Gov. Jan Brewer formally proposed an extensive revamp of how Arizona collects sales taxes, drawing immediate fire from cities 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 ever 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.
But the most controversial part would scrap the system where taxes on construction and other kinds of contracting are collected where the work is done. In essence, 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 this plan, 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 this plan a non-starter, at least in its current form.
He said this creates 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.
And Rep. John Kavanagh, R-Fountain Hills, agreed.
“I don’t see how a policy that creates winners and losers is simplification,’’ he said, which was the goal of the gubernatorial task force that crafted it. “It shouldn’t be there.’’
Ken Strobeck, executive director of the League of Arizona Cities and Towns, said that does not even consider what happens when a major developer simply trucks 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, she argued, will mean more money collected.
And she said 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. And there are no immediate plans to hire additional staff for the Department of Revenue.
“I know that the cities have some problems with it,’’ Brewer said of the proposal. But she brushed aside their concerns.
“The bottom line is there has been a lot of leakage from revenue,’’ she said. And Brewer 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 is unconvinced. He said 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, leaving cities and town to “hope that they’re correct in their prediction of greater revenues.’’
The flip side of what Lesko wants to do, , though, could create a windfall for other cities which will begin collecting more sales taxes from items sold at lumber yards, home improvement stores and other shops where contractors now get their money. They will not only get those additional dollars but also benefit from that bigger pot of state shared revenues.
Anyway, Brewer said anyone with problems with the plan will have a chance to register objections as the bill makes its way through the Legislature.
The less controversial part of the measure deals with limiting the differences among cities in what they tax.
Andrew John, one of the owners of John’s Refrigeration, said his staffers do work in 10 different cities from in the Phoenix, Scottsdale, Mesa and Gilbert 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 the 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.’’