IRB Says There’s No Plan B if Excise Tax Appeal Loses

IRB Director Joel Lee testifies before the Senate Finance Committee about his department's budget Tuesday. (Photo by Barry Leerman for the V.I. Legislature)
IRB Director Joel Lee testifies before the Senate Finance Committee about his department’s budget Tuesday. (Photo by Barry Leerman for the V.I. Legislature)

Internal Revenue Bureau Director Joel Lee told lawmakers Tuesday that if the District Court rules against the government’s appeal to reinstate excise taxes, the bureau has no backup plan in the face of roughly $45 million in tax collection losses each year.

“We don’t. We’re hoping for this to go through,” Lee said, expressing confidence that the court would rule in the government’s favor.

Lee led a team of Internal Revenue Bureau officials in defending the agency’s Fiscal Year 2020 budget before the Senate Finance Committee in the Earl B. Ottley Legislative Hall on St. Thomas.

“You need to begin to have a discussion as to what the government of the Virgin Islands is going to do if we do not receive a favorable decision and this government is going to lose $45 million a year in estimated collection,” said Sen. Kurt Vialet (D-STX), who chairs the Senate Finance Committee.

Excise taxes on goods imported into the territory halted in November 2018 following a September ruling by District Court Judge Curtis Gomez that invalidated the territory’s excise tax, saying it violates the U.S. Constitution’s Commerce Clause. The ruling called into question tens of millions of dollars in excise taxes collected in recent years.

Internal Revenue data indicates that the V.I. government collected between $23 million and $33 million in excise taxes per year from 2012 through 2017, averaging $25.7 million per year.

In January, the Third Circuit Court of Appeals, which agreed with Gomez’s order, extended a deadline for the government to file a brief until March 1.

When Vialet asked if the excise tax can be “named something else and come back in the same format,” Lee said “not quite because the nature of it is an excise, then it’s still an excise whether we shift the names around.”

To date, the bureau has already lost roughly $20 million in excise tax collections for the current fiscal year, a number that Lee said resulted from continuing data collection without actual collection of taxes.

“For those business that continue to refuse to voluntarily comply with the tax laws, the bureau will decide if this collection tool should be pursued,” Lee said, referring to shutting down businesses for noncompliance.

Lee said the IRB has also started canvassing and making courtesy visits to cash-only businesses to ensure that they are in compliance and “doing the right thing,” he said.

Lee also reported progress on the tax refund end. For the current fiscal year, the bureau has so far paid 15,523 units of income tax refunds totaling $31.8 million, with 23,474 units of refunds totaling $53 million remaining unpaid.

According to Lee, total revenue collections for the current fiscal year totaled $533 million as of May 30. This represents a 33 percent increase over last year’s $400 million in collections for the same time period. Individual income taxes make up roughly half of the collections, followed by gross receipts and corporate income taxes. Despite the passage of President Trump’s Tax Cuts and Jobs Act of 2017, the territory has seen higher levels of tax revenues, Lee said, due to the recovery dollars impacting the local economy.

According to Lee, his agency will ramp up tax collection efforts, with the goal of collecting an additional $40 million in delinquent income taxes for Fiscal Year 2020. The bureau’s delinquent accounts’ collections secured 2,913 delinquent returns worth $35 million for Fiscal Year 2018. For the current fiscal year, the bureau has so far collected $21 million dollars from 1,693 delinquent returns.

This fiscal year, the Internal Revenue Bureau is asking for $13.1 million from the general fund, a four percent increase from last year’s budget of $12.6 million. Of that amount, $6.8 million would cover personnel costs and $2.9 million in fringe benefits for 145 positions territory-wide. The agency also budgeted roughly $360,000 for utilities and $250,000 for capital expenditures.

Present for the committee hearing were Sens. Donna Frett-Gregory (D-STT), Marvin Blyden (D-STT), Oakland Benta (D-STX), Janelle Sarauw (I-STT), Dwayne Degraff (D-STT), Allison Degazon (D-STX), Javan james (D-STX) and Vialet.