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 on a 6-1 margin 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. That is considered a precursor to Arizona being able to take advantage of pending federal legislation which would allow states with simplified sales taxes impose their own taxes on Internet purchases made by local residents and businesses.
"Arizona needs to get prepared for it,'' said Rep. Debbie Lesko, R-Glendale.
That part of the plan being pushed by Gov. Jan Brewer is not controversial. And the mayors said they even think a deal could be worked out to ensure that businesses face only a single audit of their books, not separate reviews by the state and each affected city.
What is causing heartburn is scrapping the ability of cities to levy a separate tax on construction that occurs within their limits. Instead, contractors would pay sales taxes when -- and where -- they buy their supplies.
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.
But Christian Price, mayor of Maricopa, said the plan also would eliminate the ability of cities to levy their own local construction taxes. And that, he said, would devastate the budget of his rapidly growing community as most of the items used by builders likely are purchased elsewhere.
With the more than 90 cities lined up in opposition, Michael Hunter, the governor's chief tax advisor, crafted compromise language for HB 2111 in hopes of lining up support: Cities would be able to levy a new tax on residential and commercial construction in hopes of lining up support.
But Tom Schoaf, mayor of Litchfield Park, said that's not an answer.
"The problem is that right now we also tax the trades,'' he said. That means his city and others also impose a levy when someone replaces a roof, installs a new water heater or does any remodeling.
He estimates those trades amount to 20 percent of what the city collects now in construction revenues, dollars that would disappear even under the compromise plan. And he said that in cities like Scottsdale the figure is probably closer to 50 percent.
Schoaf said it's possible the problems could be worked out -- eventually.
"It probably can't be this year,'' he said, saying that neither cities nor the state Department of Revenue have good data on how much cities collect -- and would lose -- in taxes on repairs and replacements, versus new construction.
Scottsdale Mayor Jim Lane said without that hard information cities cannot even begin to negotiate a compromise.
The mayors first want an outside, independent audit of contracting tax collections. And that could not take place between now and the anticipated end of the legislative session in April or May.
Hunter, however, warning lawmakers that failure to act now could be devastating to the state if its sales tax system is not brought into conformity with what is required by the federal Marketplace Fairness Act, the one that would allow Arizona to collect taxes on Internet sales.
"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.
"The newspapers, I'm guessing, and a lot of the retailers out there will want to know why couldn't you accomplish this, why couldn't you get the job done,'' he continued. "The stakes are as high as I could ever imagine them being.''
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, acknowledged that the plan, as it now stands, may result in some cities winding up with fewer tax dollars. But he called it "unrealistic'' to hold up the package until every community gets a final idea of how their revenues will be affected.
Worsley said if there are problems the system could be tweaked next year.
"We have to move forward,'' he said.
Only Sen. Olivia Cajero Bedford, D-Tucson, refused to go along. She said officials in her home down are "not entirely happy with it,'' saying there need to be better figures on how cities will be affected.
Lesko said what is being pushed here is hardly unique. She said 46 other states already have a system where contractors pay sales taxes when and where they buy supplies, rather than computations based on the value of the finished product.
The legislation still has other hurdles, including votes of the full Senate and House.