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Revenue Dep’t Boat Bungle Prompts Call for Tightening Tax-Collection Rules

A dustup earlier this year between a Murfreesboro man and the Tennessee Department of Revenue over taxes on a home-built boat has led one lawmaker to consider reforming the state’s tax laws.

The problems began for Johnathan King, 39, when he attempted to register a 14-foot boat, which he had built in his garage for personal use, with the Tennessee Wildlife Resources Association. The boat, made of plywood, fiberglass overlay and epoxy, had been built with materials purchased locally, a motor purchased in Hermitage four years ago, and plans purchased over the Internet, King said.

“We were informed that we had to provide documentation, receipts and several other things on the value of the craft, and what it would be taxed at, and then the cost of building it,” King said. “And that’s really what kind of set off the debate on the tax issue, which prompted the Department of Revenue to send us that letter indicating that we were dealers.”

The term “dealer” is used in the sales and use tax laws to describe anyone with an obligation to pay tax, whether it’s on the sale or the purchase of an item, according to a statement from the Department of Revenue: “It is not the Department’s position that an individual who builds a boat from a kit or component parts is in the business of selling boats. However, tax is due on the purchase of those materials, just as it is due on any other purchase.”

The department sent King a bill amounting to over $500 for the estimated taxes on his boat, which included sales and use tax on the materials used to build the boat, as well as the threat of a lawsuit if he did not pay. King, a former employee of the Internal Revenue Service, has since gotten the bill reduced to $40.

King’s case also attracted attention from Capitol Hill.

Rep. Joe Carr, R-Lascassas, King’s representative, said the law governing King’s tax case is overly broad and ambiguous and gives state tax collectors too much wiggle room. Carr says the state should not have compelled King to pay the tax on the boat since he had already paid sales taxes on the materials.

“That’s just an example of an overbearing bureaucracy that has too much latitude with regards to how a statute or regulation can be interpreted,” Carr said.

King agrees: “I just can’t believe nobody has put their feet to the fire before now. And they still don’t really have their feet to the fire.”

The use tax, which was enacted in 1947, is used by the state “to complement the sales tax by taxing merchandise purchased from out-of-state sources that do not collect the state’s sales tax,” according to the Department homepage. The tax exists in order to protect local businesses from “unfair competition” from out-of-state merchants who don’t have to collect the sales tax.

King, who had a previous dispute with the state over a $650 tax bill on his corporation, calls the Department’s methods “thuggish at best.”

Carr, who was unable to file a bill in time to address the issue last legislative session, has said that if he is re-elected he will take the issue back up next session. He intends to file a bill to revise the wording of the state’s tax laws as to who is required to pay taxes as a dealer, as well as who is not, in order to prevent any future misinterpretations and problems for Tennesseans.

“That’s the silliness of some of these regulations, and we’ve gotta deal with it in, I think, a fairly forceful manner,” Carr said.