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The ’90s were rough times for Edge and Wet, a combo Capitol Hill bar and strip club operating under the same roof. The club wasn’t very fastidious about keeping the books and fell behind in its payments to tax authorities and suppliers. By early 1996, it had filed for bankruptcy in federal court.
During court proceedings in the summer of 1997, the proprietors of Edge and Wet made a novel argument to minimize their $800,000 in liabilities vis-a-vis one of their most important creditors, the District government. They seized on a provision in the D.C. code exempting admissions to artistic performanceslike, say, the ballet or a string quartetfrom the city’s sales tax.
The club argued that its particular brand of performance artthe strip showwas every bit as worthy of the exemption as those other kinds of art. In a ruling that shocked few, the bankruptcy judge dismissed Edge and Wet’s creative interpretation of the tax code.
These days District businessesespecially restaurants and barsare finding little wiggle room in their dealings with tax authorities. Dating back to the installation of Anthony Williams as D.C.’s Chief Financial Officer in 1995, the Office of Tax and Revenue (OTR) has beefed up its targeting of tax scofflaws and improved collections strategies. And when tax problems have forced businesses into bankruptcy, OTR and the city’s Corporation Counsel have refused to take a back seat to other creditors. The result is a richer city treasuryOTR has doubled its delinquent collections in the past two yearsand a wariness among local businesses when it comes to rendering unto Caesar in the District.
“There won’t be much of a need to raise taxes if they collect the ones owed to them in the first place,” says Andrew Martin, a D.C. accountant who assists businesses in their dealings with city tax authorities.
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Anyone who frequented Rumors at 19th and M Streets over the past decade knows just what commodities the downtown dance club and restaurant doesn’t skimp on: beefboy bouncers, who stand poised to eject slobbering riffraff on cue; overplayed dance tunesthink “Dance Dance Dance!”; and lots of romaine lettuce for salad-seeking lunch crowds.
The club’s managers, however, apparently don’t place as high a priority on paying their city taxes. After Rumors filed for bankruptcy in March 1997, the District filed a tax claim against the club for over $1 million. Over 90 percent of the liability came in sales taxes, some of which dated all the way back to 1990.
Rumors’ tax liability could have kept D.C.’s recycling program running for a few months or paid the yearly salaries of the 13 D.C. councilmemberswith about $27,000 to spare.
Rumors’ delinquency doesn’t reflect well on the the city’s collection systems of the early and mid-1990s, when the club piled up much of its tax debt. Asked whether a city business could skate that long under OTR’s current management, Martin responds, “No way.”
“We have put more people on collection work,” says Lee Monks, director of OTR’s compliance operations. Whereas the department pulled in $26 million in delinquent collections in fiscal year 1996, it reaped $52.8 million in fiscal year 1998. Much of the productivity boost, says collections chief Don Walsh, has come from the department’s 16-employee tele-collections office. The staffers work exclusively on the phone, apprising scofflaws that the authorities are aware of their outstanding balances. In all, says Walsh, OTR has 80 staffers collecting taxes.
Management at Joanna’s, an M Street strip club, figured out just how long it could hold out on the city’s tax collectors. A note in the club’s 1996 bankruptcy filing states clearly why it took the plunge: “Debtor filed for relief under Chapter 11 when the District of Columbia closed debtor’s business for failure to pay its taxes.”
Tipping restaurants and bars into bankruptcy is a great image booster for the District. The longstanding practice among such cash-intensive businesses is to service critical accountsbooze companies and employees, for startersand to hold the tax folks at bay.
“Liquor suppliers fax around bounced checks,” says Darrell Clark, a bankruptcy lawyer with the downtown firm Morrison & Hecker. “If you stiff one of them, you’ll be on a COD basis from that point on.”
And once the clubs file for bankruptcy, lawyers for the District are taking extreme measures to teach them how seriously they should take their tax bills. Julia Sayles, head of the Corporation Counsel’s section on taxes and bankruptcy, says businesses with poor tax-compliance histories are no longer allowed to send their checks in the mailif they want to keep their doors open. “We have them walk their payments right into the office,” says Sayles, referring to companies in the midst of bankruptcy proceedings.
Sayles’ office applied the walk-in requirement to Edge and Wet and is currently imposing it on the managers of Escandalo, a bar on P Street NW. “It helps them develop the discipline,” says Sayles. “We don’t want them using sales tax they collect from the customers for other purposes.”
Tax attorney Andrew J. Kline says that walk-in requirements and other practices of the folks downtown are part of a trend to which D.C. businesses are slowly adjusting. “In the past few years, they have taken a much harder line with respect to payment arrangements,” says Kline.
No matter what kind of business you run, you’ll have to stiff OTR pretty hard to get the treatment accorded to Zalman Fishman. In 1988, Fishman, along with his sister, Rebecca Fishman, opened Fifth Column, a club that eventually turned into the headquarters for the local Eurodisco set.
The Fishmans did everything necessary to make their club a success, including selecting a hip location in old downtown, instituting a strict dress code, and outfitting the place with a sleek decor. They forgot one part of the equation: paying taxes.
“I don’t think they ever made a single payment,” says Clark.
The club’s record of nonpayment eventually prompted an investigation by District tax officials. To solidify the city’s case, undercover tax sleuths descended on the bar to estimate an average night’s take and verify that the club was not putting its sales taxes in escrow. The authorities estimated that the establishment owed the city over $900,000 for its eight years in operation.
Under the weight of claims from the District and various other creditors, Fishman’s company, Entertainment Concepts Inc., filed for bankruptcy in November 1995. The club closed for good in February 1996, as bankruptcy officials auctioned off its assets and paid creditors at least 50 cents on the dollar. The D.C. government got $500,000 in back taxes.
It didn’t end there for Fishman, who was prosecuted for tax fraud and sentenced to three years’ probation and 300 hours of work repairing D.C. public schools.
“They basically made Zalman the example for every other business in town that didn’t pay taxes,” says Clark.
In the new era of prohibition on tax delinquency, bars and clubs are still free to pour on as much whiskey and disco as their customers can toleratethey just have to make sure the District gets a cut. CP