Meals tax law changes get mixed response from legislators

The General Assembly Building as viewed from Broad Street. (BizSense file photo)

Proposed changes to state law to address city tax collection issues like the ones that have been plaguing Richmond restaurant owners received a mixed reaction from Virginia legislators Tuesday.

Two-thirds of the Senate Finance and Appropriations Committee balked at Senate Bill 294, an amended version of which would allow Richmond and other cities to apply meals tax payments to the tax returns they accompany, rather than to delinquent accounts first as existing law requires.

The bill also would allow city finance directors to waive penalties and interest if it’s determined to be in the locality’s best interest. In Richmond, the accumulation of such fees without notice to the taxpayer has resulted in multiple restaurants receiving tax bills for tens or even hundreds of thousands of dollars owed.

But senators on the committee questioned whether other cities would have to change their tax collection practices for an issue that apparently has only been a problem in Richmond.

Sen. Creigh Deeds (D-Charlottesville), who led the vote against the bill, called it “a hammer aimed at one locality when we ought to be legislating statewide.”

Sen. Creigh Deeds during Tuesday’s hearing. (Screenshot)

“I think we were all embarrassed by what we read about the City of Richmond, and I don’t want to make any excuses for the city, but localities have the ability to fix this problem,” Deeds said. “This is going to affect one type of government, and I just don’t think it’s good policy.”

Sen. Bill DeSteph (R-Virginia Beach), the bill’s chief patron, described the bill as discretionary and optional to cities that wanted to apply it. He maintained that it had been drafted in consultation with the state treasurer’s office, the Virginia Municipal League and the Virginia Association of Counties.

“This is voluntary, so they can administer it if they want,” DeSteph said. “They don’t have to do it this way, but it allows them to do it this way if they’d like to.”

DeSteph was responding to Sen. Adam Ebbin (D-Alexandria), who took a similar stance to Deeds and others in the hearing.

“This impacts other cities besides Richmond differently than the rest of the commonwealth,” Ebbin said, adding the bill would create “a small administrative burden for cities like Lynchburg and Alexandria that utilize a director of finance.”

Deeds motioned for the bill to be passed by indefinitely, meaning the bill could be taken up by the committee later in the session but would die if it doesn’t. The motion passed 10-5.

Later in the day, a House version of the bill – H.B. 1483, patroned by Del. Delores McQuinn (D-Charles City) – was advanced by the House Finance Subcommittee, which voted unanimously to report it to the full committee.

A related bill – H.B. 1535 – likewise advanced to the full committee, which is scheduled to meet today (Wednesday). That bill, patroned by Del. Michael Jones (D-Richmond), would allow discretion on the application of a seller’s commission for businesses that collect meals taxes.

The commission allows businesses to keep a percentage of the meals taxes they collect to cover credit card processing fees used in collecting that tax, but only if their accounts are in “good standing” with the city. Richmond officials have said the requirement has contributed to the high delinquent tax bills seen among restaurateurs in the city.

The Richmond City Hall building. (BizSense file)

The bills are aimed at putting a stop to what restaurant owners say has been a problem in Richmond for years: their monthly meals tax payments being applied to unknown late fees and interest charges that snowballed over time without notice from the city. City officials have maintained they are only complying with existing state law that requires that tax payments be applied to the oldest liability first.

The bills are supported by the Virginia Restaurant Association, which held a press conference last week demanding that Richmond pay back the penalties and interest to affected restaurants. The Richmond-based group was represented at Tuesday’s meetings in the General Assembly Building.

The seller’s commission bill, which the City of Richmond requested, is one of several steps the city is taking to address the issue. It’s also proposing changes to Richmond’s tax policy to address, among other things, interest and late-payment penalties applied on personal property taxes, which are currently assessed a 10 percent penalty with interest applied the first day a payment is delinquent.

The change, through an ordinance that’s set to be considered next Monday, would reduce the penalty to 2 percent for the first month and hold off interest until the following month.

Meanwhile, Brad Hemp, a former co-owner of Brenner Pass and Metzger Bar & Butchery who’s among those who have brought the issue to light, sent an email to Richmond City Council members Tuesday requesting a meals tax penalty amnesty, which he said would go further in addressing the issue than the ordinance.

“I applaud the proposed ordinance that will come up for a vote next week,” Hemp said, adding that its requirement that the city finance department assign meals tax payments as submitted “should prevent much of the problems of rolling penalties going forward.”

“However, the ordinance does not address the hundreds of restaurants saddled with millions of dollars in improper penalties,” Hemp said in proposing the amnesty, which he said could waive all penalties assessed for partial meals tax payments, contending that partial payments in most cases indicate that the rest was put toward delinquent balances without the taxpayer’s knowledge.

City Council is scheduled to consider the ordinance to authorize the changes at its Feb. 12 meeting.