By State Rep. Laurie Sanborn

Sunday, July 17, 2011

On June 25, an important bill passed into law that will help improve fairness for New Hampshire’s small business owners and get our economy going.

There is a natural tension that exists between any taxpayer and any tax enforcement agency, and this has always been true for business owners and the Department of Revenue Administration (DRA). This tension is generally healthy and normal; most people are willing to pay reasonable taxes, as long as the amount is fair and the tension is pulling equally in both directions. Everyone wants to be held to the same standard.

The balance of power in recent years swayed too heavily in favor of the DRA, which is New Hampshire’s tax enforcement agency ¿ essentially like the state’s very own IRS. Nearly 10 years ago, the DRA began to aggressively increase audits on small business owners at a rate far more frequent than the IRS.

As difficult and painful as an IRS audit can be, the process does provide a degree of fairness because both sides are held to the same burden of proof. In New Hampshire, it hasn’t been working this way; the only burden of proof was on the taxpayer—the small business owner.

A perfect example of this is under a “reasonable compensation” audit. The DRA has looked at how much personal income the LLC owner, sole proprietor, or partner paid themselves, and determined if it was “reasonable” and therefore deductible from their Business Profits Tax liability. If the DRA, in its sole discretion, deemed it “unreasonable,” the business owner had to prove why it was in fact reasonable and fight the agency. This meant hiring expensive accountants and lawyers, and spending weeks’ worth of effort documenting the tasks, hours, etc. that went into running the business.

So, under these audits, because the burden of proof was one-sided, many small business owners felt compelled to pay the DRA the 8.5% Business Profits Tax (plus penalties and interest), rather than fighting it and spending weeks away from running their company and thousands of dollars in legal and accounting fees trying to prove their worth. Others fought it, but found themselves out a hefty sum of money in the process.

Effectively, under these audits, the DRA has been telling small business owners how much money they could make. It is fair to say that most small business owners wear many different hats. In addition to being the CEO and making all important decisions on marketing, pricing, product offerings, etc., they oftentimes are the chief salesman, the office manager, the bookkeeper, as well as the Human Resources and Public Relations person. They perform any and all jobs necessary, and assume all of the risk.

In many of these audits, the DRA would look at average earnings of someone who performed one of the jobs to determine what was “reasonable compensation.” For example, a small-business owner I know whose company does property maintenance was only allowed to pay himself what an average Janitor would make! Obviously, this did not take into account the other tasks he performed; the additional training, skills and experience he brought to the company; or the many years he received little or no pay.

Fortunately, fairness has been restored in Senate Bill 125 the New Hampshire House and Senate recently passed. As long as the owner can show that s/he provided actual personal services to the business, the law shifts the burden of proof from the small business owner onto the DRA. This law takes effect for tax years beginning January 1, 2011.

Balancing the scales of power and restoring fairness puts us in better shape to create jobs in New Hampshire. When our small businesses sense the environment is positive, predictable, and fair they will start to expand and hire again.

We hope this new law sends current and prospective employers a positive message about the pro-business environment we offer here in New Hampshire.

State Rep. Laurie Sanborn is founder and chair of the N.H. House Business Coalition, a bipartisan group of legislators focused on promoting job creation and expansion of our economic base through strong, responsible business growth and success.