Rio Nuevo may have found its missing millions: Some downtown businesses weren't coding their tax filings properly, so state sales tax revenue owed to the revitalization effort wasn't getting there.
No one with Rio Nuevo, the city or the state would venture a guess how much could be at stake, but it could easily be millions - and it's unclear when or how much of it will be recovered.
A recent audit of one business turned up $2.2 million. And a limited survey of a stretch of East Broadway turned up five more whose tax payments weren't reaching Rio Nuevo's coffers.
"It could be huge," said new Rio Nuevo board Chairman Fletcher McCusker.
The businesses have all paid their taxes in full. But their tax filings must be coded a certain way for Rio Nuevo to get its share. Otherwise, the money just goes into the state general fund.
Two downtown businesses contacted by the Star said they were never told until recently about the special coding requirement.
Efforts to recover some of the lost funds will not cost businesses any more, and businesses will not be penalized for the coding error, city and Rio Nuevo officials said.
The problem came to light when McCusker started learning about the agency's cash flow and realized it wasn't receiving all the state sales tax revenue it could. Rio Nuevo is supposed to get a portion of state sales taxes collected in the designated tax-increment-financing district.
"Astonishingly, they have to code their own tax return in order for Rio Nuevo money to be reallocated back to us," McCusker told the Rio Nuevo board on Thursday. Many of the 1,100 merchants in the district may not know that.
The recoverable amount for each business ranges from a few hundred dollars to millions. No one has a guess at this point how many businesses have not been adding the code.
Last month a routine city audit found one store that hadn't correctly coded its tax returns going back to 2005, adding up to $2.2 million in lost revenue, McCusker said.
Assistant City Manager Kelly Gottschalk said she's been tracking the problem since 2009. Since then, she's collected $12 million in tax revenue that wasn't correctly allocated to Rio Nuevo.
Rio Nuevo qualified to start receiving tax revenues in 2003. But before 2009, no one was tracking and monitoring the TIF revenue, and Rio Nuevo wasn't interested in the problem until the new leadership took over recently, Gottschalk said.
After recognizing the problem, Rio Nuevo launched a "tenacious" merchant education program, McCusker said.
"What we're communicating to merchants is this is good for Tucson," McCusker said. "It doesn't cost you anything to put that 3-letter code in there, and there's no penalty if you don't."
Margo Susco, owner of clothing store Hydra, has operated her business downtown for 18 years but just learned about the need to code her tax forms two weeks ago.
"I would venture to say most of the businesses do not know about it," she said. "It was news to me."
Lisa Misuraca, owner of Totally Kids Furniture, has operated her business on East Broadway for 14 years and heard about the Rio Nuevo code about two years ago while talking with a city staffer about tax matters. After that, her state tax forms came pre-printed with the code already on them, she said.
Rio Nuevo asked the state and the city for lists of merchants in the district and received incomplete lists, McCusker said.
Michele Bettini, operations administrator for Rio Nuevo, is driving up and down Broadway comparing the list of merchants to storefronts to see which businesses may not be counted.
That's going to take time, but Bettini said in just three days she found two restaurants, a barber shop, a coffee shop and a big-box office supply store that weren't on the list.
"Obviously, we're going to find a lot more," she added.
Until now the city had taken on the task of telling merchants how to fill out the tax form, Gottschalk said. She said most businesses do a good job of complying.
Her staff also has been working diligently to maximize the TIF revenue each month, she said, because the city backs bonds that are repaid with TIF money.
The city will even help businesses amend their tax returns, Gottschalk said.
With more eyes on the problem, the city and Rio Nuevo could find more money that has fallen through the cracks.
The state has agreed to go back three years to recover some of the lost TIF revenue, McCusker told the board. State officials did not return telephone calls to confirm the recovery process or how it would work.
getTING THE money
• 1. People pay state sales tax in a district that includes downtown and El Con and Park Place malls.
• 2. Stores send the sales tax to the state, and they must enter a 3-letter code on their tax forms to indicate they are part of the Rio Nuevo district.
• 3. The state collects the sales tax and takes out a portion earmarked for Rio Nuevo, but only from forms marked with the 3-letter code.
• 4. The state sends a report to the city for review. If they agree on the amount, the state sends the money to the trustee to pay bond debt. Processing takes three months.
Contact reporter Becky Pallack at email@example.com or 573-4346.