Just how complicated is Arizona’s sales-tax system?
Consider the case of Circle K, which has to file 50 returns a month. The convenience-store chain does business throughout the state, which means it has to navigate an array of sales-tax bases and collection systems that change from one city to the next.
For years, Arizona businesses have complained about sales-tax headaches. It’s a maze of red tape for those doing business in multiple cities that boosts costs and soaks up time. Now, the business community hopes Gov. Jan Brewer can deliver some relief.
The governor has made simplifying the state’s sales-tax system her economic priority this legislative session. She’ll seek a common sales-tax base across the state as well as centralized tax collections and auditing.
How construction is taxed could also be revamped, changing the taxing location from where something is built to where materials are bought. It’s a particularly thorny issue that would redistribute tax revenues across municipalities. The League of Arizona Cities and Towns estimates the change would cost cities $168million.
There will be other economic issues on the front burner during this year’s session, too. Education funding could increase as the state adopts Common Core Standards, mandates that align English and math requirements with the rest of the country.
Meanwhile, debate over the Arizona Commerce Authority’s transparency when it comes to private funds will likely heat up this session. The Arizona Commerce Authority’s relationship with Team ACA, a non-profit that raises private money for the agency, has long raised questions about outside influence.
But nothing is bigger than the effort to streamline the state’s sales-tax system.
“I think it would be fair to say that this is going to be the keystone economic issue the governor is going to push this session,” said Matthew Benson, the governor’s spokesman. “Sales-tax reform is about reducing the paperwork and accounting burdens on business owners.”
Critics of the proposal have questioned whether the state has the resources to manage tax collection and auditing effectively for municipalities that have handled those duties for years.
“You are talking about a significant influx of business and responsibility for all of the Department of Revenue to take on,” said Rene Guillen, legislative director for the League of Arizona Cities and Towns.
A complicated system
One point all sides in the debate do agree on is that sales tax in Arizona is incredibly complicated. Start with the name. It’s not called a sales tax but instead is the transaction privilege tax because it’s a “privilege” to do business in the Grand Canyon State.
While the Arizona Department of Revenue handles tax collection for the state, counties and 73 cities and towns, 18 other cities collect their own taxes and conduct their own audits. Many of these cities are Arizona’s largest: Phoenix, Tucson, Mesa, Glendale, Scottsdale and Tempe are among them.
They tax different items, use different language and offer different exemptions.
Jerry Bustamante, a senior vice president with the Arizona Small Business Association, said the competing systems are a drain on businesses that operate in multiple cities and towns.
“We are making some progress in our economy here in the state, and a lot of businesses are still struggling to generate revenue,” he said. “So any opportunities that exist that allow them to manage their businesses more efficiently, it will allow them to keep more revenue.”
It also has made Arizona less competitive with other states, said Glenn Hamer, president of the Arizona Chamber of Commerce and Industry.
“For companies that have locations in other states, we have heard over and over again that Arizona is far more complicated,” he said.
Another argument for simplification is to reduce redundancies. Cities conduct their own audits and collections, and so does the state.
“The great majority of city taxes are collected already by the state and audited by the state,” said Kevin McCarthy, president of the Arizona Tax Research Association and a member of the tax-simplification task force. “You get the administrative benefit in simplicity of one payment and one audit.”
But the League of Arizona Cities and Towns has questioned whether the state has the resources to take on a greater workload.
Guillen, the league’s legislative director, said cities and towns track a level of detail in sales tax that the state simply can’t achieve.
“These details help these cities and towns to better plan how they are going to use their revenue,” he said.
The league supports syncing the tax bases for all cities and states and then relying on an online portal to help businesses consolidate filings, he said.
Another point of contention is how construction is taxed. As it stands now, construction materials aren’t taxed at the point of sale. Instead, they are taxed at the construction site when the project is finished. It’s meant to account for the impacts of development.
Brewer would like to flip that around so that materials are taxed at the point of sale. This would help limit fraud and increase collections, supporters say. Critics see it as a redistribution of revenue from smaller cities and towns to big cities with major retail centers. It’s also a boon to the homebuilding industry, they say.
“It’s egregious in terms of the impact it would have on the cities,” said House Minority Leader Chad Campbell, D-Phoenix. “It’s going to be a huge giveaway to the homebuilders, and I think that’s the last thing that we need to be doing. We gotta stop propping up certain industries through our tax code.”
A number of mayors across the Valley have lashed out against the proposed change to construction tax.
For example, Tempe Mayor Mark Mitchell recently told The Arizona Republic that the shift would force a higher tax burden onto residents.
“This is just bad economic policy,” Mitchell said in an article earlier this month. “By having a broad tax base it contributes to lower taxes for everyone. It’s going to have a huge impact on residents.”
And Chandler officials recently released a statement characterizing the change as a tax cut to developers.
“The existing system is a sound practice that keeps the sales-tax revenue in the community where the actual construction occurs and additional crucial city services are needed due to expanding,” the statement said.
Whatever the final outcome, sales-tax simplification is crucial for future commerce in Arizona, particularly as online sales continue to grow, said Dennis Hoffman, an economist at Arizona State University and an adviser to the governor’s sales-tax task force.
It’s a “prerequisite to any type of federal legislation to allow broad-based remote-sales taxation, which I think going forward would be a key piece of revenue for Arizona,” he said.
Education and more
With the economy in recovery mode, Brewer and many business leaders are pushing for increased education spending, particularly when it comes to Common Core Standards.
“For proven reforms, we need to make sure those reforms are properly funded,” said Hamer of the Arizona Chamber of Commerce and Industry. “We feel the implementation of the Common Core Standards are an extremely important part of the mix of having a world-class education system.”
The standards would bring state requirements for English and math in line with standards being used across the country.
Benson, the spokesman for Brewer, said the governor will be pushing to increase funding for the Common Core Standards. Brewer will also be rolling out a performance-funding plan, linking additional education funds to schools that are high performing or showing improvement.
Unlike in previous years, Arizona is beginning 2013 with a budget surplus of nearly $700million.
Campbell said “there is a ton of room” in the budget to increase education funding. And House Speaker Andy Tobin, R-Paulden, said he also expects increases.
A more contentious area likely will be the Arizona Commerce Authority’s relationship to the non-profit Team ACA.
Team ACA is run by former Commerce Authority chief executive Don Cardon and raises private funds for the authority.
Critics have questioned that relationship, saying it invites undue influence. Tobin said he is more concerned about how the ACA spends money than who is donating to Team ACA.
“I have great issues with the Commerce Authority,” he said. “Not so much as the private dollars coming in. I am not so worried about those dollars as the spending of the existing money that we have.”
But Campbell said that is only part of the equation.
“The problem is if we don’t know where the money is coming from, then we don’t know why the money is being spent in the way it’s being spent,” he said.
“It’s time for the Legislature to step in and make sure the Commerce Authority is showing taxpayers how their money is being spent, and why it’s being spent that way, and what we’re getting for it.”