Tom Regina turned himself in.
He did what few Arizona businessmen have ever considered--Regina picked up the telephone, dialed the Arizona Department of Revenue and snitched on himself for not paying $89,000 in taxes.
Regina, a 36-year-old Tucson contractor, has not been diagnosed as crazy. But he's feared as a crazy-as-a-fox businessman whose unusual attack could gut part of Arizona's tax base and turn the state's sorry financial mess into a budget-busting free-for-all.
Regina has forced the revenue department into court in a lawsuit that challenges a tax category that collects some $200 million yearly for state coffers. He not only wants the court to forgive him his back taxes; he wants the tax wiped off the books. "If Regina wins this case, just about every contractor in the state will be marching down here asking for their money back," says Patrick Irvine, the assistant attorney general defending the revenue department.
Regina has battled for six years over a tax you've probably never even heard of--the transaction privilege tax. Put simply, it's a tax on construction. The tax amounts to 3.25 percent on every job in the state. In theory, every contractor who hammers a nail or erects a skyscraper pays the tax. In practice, Arizona contractors pay it and out-of-staters skate, Regina charges, and that gives out-of-state contractors a competitive edge on projects in Arizona.
Nowhere is that edge more significant than on federal construction projects--the plums of the building business--which account for more than half of all major construction projects in Arizona.
The Attorney General's Office admits Arizonans are the hardest hit. It's just more difficult to collect from out-of-state companies, the Attorney General's Office argues, but that doesn't mean Arizona isn't trying.
Yet Regina's suit has revealed two separate DOR policies that discourage tax collectors from pursuing out-of-state companies: An internal memo that collectors took to mean "don't bother," and the agency's reward system that penalizes collectors who waste time trying to get out-of-state tax money.
The suit also has revealed that revenue officials have secretly cut cents-on-the-dollar deals with some out-of-state companies to settle tax claims. The Attorney General's Office notes revenue officials have no legal right to make such deals on their own.
Regina first complained to the revenue department in 1984 and was blown off. Then he went to the legislature and was told to go home. Finally, in 1987, he finked on himself. His long-awaited day in court ended last week in Tucson, and now he's awaiting a decision.
"Out-of-state contractors have been beating us like a drum for years," Regina exclaims. "And they even brag about having an edge. On a $2 million job, they have a $66,500 edge. Well heck, that's our entire markup on a project--between 3 and 5 percent. They aren't paying the tax. We aren't going to pay the tax. We have no choice. If we hadn't done this, I wouldn't be talking to you today. I'd be selling shoes."
Regina claims that out-of-state firms know they won't be forced to pay the transaction tax and therefore deduct that amount from their bids.
One of those bragging is Neil Gardis, a San Diego contractor who's done federal jobs in Arizona.
"A contractor the furthest distance from Arizona within the continental United States has the best chance of coming into the state, bidding a job without the percentage attached to pay the state of Arizona, and walk away with impunity," Gardis tells New Times. "I guess you could call me an offender. I'm one of those people from out of town who didn't pay." Gardis recalls booting a "free-lance bounty hunter" out of his office when the private collector hired by the DOR demanded a tax payment for a small job at Fort Huachuca a few years ago. Gardis, who does federal work throughout the country, says he never pays the tax in any of the approximately twelve states that levy it. "The local contractor bites the bullet," Gardis says. "The out-of-state contractor never puts it [the tax] in their bid. Regina is in a competitive problem. When he competes against out-of-state contractors, the preponderance of out-of-state contractors ignore the [tax] requirement."
WHEN THE REVENUE DEPARTMENT walked into court to claim Regina is all wet, it had to face some of its own current and former employees who tell a very different story.
Revenue auditors said in pretrial depositions that they were penalized for going after out-of-state contractors and were told in a memo not to try.
"We just had to leave them alone and would not be allowed to do [our jobs to collect]," testified Gene Strizek, a former DOR field auditor. "It put the auditors in a very awkward position and certainly was not equitable enforcement of the tax laws."
Dennis Ramsey, an auditor supervisor with the department for the past twenty years, testified that this amounted to preferential treatment for non-Arizona companies.
