Capital Goods - November 2010

Hoyle’s rules
By Scott Mooneyham

Now David Hoyle gets to see what it’s like on the other side. For more than a decade, he has been one of North Carolina’s most powerful legislators. As the longtime co-chair of the Senate Finance Committee, he has been in the middle of most of the recent debates over tax policy, but he recently decided to give it all up, opting not to run for another term. Then the unexpected happened. Frustrated by a series of politically unpopular decisions coming from her Department of Revenue, Gov. Beverly Perdue came calling. She more or less sacked Secretary Ken Lay (not the Enron guy) and persuaded Hoyle to take the job. It’s an interesting choice — one that promises to offer plenty of entertainment for political watchers — for a variety of reasons.

Hoyle at times has been among the department’s harshest critics, even though it has been run by fellow Democrats. Then again, Hoyle is hardly a typical Democrat. In Connecticut or Massachusetts, he’d be a Republican. A developer with worldwide business interests, he was consistently ranked among the state’s most business-friendly legislators. A few years ago, he took on the department when it was cracking down on sales-tax collections from bakers, cabinetmakers, interior designers and other small-business owners. They claimed the tax man was using broad interpretations of the law to force them to collect the tax for services instead of goods. Hoyle helped rewrite the law to win concessions for them.

But he’s not the champion of business everywhere. More recently, he led the charge to try to force Seattle-based Amazon.com and other out-of-state Internet retailers to collect North Carolina sales tax. Amazon countered by ending an affiliate sales program with North Carolina-based businesses. Hoyle’s attitude: Let ’em leave. Then when Amazon sued: Let ’em sue. He argued that the state had a responsibility to its brick-and-mortar merchants and needed to treat all retailers the same. Out there on the West Coast, some execs may not be so happy with this development at the North Carolina Department of Revenue. But Hoyle wasn’t brought in to make out-of-state taxpayers happy. It’s the folks back home that Perdue needs to placate. Under Lay, the Department of Revenue had made more than a few enemies.

Of course, nobody likes paying taxes or, for that matter, the tax man. Going into the job, Lay, a former Bank of America executive from Charlotte, knew he wasn’t entering a popularity contest. Whether it was his fault or that of others, his agency hit some well-publicized snags that angered large groups of taxpayers. The worst was a policy change in response to a 2007 law that could have meant residents who mistakenly overpaid their taxes would never receive refunds. Lay explained that he was trying to clear out a backlog of tax cases going back to 1994. Perdue said she was “incensed,” even though two lawyers close to her apparently signed off on the policy. She stopped the change in its tracks, though some taxpayers will have to wait for the legislature to act next year before getting back their overpayments.

Lay also went at it this year with prominent business lobbyists and Charlotte Sen. Dan Clodfelter — the other Finance Committee co-chair — over how the department was applying penalties for delinquent corporate taxpayers. Lay contended that the agency needed the penalties to force to the negotiating table re- calcitrant taxpayers bent on hiding income; business lobbyists complained that the penalties lumped together the worst offenders with unintentional ones. Clodfelter compared the agency to a traffic cop pulling a speeder on a road with no posted speed limit.

Hoyle would do well to remember that Lay’s troubles came less than year after he and his agency had become heroes at the Legislative Building and within Perdue’s office. Producing $277 million in unexpected revenue — the result of a tax judgment against Wal-Mart and settlements by other companies who had used similar creative accounting — tends to do that. Doing it in the midst of a down economy might make you look like Warren Buffett for a day.

But that’s the balancing act Hoyle faces. He can make his buddies in the corporate world happy with favorable interpretations of tax law. In doing so, he might keep his old pals in the Senate from feeling any heat from business lobbyists. He might even keep his new boss from having to field their phone calls. So Perdue and those legislators will be happy awhile. Then they’ll start looking at the state’s bottom line, which is sure to be pretty ugly next year. They’ll start asking Hoyle, “What have you done for me lately?” Well, Mr. Sec- retary, what have you done?

Scott Mooneyham is the editor of The Insider, www.ncinsider.com.