Cities fear losses with collection overhaul

Sales-tax proposal could shift funds, add paperwork, critics say
2013-02-12T00:00:00Z Cities fear losses with collection overhaulHoward Fischer Capitol Media Services Arizona Daily Star
February 12, 2013 12:00 am  • 

PHOENIX - Gov. Jan Brewer formally proposed an extensive revamp of how Arizona collects sales taxes, drawing immediate criticism from city officials who fear major financial losses.

In its simplest form, the legislation would limit the ability of individual cities to decide on their own what items are taxable.

Creation of a "uniform tax base" would allow Arizona to begin collecting taxes on Internet sales if Congress gives its approval.

It also would ensure that businesses would face only a single audit from the state to determine if they had paid the correct amount, eliminating separate reviews by each city.

The most controversial part would scrap the system in which taxes on construction and other kinds of contracting are collected where the work is done. As it is now, contractors determine the price of the job and then pay taxes on 65 percent of that, the part that is presumed to be for materials, with the beneficiary being the city where the work is done.

Under the proposed change, contractors would pay regular state and local sales taxes at the time of purchase on the items they buy - and to the retailer, who might be in another city entirely.

Senate President Andy Biggs said that makes the proposal a non-starter in the Legislature, at least in its current form.

growing cities could be hurt

He said it would create financial problems for rapidly growing communities - especially if the contractors buy their items in other cities. Biggs said that would create a shift of needed funds away from the cities that, by virtue of their growth, are incurring the costs of services.

Rep. Doris Goodale, R-Kingman, said the bill, without changes, is unacceptable to her communities and therefore to her. Rep. John Kavanagh, R-Fountain Hills, agreed.

"I don't see how a policy that creates winners and losers is simplification," Kavanagh said. Simplification was the goal of the gubernatorial task force that crafted the proposed legislation.

Ken Strobeck, executive director of the League of Arizona Cities and Towns, said a major developer could simply truck in all of its supplies from another state.

Rep. Debbie Lesko, R-Glendale, conceded some changes may be necessary. But Lesko said she believes the legislation will result in less "leakage," where businesses are escaping paying sales taxes at all. That will mean more money collected, she argued.

The plan calls for the state to share more of what it collects in contracting sales taxes with the cities. Lesko said that should make up for any losses.

She also said contractors cannot escape taxes by buying supplies elsewhere, pointing out Arizona law requires businesses and individuals to compute and pay a "use tax" on whatever they purchase from out-of-state suppliers.

Strobeck, however, was unconvinced that some cities won't wind up losing a lot of money. And he doubted that anyone would properly police contractors to pay those use taxes.

He said cities now have a total of 75 people who do supplemental audits to make sure that no taxes are missed. Taking cities out of the audit business sidelines them, he said. And there are no immediate plans to hire additional staff for the Arizona Revenue Department.

Seeks to stop leakage

"I know that the cities have some problems with it," Brewer said of the proposal. But, she added, "the bottom line is there has been a lot of leakage from revenue."

Brewer also said the current system presents a "heavy, heavy burden on people that have to file the forms."

She echoed Lesko's contention that having the state share more of its own contracting tax revenues will mean more money in the pot, ensuring that no city ends up with less.

Kavanagh countered that if that were really the case, the legislation would guarantee that any additional funds collected would go directly to cities that lose funds.

"But they seem to want to hedge on that," Kavanagh said, which would leave cities and towns to "hope that they're correct in their prediction of greater revenues."

The flip side of what Brewer and Lesko want to do, however, could create a windfall for other cities, which would begin collecting more sales taxes from items sold at lumber yards, home improvement stores and other shops where contractors now spend their money. Cities would not only get those additional dollars but also benefit from the bigger pot of state-shared revenues.

Complicated system

The less controversial part of the measure deals with limiting the differences among cities in what they tax.

Andrew John, a co-owner of John's Refrigeration, said his staffers work in 10 different cities in the Phoenix metro area. He said that means 10 different price books, each of about 50 pages, "just to collect the right tax from each customer at the time we're there." He said that is not only confusing but time consuming.

It is that issue that Brewer hopes to use to sell the package. She said it will "wring some of the complexity out of this system, allowing business owners to focus less on paperwork and more on what they do best: creating jobs."

"I want Arizona to be the easiest place in the country for small-business owners to set up shop," she said.

Lesko also pushed that as a point to sell the bill.

"Arizona has the most complicated sales tax system in the entire country," she said. "In fact, 46 other states already do something similar to what we are proposing in this legislation."

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