"You as well as anybody else in that department knows there's preferential treatment going to the out-of-staters, and because of the preferential treatment they can come into the state of Arizona; they can come right here and make a bid on a contract up to 5 percent less than an in-stater, correct?" asked Regina's attorney, Pat Durazzo. "In general, yes," Ramsey answered.
Ardell Puetz, a DOR auditor, swore the revenue department's employee-rating system added to the mess. He said catching out-of-state contractors delinquent on their tax bills was as easy as "falling off a log." But auditors wouldn't spend their time on them because after they caught the tax evaders the owed monies were written off as uncollectible or the department would collect pennies on the dollar.
Auditors, Puetz testified, were judged by the amount of dollars they brought in, and collection from out-of-staters was rare. This made the auditors look bad. So, employees had an incentive to use their limited time to go after in-state people, Puetz said.
Strizek called it "an area of frustration." "The auditors saw it as a blow against them," he testified. "They were out there doing their job coming up with these assessments, which were valid. They were backed up by statute. And the next thing we know, they're being settled for 20 cents to 50 cents on the dollar or just being wiped out entirely and nothing being collected."
Former DOR investigator Fred Rodriguez said the discrimination policy started at the top. "It was, I believe, a policy that was implemented by the director's office, and it flowed down to the assistant director, and it was handled very confidentially," he testified.
The confidential 1985 memo reinforces that idea. Barbara Dickerson, then-director of taxation, wrote the two highest-level audit supervisors, alerting them there was a problem with the state's transaction tax on work done in Arizona before May 2, 1984. She told them to "avoid audits where the transactions with the federal government constitute the primary business activity" of the contractors.
According to their testimony, auditors took the memo as department policy to lay off out-of-state firms. Puetz said he thought that was the department's policy up until the time he testified on April 20, 1990. Other auditors said they thought the policy affected the tax years 1982 to 1988.
Strizek said that until 1987, when he left the department, even initial assessments against out-of-state contractors weren't being done as a result of the policy stated on the memo. And he said the DOR had "absolutely not" collected taxes from out-of-state contractors with the same aggressiveness as against in-state contractors.
DOR deputy director Craig Cormier said the department would not answer any specific questions by New Times about the Tom Regina lawsuit.
In court records, however, DOR officials and their attorney maintain the memo was misinterpreted by their auditors and collectors. It only meant to say, they argue, that a 1985 court decision had left Arizona vulnerable about collecting the tax from anyone--in-state or out-of-state companies--on work done before May 1984. So it wanted auditors and collectors to know that DOR was not going to pursue tax bills prior to that date. Because of that court decision, in 1985 the Arizona State Legislature clarified the transaction-tax law, making it clear that contractors doing business in this state were responsible for the tax.
"The department decided for periods prior to May 1984 they would not dispute anyone who said the tax didn't apply," Irvine explains. "If certain auditors gave [the memo] more meaning than it contained," Irvine says, "that does not serve to change the clear, written policy they were obliged to follow."
"There may have been actions taken in individual cases which appear to favor out-of-state taxpayers, but nothing which rises to the level of department policy," Irvine told the court. "Plaintiffs cannot be excused from paying their rightful tax because of errors in judgment, oversight, or even negligence on the part of employees of the department."
Irvine insists that the auditors are frustrated because the state isn't getting as much as the auditors think it should get.
"The auditors are like policemen," Irvine says. "They are the ones that go out and make the arrest. Policemen are never happy with the county attorney [about how cases are prosecuted]. The department has a lot of discretion by law in enforcing the tax laws. One of its functions is to collect revenue. The other is to enforce the law. And it has to balance those. Like a police department with a limited number of resources, you can only do so much. You try to be fair to everybody. But at times, you may focus on particular areas."
WHEN TOM REGINA DECIDED the revenue department was lying to him, he set up his own "sting."
In 1988, Regina called a friend who owns a contracting company in a nearby state. Regina asked him to bid on a federal job in Arizona. The friend would shuffle the paperwork, but Regina's company would secretly do the job. Regina wanted to see if the state would bother going after the friend's company for the taxes. (Regina asked that the name and origin of his friend's company not be revealed until he presents the information in court.)
