Reeder “reporting.” A hack with an agenda to push.”
    Reader reported on specific events that happened to a pair of Springfield businesses. Rich looked into the details from some different angles. Both seem legitimate. I’ve gone through a similar week-long sales tax audit myself, so I find it to be an interesting topic. Is highlighting the struggles of Illinois’ small business community such an awful agenda?

  28. - With Liberty For All - Thursday, Feb 27, 14 @ 7:47 pm:

    I am still hung up on the $800 in unpaid taxes turning into $8000. Sounds like a kinder, gentler Mafia interest rate.

  29. - Regnad Kcin - Thursday, Feb 27, 14 @ 8:41 pm:

    It’s difficult to know the whole story in these situations somewhat similar to personnel matters. The “victim” can make statements without having to supply all of the details and the accused has to stay silent.

Sorry, comments for this post are now closed.

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