By DAVID BERTOLA
Business First

Joann Swiatowy found it strange when the New York State Tax Department informed her a few months ago that she hadn't filed first-quarter taxes for The Village Spa, which she owns and operates in Williamsville.

She had relied on Rochester-based Paybooks Inc., her payroll company, to do that. She said she would call them regularly with gross payroll information. Paybooks then would access her business checking account electronically, then mail paychecks to her and pay taxes to the appropriate government agencies.

An investigation by state Attorney General Andrew Cuomo ended with accusations that Paybooks owner Jeffrey Sykes was using his customers' money to pay overhead expenses while creating insurmountable debt.

In the lawsuit Cuomo filed against Paybooks, he seeks to permanently bar the company from the payroll business in New York state and obtain full restitution for eligible consumers and a civil penalty of $5,000 for each instance of a deceptive act.

Investigators said Sykes also routinely paid personal expenses and took large cash withdrawals from business accounts that contained money intended to pay customers' taxes.

In June, Sykes was charged after Cuomo's office froze his company's assets. He pleaded not guilty to a felony complaint filed by the Monroe County Sheriff's Office in Rochester City Court and remains free on $30,000 bail.

A message to Sykes' attorney, Matthew Parrinello of Rochester-based Redmond & Parrinello LLP was not returned.

On Aug. 18, a Monroe County grand jury charged Sykes with second-degree criminal tax fraud and second-degree grand larceny.

If convicted, he could face a penalty ranging from probation to five to 15 years in prison for each felony.

Sykes, who has no previous criminal record, was scheduled to be arraigned Sept. 4 in Monroe County Court.

In July, Swiatowy tried to call Paybooks.

"I couldn't call in my payroll," said Swiatowy, one of six workers at the Maple Road spa.

When she called the state Tax Department, she was told that her first-quarter taxes had indeed been received, but the funds were not valid.

"How could this be?" she said.

She visited the Paybooks Web site and, in its place, found the Attorney General's Web site. It explained that Sykes is accused of defrauding $2 million from business owners and gave information about the investigation.

The site described Sykes' plan, similar to a Ponzi scheme. Over time, money withdrawn from the accounts of customers to pay taxing entities was insufficient. According to the Web site, Sykes did not make payments on behalf of hundreds of customers or paid authorities late, resulting in the assessment of interest and penalties against the customers.

Investigators said Sykes and Paybooks routinely misrepresented to customers the status of tax payments, the cause of late payments and the health of the business.

Swiatowy is waiting to learn whether she'll be reimbursed for federal and state employment taxes, which essentially she's paid twice: Without disclosing tax figures, she said Village Spa's second-quarter federal employment taxes had to be refiled.

"It's been a big inconvenience," she said, adding that Sykes should receive jail time. "I think he would deserve more than probation. It's greed and unethical, and (probation) would be just a slap on the wrist when others are paying the consequences for the corporate greed of others," she said.