The phony company sent in all the paperwork, Regina's company finished the job, more than $1 million was paid for the work, and everyone waited for the revenue department to come calling for its $33,000 tax share. But the state never came knocking.
Regina says he eventually called the revenue department and said, "Hey guys, I know an out-of-state firm that didn't pay its tax." He found the revenue department didn't even realize his friend's firm supposedly had been in Arizona building a project.
"So DOR went up and they did an audit," Regina remembers. "That was two years ago and they have not received a payment to this date. But, the DOR and the AG's office won't get off their lazy butts to collect it."
With Regina pulling the strings in the background, the friend said he wouldn't pay the full tax bill, but asked what kind of "deal" DOR officials were willing to cut. They were willing to "waive" the penalty fee and, after the contractor said his business was ailing, even reduce the taxes, offering to settle for 30 cents on the dollar. That offer is pending.
All the while, Regina was collecting the paperwork from DOR to use in his lawsuit. He says revenue officials to this day have no idea he's involved with the out-of-state contractor.
Regina thought the ruse he orchestrated proved how easy it was to escape the tax. But he still needed to show there was massive tax evasion.
To do that, he went to the same business reports that DOR uses to assess taxes on contractors. The reports log every federal construction job in Arizona. Regina then looked for which out-of-state contractors coughed up taxes. The first place he looked was the list of contractors who held a state tax license--sort of a social security number for companies. If contractors weren't bothering to get the license, then Regina figured they wouldn't bother paying their taxes. Regina was shocked to find, according to DOR's records, that 70 to 80 percent of the out-of-state contractors he knew were doing business in Arizona didn't even have a license.
In his initial inquiry in 1987, Regina picked three groups of contractors who had been paid $207,207,000 by the federal government for construction jobs, according to the business reports. His research found the majority had never been licensed and never paid. DOR officials, in written responses during a two-year period, said the group had paid a total of $455,000 in taxes.
Regina responded with some simple calculations to show those companies owed $6,734,000 in taxes. Only then did the department change its tune, claiming there'd been a mix-up and on further review, all the companies had paid all their taxes.
Regina contends the department really did collect only $455,000 from those firms, and came up with the mix-up excuses only after being caught. He complains the department is hiding behind the shield of confidentiality and gives whatever numbers it wants to without having to prove anything.
New Times ran up against the same wall. The paper compiled a list of 136 contractors from 33 states who had built federal projects in Arizona in 1987. DOR refused to supply information about whether any of those contractors held the required Arizona license that year. It would only reveal which companies currently hold a license, but refused to verify if those firms had been licensed at the time of their projects.
When asked directly how much tax was paid by those contractors, DOR officials said that information was not available because it was confidential.
Ian McPherson, an assistant attorney general, says the department does not have to disclose licensing information except in a Tax Court case under orders from a judge.
But even the courts have a hard time prying information from the DOR. In 1988 a Tucson judge ordered the department to give Regina information on licenses and tax collections. DOR ignored the order. When Regina's suit was transferred to Tax Court Judge William T. Moroney, another disclosure order was issued. DOR refused yet again, still singing "confidentiality." Moroney then specifically told DOR what it must reveal. The revenue department finally coughed up information on August 2.
Regina originally wanted information on 4,000 out-of-state contractors, but eventually agreed to probe only 354. The information DOR turned over showed only 155 ever had held an Arizona license. Regina says that means almost 57 percent of those contractors did not pay their taxes. Those unlicensed companies had earned $280,189,000 on federal construction projects in Arizona from 1985 to 1989. They owed Arizona $9,106,143 in taxes that weren't paid, he contends.
Regina also found eighteen companies on the list had canceled their licenses in 1985 and 1986. Those firms had received $78,504,000 for federal projects in Arizona after canceling their licenses and collectively owed $2,551,380 in unpaid taxes.
Regina contends that even the remaining 181 companies that were licensed didn't pay their full tax share.
Patrick Irvine of the Attorney General's Office says Regina can make all the calculations he wants, but he's wrong. Irvine insists the list actually proves that out-of-state contractors made "substantial tax payments." "It cannot be disputed that the department does collect taxes from out-of-state contractors," Irvine says. "Regina is upset that we're not collecting enough."
