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Cities Have Proven They are Not About Tax Simplification

Monday, March 11, 2013   (0 Comments)
Posted by: Rick Murray, CEO
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Cities Have Proven They are Not About Tax Simplification

Perhaps one of the biggest and most contentious issues to face the Arizona legislature in many years is the sales tax simplification. In Arizona, sales tax that businesses pay is called the Transaction Privilege Tax or TPT.

Arizona is one of only four states in the country that doesn’t have a uniform tax policy system that allows one point of contact and one point of audit for small businesses to pay the tax. And arguably, Arizona’s is the most complicated.

The Transaction Privilege Tax Simplification Task Force aimed to clear up the confusion and had drawn up 10 proposals for overhauling Arizona’s sales tax system. Only 3 of the 10 proposed changes require legislative action, but those 3 are opposed by many cities.

Other than creating a better economic development climate, the tax overhaul is necessary to allow Arizona to take advantage of federal legislation to collect remote sales taxes from online transactions…which have been estimated to be in the 100’s of millions of dollars.

The bill includes a proposal to have the Arizona Department of Revenue collect sales taxes for all cities in Arizona, including 18 that currently collect their own TPT, and it would eliminate cities’ abilities to conduct their own TPT audits of businesses. That function would also shift to the revenue department.

Currently, a business that conducts business in multiple cities is required to determine the tax rate, fill out the paper work, and pay the taxes for each city. For service related businesses, filling out the paperwork for the privilege to pay taxes has become a huge burden and a large part of their monthly overhead. Some are remitting taxes to several jurisdictions every month. For a state that proclaims that it is pro-small business, this is an odd way of showing it.

But cities have been worried about the measure’s impact on their finances. They oppose the provision to eliminate the construction sales tax and to collect taxes on construction materials at the point of sale. Currently, the tax revenues are split with the municipalities where construction activity is taking place.

Recently, the governor’s proposal was amended to allow municipalities to continue to tax construction activity while the tax on materials would be collected up front at the stores wherever they are purchased. So in theory, a sub-contractor will pay the full retail tax on the materials at the store where he’s bought them, just like everybody else. The cost of his work will then be rolled into the final and total cost of the construction, which will be subject to municipal taxation, which helps keep the cities revenue neutral.

While this compromise on the governor’s part seemed to alleviate the cities concerns on lost revenue the cities now smell blood in the water and want more.

Cities say they want to have the audit authority rather than the state for businesses within their jurisdiction. According to Lee Miller, ASBA’s lobbyist, the cities don’t want to be responsible for having to lay off their local audit staffs. Additionally, cities assume that any commitment the Governor and the legislature make to a "high quality” state audit staff will evaporate next legislative session when auditors will once again just be another kind of state employee subject to the general whims of the legislature and the executive on staffing, training and pay.

So, the cities are now advocating that the state defer to the cities on audits, that the cities will cooperate amongst themselves on doing audits and the cities will audit for state compliance as well. Really? Isn’t that like the tail wagging the dog?

This latest move, in the face of a goodwill gesture on the part of the governor, proves that the cities are not at all about tax simplification. They continue to hold their hand out for the taxes the hard working small businesses generate, but are more interested in protecting their kingdoms of bureaucracy that helping small business become more profitable and sustainable.

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