PHOENIX - Rebuffing the concerns of mayors from around the state about lost revenues, a Senate panel voted Wednesday to sharply revamp how sales taxes are assessed and collected.
The legislation, approved 6-1 by the Finance Committee, would set up a simplified system of what products and services are taxable, limiting the ability of cities to tax transactions not on a preapproved list. The change is considered a precursor to Arizona being able to take advantage of pending federal legislation that would allow states with simplified sales taxes to impose their own taxes on Internet purchases.
"Arizona needs to get prepared for it," said Rep. Debbie Lesko, R-Glendale.
That part of the plan is not controversial.
The problem for cities is, it would also take away their ability to charge a separate tax on construction that occurs within their limits. Instead, contractors would pay sales taxes when and where they buy their materials.
Lesko said there is a problem of contractors not paying taxes when they buy items and then escaping the levy at the time of construction.
She estimated that "leakage" at up to 31 percent, or about $148 million a year to the state.
With the more than 90 cities lined up in opposition, Michael Hunter, the governor's chief tax adviser, crafted compromise language for HB 2111 that would allow cities to impose a tax on new construction. But city leaders complained they would still lose untold millions of dollar on repairs and remodelings.
Hunter, however, warned lawmakers that failure to promptly bring the sales tax system into conformity with what is required by the federal Marketplace Fairness Act - the law that would allow Arizona to collect taxes on Internet sales - could be devastating.
"I just want you to think of what the headlines will look like if the Marketplace Fairness Act passes and all of these (other states) with a simple tax code are able to implement (the law) and Arizona is not," Hunter said.
That message did not go unnoticed.
"Our brick-and-mortar retailers in this state are being hurt dramatically with a nearly 10 percent disadvantage to online retailers because we're not collecting that sales tax," said Sen. Steve Farley, D-Tucson.
Sen. Bob Worsley, R-Mesa, said it is "unrealistic" to stall the entire tax overhaul until a compromise protecting the cities can be negotiated, which could take some time.
Only Sen. Olivia Cajero Bedford, D-Tucson, refused to go along. She said officials in her hometown are "not entirely happy with it."
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