Local Hero or Tax Cheat?
On the morning of Thursday, January 17, my business -- an ice cream store called Toscanini's in Cambridge, Massachusetts -- was closed by the state for nonpayment of taxes. Two state troopers and two stone-faced officials from the Department of Revenue arrived with a court order. They let me and my sister Mimi (who is my partner) remove a few computers; then they changed the locks on the doors and affixed to the windows a Day-Glo sticker that read: "SEIZED." Mimi and I stood for a few minutes on the sidewalk, stunned. Then we went off in a daze to a friend's house so we could use telephones and the Internet. It was the start of a week that was by turns frightening, embarrassing, and deeply moving.
I had come to Boston in the late '70s to finish college. I never graduated, but I did get a job as the nighttime cleanup guy at an ice cream shop. In time, I was promoted to server, and then I was taught to make the ice cream. Eventually, I decided to go out on my own.
Toscanini's opened in 1981, in Cambridge's Central Square, near the Massachusetts Institute of Technology. (The name was suggested by a former partner whose grandfather, a musician, had played for Arturo Toscanini.) The area included two gentrifying neighborhoods, two housing projects, and old industrial buildings that were converted over time into offices.
From the beginning, we emphasized quality, customer service, and a sense of place. We used ingredients from other countries and cultures -- nocciola and gianduia from Italy; khulfee, cardamom, and saffron from India. We came up with flavors like tiramisu and mango-Guinness. (That last flavor sounds horrifying to most Irish but is popular with people from Barbados.)
How the store looked and how customers felt when they walked in the door were very important to me. A key part of this was music. Over the years, employees helped us put together a nice soundtrack that featured an eclectic mix of jazz, opera, New Zealand pop, any kind of British music, and even Balkan choral singing.
Toscanini's got off to a good start; it quickly built a following in the neighborhood. As time went on, our reputation grew. People magazine hailed our vanilla ice cream as the best in the U.S. The New York Times went further, proclaiming that Toscanini's was "regarded by lactophiles as the best ice cream in the world."
As is often the case in business, a little success can be a dangerous thing. Within six months of opening, I was urged by customers and friends to add new stores. It was an impulse I resisted. For many years my goal was to have a single, extraordinarily busy location like Pepe's pizza in New Haven, Connecticut, or Ted Drewes Frozen Custard in St. Louis or the Salt Lick, a barbecue restaurant near Austin.
Toscanini's never quite achieved that goal. We were often busy but never extraordinarily so. As the years passed, Drewes and the Salt Lick opened additional locations, and with some trepidation, I decided to expand, too. My second store, located inside MIT's student center building, was probably my favorite, because it was such a part of the MIT community. The school had always meant a lot to Toscanini's. A survey of students and faculty had ranked us as the community's favorite off-campus business. Right before we opened on campus, in 1987, a student wrote a paper on our plans. He estimated that we would gross $1 million a year in the new location.
It didn't work out that way. That store was busy Monday through Friday when classes were in session, but it was never crowded at night or on weekends, and it was positively dead from December 21 to February 5, when MIT had a long winter break. Worse, MIT doesn't have much of a summer school. I worried that I was running the only ice cream shop in the country that experienced a decrease in sales during July and August. After a decade of mediocre results, I closed it down.
My expansion plans could have ended there, but they didn't. I raised $200,000 from friends and family and began to scout new locations. People had always suggested that I open a store in Harvard Square, and finally I did. It was a small, 500-square-foot nook directly across from Harvard Yard. Next, I took over another business, a coffeehouse called the Someday Café. Between these two new stores, we added $10,500 to our monthly rent. We also started selling pints of ice cream through Whole Foods in New England.
The complexity of managing multiple locations and a wholesale division was more than I had expected. Supplying the different stores was a problem that should have been easily mastered, but I never created the systems necessary for what business schools call multiple-unit operation. I found myself spending much of my time bicycling around the city or riding the subway. I wasn't making ice cream anymore, and I seemed to be constantly telling workers not to play death metal, speed metal, or gangsta rap. My problems seemed to multiply, and I had the uneasy sense that the stores were wandering away from an intangible ideal that I deeply valued.
I could give you plenty of excuses for what happened next. Our margins were low to begin with, which meant that when our costs went up, we sometimes slipped into the red. If I had one underperforming store, I would have had enough cash flow to get by. But with two underperforming stores, I had no margin for error. Because we constantly flirted with unprofitability, and because I had virtually no securable assets -- I live in a rented apartment -- my bank was unwilling to lend me money.
