Big deposit, no return

At a time when state budget problems are causing widespread pain, here's one more piece of bad news: California owes millions of dollars to small-business owners. The Board of Equalization, the ultimate authority on California tax law, requires roughly 30,000 businesses to pay a returnable tax security deposit. However, a major agency oversight has delayed tax refunds for thousands of small businesses.

Under state law, certain businesses can be required to post and maintain a tax security deposit with the state's sales-tax agency for their first three years of operation. The security deposits, which range from $2,000 to $50,000, act as collateral against any potential tax liabilities. State law requires the release of security deposits for businesses with perfect tax payment records for three years.

After receiving a call from a San Diego business owner who paid the security deposit, I launched an internal investigation into the state board's refund procedures and discovered a systemic problem at the agency. Out of California's $436 million in tax security deposits, more than $38.8 million in refunds are eligible for release but are being held by the agency. In my district alone, which represents one-fourth of the state, security deposits worth more than $4 million were improperly withheld from more than 600 businesses. Some deposits were withheld for more than four years.

Why is this happening? Unlike that income tax refund your family anticipates and budgets, tax security deposits are held for so long that many small-business owners forget they exist -- and don't remember when their refund is due. The tax security deposit restrictions are buried in the mountain of forms and paperwork in a seller's permit application. New businesses, especially those with nonnative English-speaking owners, often fail to understand the deposit's terms and conditions.

But a small-business owner's right to that refund shouldn't be dependent on his or her good memory. The Board of Equalization knows the names and phone numbers of every affected business because these businesses continue to pay their taxes. The agency should be taking proactive steps to get refunds to small businesses, but our investigation indicates that staffers do not clearly understand that they are required by law to get these refunds back on a timely basis. In one case, the agency contacted an Orange County businessman a year after his refund was due -- not to refund his deposit but to audit his business. Even after a flawless audit, the agency still failed to return his tax security deposit.