Why one state agency won't accept California IOUs

Why one state agency won't accept California IOUs

Barring a last-minute agreement in Sacramento, the state of California will start paying some of its bills with IOUs on Thursday.

The state would like banks and others to accept IOUs as a form of payment. But one state agency, the Board of Equalization, will not accept IOUs as payment for sales taxes.

Although a state code expressly allows individuals and businesses to pay their state income taxes with state-issued IOUs, there is no such provision allowing retailers to pay their sales tax with IOUs.

That didn't sit well with some merchants the last time the state issued IOUs, in July and August of 1992. Some retailers who did business with the state and received IOUs tried to use their IOUs to pay their sales tax bill.

One of those businesses was ATI Parts in Sutter Creek, a family-run auto-parts shop whose customers include several state agencies including the transportation department, a prison and Cal Fire.

"I was upset that we were getting so many of these IOUs," recalls Margaret Swift, who ran the shop at that time with her husband. Today, at 83, she is mostly retired.

Jim, Margaret and Ed Swift

Initially, Swift withheld sales tax due on sales to the state for which it had received IOUs. Later, she decided to send in IOUs as payment for those taxes.

When Swift's move got into the news, she and her husband were so inundated with media interviews that they had to slip away to their cabin in the woods.

Swift says the Board of Equalization sent her a notice saying she owed penalties and interest on the unpaid taxes. "I can't remember all the details," Swift says, but ultimately she did not have to pay penalties and interest.

Anita Gore, a spokeswoman for the Board of Equalization, says her agency is reviewing the IOU situation.

Last July, when the state entered the new fiscal year without a budget and was going to be unable to pay some bills, the board issued a notice saying it would give certain businesses that contracted with the state an extension on paying their sales taxes. It said it would waive the normal late-payment penalties, and also waive interest on the portion of the late payment that was equal to what the state owed the business.

Gore says the state likely will grant a similar extension and waive late-payment penalties if California starts issuing IOUs this week. But the board is not sure whether it has the authority to waive interest this time around because the state technically has a budget in place.

Swift's son Jim Swift, who now runs ATI Parts, says that if he gets IOUs from the state, he will use them to tax on his sales tax.

"I wouldn't have any choice. I have no surplus cash to loan to the state," he says.

For more on IOUs, see my Tuesday column here.

Posted By: Kathleen Pender (Email) | July 01 2009 at 12:15 PM