The bottom line is that, in the day-to-day craziness of running a business that was in danger of going off the rails, I missed tax payments -- both employment taxes and my state meals tax. When it came to paying the state on time or making payroll and paying the milkman, I felt I had to worry about taxes second. Over a five-year period from 1999 to 2004, the total amount I failed to pay was $177,000.
Digging my way out of debt was difficult. Businesses like mine are at the mercy of commodity price increases. Over the past few years, dairy costs have risen 18 percent. Chocolate prices have nearly doubled. So has the price of paper products like napkins. The competition for workers, even in the food services industry, has become intense, driving up labor costs. And health care is a killer: When I first started providing health insurance to every employee who worked more than 30 hours a week, my monthly cost was $80 per person. Today it's $258.
Some people suggested that I declare bankruptcy, pay off my taxes, and move on, but I was too stubborn for that. I liked running the business too much, and I liked the place I had created for myself in the world. I didn't want to admit that it was in danger of failing. I also felt that if I rolled over I would be leaving my financial backers in a bad position.
As my debt mounted, the state put a series of five liens on my business. To keep from falling further behind, I contracted with a payroll services company, and soon I was making all of my current tax payments. Now I had to work on those back taxes. The state was willing to work with me, especially because I wasn't adding to the debt I owed. But the interest and penalties compounded rapidly. I can understand why: The state doesn't want to be used as a bank. Though I made regular tax payments, my debt grew like kudzu.
Two years ago, my sister Mimi came aboard to help me run Toscanini's. She had managed a number of large white-tablecloth restaurants, and now she worked ferociously to understand and resolve our problems. We closed the Harvard Square store and the café and met with the Department of Revenue to negotiate a payment plan. By this point, I had paid $187,000 to the state -- the original bill and then some -- but because of penalties and interest, I still owed an additional $167,000. We thought that at least $50,000 of the assessments were incorrect and filed for an abatement.
Negotiations dragged on through the summer of last year and into the fall. At some point, we realized we had not heard from the Department of Revenue in a while. Mimi and I decided to let sleeping dogs lie. Spring was just a few months away, and our sales rise with the thermometer. We figured we could resolve the matter then, when our finances were on the upswing. When the state arrived to padlock our doors on that January morning, I realized my mistake.
The Department of Revenue officials told us that they didn't want to seize the business and that if we made a major payment, we could settle the case that very day. But that was easier said than done. A few friends generously offered to donate money to help us. But my sister and I had little savings, and with the business shut down, we were worried about covering our own day-to-day expenses, never mind making a balloon payment on back taxes.
My sense of embarrassment and humiliation grew hour by hour. I felt like the captain on the Exxon Valdez. How had I lost control? By my actions and inactions, I had placed in jeopardy the sum of many years of hard work on my part as well as the contributions made by employees. Expansion was possibly a good idea, but I had executed my plan in the worst possible way. I felt like I had let down my customers and my financial backers. That night, it was not easy to fall asleep.
The next day, Mimi and I contemplated our course of action. We needed to get in touch with family, friends, potential investors, and vendors. At the same time, the press was alternately eulogizing and gang-tackling us. Boston has two major daily newspapers, two major weeklies, lots of television and radio stations, and dozens of college papers and Internet start-ups. All of them wanted to write about Toscanini's, it seemed. In the midst of great confusion and near panic, we received a few offers of help, including some pledges for cash contributions. It was then that Mimi called Sam Mehr.
When he is not studying at the Eastman School of Music in Rochester, New York, Sam makes ice cream at Toscanini's. He started working at the business when he was in high school and picks up shifts when he is back in town on school vacations. Sam invented a number of our flavors, including Blue Lemon. He also serves as our IT guy. And as it happens, he is an experienced fundraiser. A few years ago, he raised $40,000 to create an endowment for his high school music program.
Mimi told Sam about the situation and that some people had offered to donate money to help us reopen the business. The best way to do this, Sam said, was to create a website. He suggested we set up a PayPal account, linked to the site, to facilitate transactions. I was embarrassed at the idea of taking donations, but then my brother Joe told me to relax and let people be nice to me. So Sam went ahead and created the website. In no time at all, we had raised $500. By the end of the first day, $3,000 had been donated. After two days, we topped $6,000.
Though this was heartwarming, I wasn't sure we were going to make it. And I didn't quite realize that the website would become an open forum for the Toscanini's community. Many of our donors posted comments thanking us for coming up with great flavors like Burnt Caramel. But other people left angry notes. "I think it is outrageous to not pay your taxes and then have other people pay for it. Shame on you Gus…" wrote one person. "I don't see that it's the public's responsibility to pay an individual business owner's taxes," said another. (See Feedback Comes in More Than 100 Different Flavors.) These statements were hard to ignore and played into my growing sense of fear and self-doubt. I worried that every encounter on the street would elicit a reproach from a stranger or a friend or a former customer. The stress was incredibly high and would peak when I tried to sleep.
