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Thursday, May 13, 2010

More Small Biz Regulatory Nightmares

 I've mentioned that I'm involved in putting together another business venture with some other folks.  I discussed some of the headaches ("Dealing With Government Workers") we ran into with regards to the first property we were considering for our business.

After the last interaction with the city, I've learned to keep my mouth shut.  With this new property, I will only speak in generalities.  There will be no disclosure of the specific site or business-type until the very last minute.

We've also come to the conclusion that it will be better to ask for forgiveness than to ask for permission.

Here is one of the city regulations:  We need to have a new sign installed.  The city regs say that the fee to the city is based upon the cost of the sign.  The cost to the city to enforce their sign law is unchanged by the cost of the sign.  It either meets size and "local standards" laws or it doesn't.  The price of the sign is irrelevant, yet that's how they set their fee.

What might be the reaction to this fee structure be from business owners?  As one of my partners pointed out, the first reaction would be to put up the cheapest, skankiest sign available.  That would really help with making a business district look like a business district, wouldn't it?  It would explain why this city has so many business signs that are of the plastic banner type.

Let's say that you want a nice, business-like sign.  What would you do to get around this regulation?  Let's say you wanted a sign that costs $5000.  It's been suggested that you could agree to pay the full $5000 for the sign, but ask the sign maker to give you an invoice (to be shown to the city) for $2500.  To help convince them to do this, you could offer to pay $2500 via a business check to cover the invoice, and you'd pay the other $2500 in cash.

The sign maker would jump at this.  They make a full sale, but only half of the income would need to be reported on taxes.

City, can you say, "unintended consequences?"  They incent you to find ways around the laws.  Instead of being a helpful entity to attempt to influence you to do business in their city, they throw up roadblock after roadblock and fee after fee.

Great plan.

Governments have come to the realization that their laws are encouraging people to break them.  Instead of changing the laws to encourage commerce, they make new laws to tighten their grip on your business.  A new law was recently included in, of all things, the recent ObamaCare bill.
An all-but-overlooked provision of the health reform law is threatening to swamp U.S. businesses with a flood of new tax paperwork.

Section 9006 of the health care bill -- just a few lines buried in the 2,409-page document -- mandates that beginning in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year.
So, now businesses - regardless of their size - will be required to get tax information from every single person or business from whom they buy anything.  Not just contract workers, but anyone or anything that you paid $600 or more.

The government's plan is to match 1099 data with business tax returns.  If they see you received 1099's totaling $100,000 but only showed income of $75,000, you'll be getting a visit from your local IRS agent (followed shortly thereafter by state and local tax collectors).

What if you're a business like a used car lot or a pawn shop, and your suppliers - people selling their cars or other expensive goods (like coins, rare guitars or artwork) don't want to get 1099'd?  My guess is that they'll simply provide an invalid SSN.  How is the buying business going to verify the number is valid? 

When that "loophole" is plugged, another one will be found.  Over-taxed businesses WILL find a way to make a living.  If the government wants a piece of that via taxes, they had better come to the realization that lower taxes encourage higher compliance.

Accept The Challenge

If you are even considering starting a small business, go talk to the city folks in planning and zoning first.  If you can make it a Home Based business, your headaches are much smaller, though you're generally limited to the types of business you can run (most cities here in California don't allow home based businesses to have customers come to your home - day cares being an exception).

If you're going to have a regular, retail business, expect to jump through a ton of hoops.  The cities look at you as an ATM machine.  They will nickel and dime you to death, if you allow them.

If you don't adopt a private, "Us versus Them" perspective, you'll be taken advantage of.  And I said private because you do not want to get some low-level bureaucrat pissed off at you.  They have regulatory power, they know it, and they won't be hesitant to use it.

Welcome to America, comrade...

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Anonymous said...

You could also pay for the $5,000 sign with about 280 silver dollars (or whatever current market value is at the time). Just agree to how many silver dollars would cover the cost of the sign, and pay. Silver dollars are still official U.S. currency so it should be completely legal to do this.

Anonymous said...

I have always had a similar problem with property taxes. The county taxes you based on property value and yet all of the county governments costs relate to numbes of people/children in the county or how needy they are. It would be fairer to charge a flat fee for each domicile then everyone gets to pay the cost of government. I bet that would change some voting habits.

Joseph said...

Chief, how and why do you do it? By 'it' I mean stay in California. If I may be so bold as to inquire is it family ties or something else? It is not as if things where I'm at are all roses but your are in one of the most oppressive places in the U.S.

Good day to you and best wishes on your adventure.

Chief Instructor said...

Suburban, that's a hell of an idea! I like it a lot.

Anon, yep, they base their taxes, not to cover costs, but to see which method produces the most revenues for the city/county/state. I guess I shouldn't be surprised.

Joseph, no problem. Yes, it is 100% because of family. Both sides of our family live within 150 miles of the Bay Area, and 80% of those are within 50 miles.

Still, leaving is an option. My wife and I took a week-long trip to Idaho a few years back, and really liked the state. She actually brought it up yesterday when we were discussing some bone-head stunt our state was pulling.

The wagon wheel ruts are clearly headed out of this state. We may join them, or more likely, head for the boonies to reduce the impact somewhat.

Joseph said...

Chief, totally understood. We haven't lived near family in over a decade and it has been tough at times, especially with kids. We understand the fragmentation of the extended family in today's world and do not wish our children perform the same activity but have tried to be very clear to explain our reasons to them. Time will tell.