SPROUSE versus THE WV TAX DEPARTMENT We often wonder why our state doesn’t move forward, why businesses are reticent to locate here, and why our small businesses here in the state struggle to excel. In starting West Virginia’s first fitness franchise, Brickhouse Cardio Club, we honestly expected our biggest competition to come from large national competitors such as 24 Hour Fitness, LA Fitness, Anytime Fitness, etc. What we quickly found was that our largest competitor to this point has been government. By far. Without any doubt, our biggest impediment to success is governments, state and local as well. We mistakenly thought that we would at a minimum be ignored by the state, and who knows, maybe we might even be credited with building a successful fitness franchise right here in what many consider to be the unhealthiest state in the nation. Crazy thinking, this is West Virginia after all. I will leave out the intricacies of government regulation in trying to franchise a concept in various states throughout the nation for another day. Phe It’s not possible to even begin writing about the mounds of government red tape we face in various states (one of the reasons given for our franchise application being rejected in one particular state was because the application’s font size was 11 and not 10.5 – no joke). I will also leave out the crazy local regulations of cities and towns throughout the country that our franchisees must face where in one case our franchisee had to provide a local municipality with the SIZE of the BOLTS they were using to install an outside sign – again, no joke. What I will focus on is West Virginia. And, the West Virginia Tax Department. And, their bullying and vicious tactics. And, their push to drive us into bankruptcy. The West Virginia Tax Department is huge. They have auditors upon auditors. They have managers upon managers. They have lawyers upon lawyers. They have the advantage of having all of these employees on salary and not having to worry about paying an hourly rate for each hour worked. Unfortunately for small businesses trying to fight them, we have to pay everyone from accountants to lawyers by the HOUR. This gives the tax department a massive advantage and a hammer more powerful than Mjolnir to hold over the heads of small business owners. Small business owners quickly realize that fighting the tax department will likely cost them more than the tax assessment itself. So, many simply acquiesce. The problem we faced in accepting the Luca Brasi-type offer of the tax department (either our brains or our signature would be on the agreed order to make our members pay sales tax to get healthy), is that Brickhouse Cardio Club has thousands of members in our state that would have to begin paying 6% sales tax when our competitors were not charging it (and providing much less personalized service than we do). We have multiple franchisees in the state who own Brickhouse Cardio Clubs and they would have to begin charging their members 6% and put themselves at a competitive disadvantage (6% in the fitness industry is a HUGE margin). We had no choice but to fight them. What were we fighting exactly? In 2012, the State Tax Department showed up for a sales tax audit. Yea, that’s never good news. And, let’s be honest, the Tax Department rolls into your place with a full sense of schadenfreude. They love feeling that sense of fear a business has when they stroll in the door. See in West Virginia, some health clubs charge sales taxes on their members. Some don’t. Some provide personalized fitness programs, other don’t. Nautilus here in Charleston fought the tax department some time ago and won, they don’t charge their members sales taxes. Others have fought the tax department and lost. I can’t imagine the countless fitness centers that were given the same treatment as us and quickly folded and genuflected when their heard the sound of jackboots marching in their door telling them it’s time to pay up. Well, honestly, as soon as I got the audit request, I knew the tax department was not going to come in and say everything was OK. That’s not the auditor’s job. Without ever stepping foot in one of our Brickhouse Cardio Club facilities (or even really asking about the concept), the auditor determined that we do not provide personalized fitness programs, went back five years into 2007 and banged us with $52,430.25 (plus interest and penalties) in tax assessments based on the Brickhouse Cardio Club business. To show how clueless the Tax Department is, when they were presented with the fact that my company ran Curves from 2007 to 2010 and then Brickhouse Cardio Club from 2010 forward, the collective response was a shrug of the shoulders. They honestly didn’t even realize they were auditing two completely different concepts. Well, wait, how do you know we didn’t meet the requirement of the personalized fitness program if you didn’t even know what our concept was for three years of the assessment. Response? Again, a shrug of the shoulders. So, for the final audit presentation to us, their manager was there. The manager and auditor seemed baffled when presented with the section of West Virginia code (not the sales tax exemption, but a completely separate section) that specifically carved out a sales tax exemption for people who use our personalized fitness programs. Now mind you, theoretically, the concept of the state charging people 6% sales tax on trying to get healthy is ludicrous. It clearly is something 100% of lawmakers would oppose, but understand this was a tax that was NEVER collected. It wasn’t like we were charging sales tax, collecting it and simply not submitting it. We never collected 6% from our West Virginia members, but in the Tax Department’s eyes, who cares? It was owed, so we would have to take it out of any profits we had today and begin charging members 6% for trying to get healthy. So, our lawyers and us went to meet with the Tax Department and their lawyers to show them the code section and reason with them that we likely would win at the Office of Tax Appeals, because… well… the law was clearly on our side. Even their lawyers seemed surprised to find this code section not dealing with sales tax exemptions and specifically dealing with the exempting of memberships for personalized fitness programs. Needless to say, that meeting was 2 hours and about $1,500 of our lawyer’s time that I’ll never get back. Again, a shrug of the shoulders from the Tax