All of this happened just before the Martin Luther King weekend holiday. State offices were closed on Monday, which meant that Mimi and I couldn't do anything that would allow us to reopen until Tuesday morning. That Sunday night, I made plans to meet some friends at Gandhi, an inexpensive Indian restaurant not far from my padlocked business. With zero income and negligible prospects, I worried about spending money on even a modest dinner out. The streets of Cambridge were nearly empty on that wintry Sunday night. It was easy to find a parking space for the large freezer van I drove around. As I locked its doors, a street person approached me. "Hey, man," he called out. "You got any damaged pints in that truck?" "No," I said. "I don't have any ice cream." I had been locked out of the store for four days. If I wanted ice cream, I would have had to go to Whole Foods and buy a pint.
Sensing my mood, he changed tack: "My name's Anthony," he said. "Nine years ago, you gave me a pint. You got to get back. Remember…Anthony." Between that encounter and dinner, I started to feel better. Around midnight, a friend from Washington, D.C., called to see how I was doing. "It's a good day in the lifeboat," I joked. "There aren't any sharks circling; there aren't any buzzards overhead."
"And there are no leaks in the boat," she added.
The next day, Mimi and our accountant, Robert Hurst, spoke with the officials at the Department of Revenue. They were, as they had been throughout the process, incredibly fair, patient, and professional. They said they were impressed by the amount of attention we had received, with the newspaper articles and the TV segments and the activity on the Web. Perhaps they saw a benefit for themselves in our saga. During a typical year, the Department of Revenue will seize roughly 75 businesses in Massachusetts, and few of those actions get any attention. In terms of warning small businesses what could happen to them if they failed to pay taxes, closing Toscanini's was a PR bonanza for the agency.
By Tuesday night, we learned we had passed our initial fundraising goal of $25,000. That was good enough for us to arrive at an oral agreement with the Department of Revenue on Wednesday. On Friday, Mimi picked up a certified check at our bank -- the sum of our PayPal donations up to that point. She and I drove to the offices of the department's seizure division, in Chelsea, Massachusetts. The level of security there reminded me of that at the Pentagon station on the D.C. metro. Two department officials came downstairs, and we gave them the check and filled out the necessary paperwork. Forty-five minutes later, we met them at Toscanini's, changed the locks, and took back possession of the business. Mimi and I immediately set about cleaning the store. A health inspector from the city of Cambridge came by a little while later, and then we were officially cleared to reopen.
Getting the store back up to speed took a lot of hard work. Plus, there were so many people we had to call or write to thank, and there was another flurry of newspaper, radio, and TV interviews. One writer ridiculed my "cyber-panhandling" in The Boston Globe. Another reporter asked me what I planned to do next. "All I want to do is make ice cream and pay my taxes in a timely fashion," I replied. That will include taxes on the $34,348.08 raised to date through the website, of course. On the bright side, when Mimi and I closed the Harvard Square store and the café, we were able to create a loss carryforward that we can apply to future income tax liability.
Looking back, I realize that I got to play the George Bailey role in It's a Wonderful Life. When trouble struck, the amount of support that came to me from all over the world was amazing. But it was also an experience that no one would ever choose to go through. I am determined to avoid any new misadventures. We have a tentative agreement with the state concerning the abatement, which would reduce our remaining tax burden. When it comes to expanding, I won't do anything unless there's almost no downside risk.
Am I a tax cheat? It's hard to answer that question without sounding cavalier. I was certainly a nonpayer of taxes, and I know that I created the problem myself. But I have to say that I look at this more as a sign of my own stupidity than as something unethical. Maybe that's proof of my ethical myopia.
Why did all of these people rally around Toscanini's? I think many of the people who helped us had sympathy for me, even as they recognized that my own inept management was to blame. A few mornings after we reopened, I pulled up to the parking lot behind our store, and there was an auxiliary police officer blocking my path. For a moment, I was filled with a sense of panic. But as it turned out, there was a fire nearby, and he was just trying to keep traffic moving. I parked a few blocks away. As I walked to the store, the officer came running up behind me, exclaiming that he hadn't recognized me -- otherwise, he would have let me park behind the building. Then he told me he had heard about my situation. He said he was also a small-business owner on the side. "No one understands that all we get is what's left after everyone else gets paid," he told me. "It's almost impossible sometimes." Then he gave me a hug.