Tucson businesses soon won’t cut a check to the city for monthly sales tax receipts.
Instead, they will send those tax dollars to the Arizona Department of Revenue, which will collect every city sales tax dollar beginning next year.
The switch is part of a tax simplification law passed by the legislature in 2013 and applies to all cities and counties.
The change worries city finance officials who expect the state could take up to eight weeks before it deposits any money into Tucson’s coffers once it takes over tax collections next year.
Finance Director Silvia Amparano said if that happens, the city would have to find about $26 million to cover the two-month delay.
After that, it’s still unknown whether the state will be on time with future deposits or will the gap continue.
“We hope it’s just a tiny issue of that lag and they eventually catch up, but we don’t how long that lag is going to be,” Amparano said.
The city will likely draw from its approximately $185 million pooled cash account to pay its bills on time.
Chief Finance Officer Kelly Gottschalk said if the city does take from the pooled cash fund, it would have to repay that money plus interest.
“There is the cash there, but we are losing the interest,” Gottschalk said.
But cash flow isn’t the only concern.
Currently, the city collects real-time information each day as businesses pay their tax bills. The process gives city officials an instant snapshot of who’s paying and whether or not sales tax revenue is rising or falling based on the previous months economic activity.
As of now, Gottschalk said the city still doesn’t know what kind or how much data the state will provide each month. And that could hurt the city in drafting future budgets or tracking what businesses are, or are not, complying with the rules.
“The less information that you have the less ability we have to do our job whether that’s projecting the numbers, or ensuring that everybody who owes us is paying,” Gottschalk said. “So depending on the form and timeliness that this data comes in, that can have a big impact.”
City officials will continue to work with the state to achieve as smooth of a transition as possible in January, Gottschalk said.
The city will incur additional costs due to the switch since city finance employees must receive Department of Revenue training and certification, and make other adjustments.
To offset some of these expenses, the state will allow cities to charge businesses a tax license fee up to $50 a year. City staff is recommending the council set the fee at $20 during today’s meeting.
This would be in addition to Tucson’s existing business license tax ($45), which nets the city about $1.8 million annually.
Councilman Steve Kozachik said the legislature belied its business-friendly rhetoric with this bill.
“How is it pro-business to pass a law that adds another fee on (businesses)?” Kozachik said.
OTHER TAX CHANGES
New rules regarding what cities can tax for construction activities will also go into effect.
The most significant change would prevent the city from taxing a contractors’ gross receipts for a project, limiting the tax to just the construction materials at the point of sale.
That means the city would only collect sales tax from project materials bought at a store within city limits.
But the new rules mostly apply to repair and maintenance projects, said Ken Strobeck, Executive Director of the Arizona League of Cities and Towns.
The city would still be able to tax new construction projects under the current system, Strobeck said.
The city anticipates losing $1.6 million even though it’s difficult to gauge what effect this will have since the city doesn’t know whether contractors buy their materials inside or outside the city.
The loss has already been factored into next year’s budget.