Department and off we went to the Office of Tax Appeals. After a multiple hour hearing in 2013 at the Office of Tax Appeals, even the tax department admitted that Brickhouse Cardio Club was the “Cadillac” of personalized fitness programs, but to them, it didn’t matter, we should still have to pay. Why? Well, because they said so. The judge at the Office of Tax Appeals (OTA) ruled strongly and clearly in our favor. He made it clear during the hearing that the Tax Department was wrong. (The positive decision on our side came on Election Day, so at least I won one decision that day!) So, what does the Tax Department do? They appeal it to Circuit Court and enlist another massive state agency, the Attorney General’s Office, to handle the appeal. So now we have not only the might of the Tax Department, but the legal expertise of the Attorney General’s Office fighting against us. Over $52,430.25. Now, never mind that if you added up all the time, effort, appeals, and legal needs of the State’s case as if they were an actual law firm, they likely would have already spent well over $100,000 in fighting this case, if not closer to $200,000. But, these folks are on salary so no worries there, they will just keep throwing more effort and resources, file motion after motion and concoct legal brief after legal brief, to try to bury Brickhouse in legal bills. Unfortunately for any small business, we have to pay by the hour. Ahh, and there’s the rub. The Tax Department knows darn well that most small businesses simply do not have the resources to fight them. So, when they get a small business that actually stands up to them – and one that actually wins in court – they make the effort to do everything they can to bankrupt that company. At any cost. And, that’s what exactly is happening today. We may win in the long run, but they will make it so stressful and so toxic and so painful that it will send a message to everyone who tries to fight them. Fight the Tax Department and they will make it so costly it may drive you into bankruptcy. The choice is yours. In the Legislature, I mistakenly supported the Office of Tax Appeals. It was sold as a way to litigate these complex matters (although our matter is far from complex, it’s pretty straightforward actually which the Judge at the OTA said in his opinion) in a less expensive venue than Circuit Court. Now, I give the ALJ credit and I’m not downing the Office of Tax Appeals (OTA). They do a fine job. They listened to our testimony, the incoherent testimony of the Tax Department, and made a strong and clear determination in our favor. However, if the Tax Department is going to appeal it anyway, then all the OTA does is simply add about $20,000 in legal costs to the process for the small business owner daring to fight the Tax Department. So, my question is this and I think a good reporter needs to determine this. In what percentage of cases that the Tax Department loses at the OTA do they appeal it up to Circuit Court anyway? There are only two options. Either they appeal it regularly which means the OTA process is worthless and simply adds costs to small businesses because they have it fight it out in Circuit Court anyway. Or rarely, which means they simply are targeting me individually because we chose to actually stand up to them. Either way, it’s an unfair process weighted heavily in the Tax Department’s favor. My “prize” for winning at the Office of Tax Appeals? A $20,000 legal bill and an appeal to the Circuit Court that will undoubtedly cost another $20,000. I had kept my mouth shut up to this point, but when I saw the appeal from the AG’s office regurgitating the same tired arguments that were just destroyed at the Office of Tax Appeals, I couldn’t hold my tongue any longer. Someone has to stand up to these guys. Someone has to show that the Tax Department is either targeting people or simply ignoring the OTA process and appealing everything to Circuit Court. Since I left the Legislature in 2009, I have never asked for help from any legislator or even brought an issue to them. But, someone, somewhere has to stop this insanity. I suspect if we win in Circuit Court (which I know we will because the law is clear as day), the Tax Department and AG’s office will appeal it to the Supreme Court. My prize? Add another $20,000 or more in legal bills. Total legal bill? $60,000. Total assessment? $52,430.25. AND… there you have it. That’s the message the Tax Department is trying to send in their battle with me. Want to disagree with us, even when we are clearly wrong? Strap on the legal team and we will drag you through years of stress and torment and cost. If we lose? We will shrug our shoulders, file it away, and move on to the next victim. And your “prize” for winning and defeating the Tax Department? A legal bill that I’m guessing Anthony and Dominic’s kids will finally pay off when cars are zipping through the air, Jetsons-style. Instead of $60,000 being invested in a growing West Virginia business, you have $60,000 in legal bills to fight a Tax Department that knows before ever going to Circuit Court that they will lose. I’m sorry, but there is something wrong with this picture. Something terribly wrong. Either the Legislature needs to step in and eliminate the Office of Tax Appeals or allow small businesses to collect legal fees when the Tax Department loses at the OTA then appeals it up and loses again. At this point, there is absolutely no deterrent for the Tax Department when considering an appeal. Why wouldn’t they appeal? What do they have to lose? But, if a small business wins, they only have another massive legal bill awaiting them when the Tax Department appeals. Something in this process needs to change. Small businesses should be supported. When we started Brickhouse Cardio Club, we didn’t expect a slap on the back from Earl Ray or anything for being the only West Virginia company on the Entrepreneur Magazine Franchise 500. We didn’t expect a slap on the back for being named a Top 50 Franchise for Veterans in USA Today. We didn’t expect any praise from the state. We would have been happy to just have been left alone to build our business. But, we certainly didn’t expect a kick in the teeth from his Tax Department either. That’s exactly what we received. And, if we prevail and defeat the Tax Department? The next small business victim, please step up.
Posted on: Mon, 14 Jul 2014 14:01:26 +0000
Trending Topics
Recently Viewed Topics
© 2015