Irvine maintains that it's not as black and white as Regina is making it out to be. "In our opinion, the information as presented is essentially worthless," Irvine says. He maintains there are at least three reasons for licensed contractors not to show up on the list provided to Regina. If the company were a subcontractor on the job and not the general contractor, it wouldn't owe the tax in the first place. Or if either the address or name of the firm wasn't identical to the information in DOR's computer, it wouldn't show up as being licensed.
"That's just not accurate," Regina says. He maintains that if that's the explanation DOR will rely on in court, the department's in for a big surprise, since his information is coming from the same reports DOR uses.
"LET'S MAKE A DEAL." Former chief DOR investigator Fred Rodriguez contends that was the attitude of revenue department honchos when they approached out-of-state contractors.
"It was outrageous," Rodriguez tells New Times. "They would cut deals with out-of-state contractors without even finding out if the taxes were collectible--and it was deliberate. This practice was common."
Take the case of Harris Construction, an Idaho contracting company that was helping build the Central Arizona Project canal. The company did not voluntarily pay its tax bill and according to DOR records, an audit showed it owed $133,517. The department also assessed a $40,629 fine. The auditor wrote the Attorney General's Office and recommended filing a lawsuit to collect. Frank Migray, an assistant attorney general, filed a lawsuit in June 1986 against the company.
After the suit was filed, DOR officials cut a deal with the company without Migray's knowledge. According to a confidential DOR report, Harris Construction had sent a letter saying the taxes would bankrupt the company. The DOR replied by sending a letter telling the company that if it paid $70,000, the department would forgive the rest of the debt. On July 17, the department sent a letter to the company acknowledging the $70,000 payment and said the company could skip on the rest. The problem with the deal was that Arizona law forbids such deal-making practices, unless the Attorney General's Office approves it. But in this case, the deal was made without Migray's knowledge and while he was still preparing for trial, according to the report and deposition testimony.
Rodriguez, who investigated the Harris case while at DOR, says the department never checked to see if the company was really facing bankruptcy, ignoring the department's own cardinal rule: Make them prove they cannot pay before settling for less than what the state is owed.
Irvine says he cannot comment on the case because it is confidential taxpayer information. But, he did stress there are considerable--some would say insurmountable--problems in getting out-of-state companies to pay.
"It should surprise no one that it is more difficult to collect out of state than in state," Irvine says. "Within Arizona, the department may use a variety of collection procedures available to a government. These procedures are not available to the department in other states and collection may only be pursued after an Arizona judgment is obtained and recorded in the other state. The department does follow this procedure with taxpayers. Judgments are obtained and out-of-state collection activities are pursued. However, they do take more time, and taxpayers therefore have more opportunities to hide assets or otherwise avoid collection."
Another problem, he notes, is that most states bar the Arizona attorney general's lawyers from filing liens. "I can't go to Utah and enter their courts to seek a judgment because I'm not licensed to practice there," Irvine says. He notes Arizona does hire attorneys in other states to handle tax cases.
But Irvine argues that just because they can get away with not paying their taxes, that doesn't mean the state isn't entitled to try to collect.
"That's the essence of this case," he says. "[Regina] argues that if you can't get the taxes from anyone that cheats, that means you can't tax anyone. We just don't believe that's true. There is no rule on tax collection that if you don't collect against everybody that you can't collect against anybody. If that were the legal rule, the system wouldn't work."
Regina argues that DOR's "discriminatory" system on this tax doesn't work, either. He claims Arizona contractors can't continue under a system that hands an unfair advantage to their out-of-state competitors. And DOR will regret it. "They're killing the chicken to increase egg production," Regina says. "What will happen is in-state contractors will continue to be starved out of federal work. And if that happens in a downturn in the economy when contractors are dependent upon federal work, it will be a contributory factor to Arizona contractors going out of business. Then, who will be paying the tax?"
Regina proudly admits he finked on himself to prove that out-of-state builders are walking away from their bills.
"If Regina wins this case, just about every contractor in the state will be marching down here asking for their money back."
"It cannot be disputed that the department does collect taxes from out-of-state contractors. Regina is upset that we're not collecting enough."
"There is no rule on tax collection that if you don't collect against everybody that you can't collect against anybody.
