Use-tax vote a struggle

Quinn, Magill have changes of heart on city collection of up to $4.6M

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— The overturning of a controversial ordinance at this week's Steamboat Springs City Council meeting hinged on late-breaking changes of heart by two councilmen.

Councilman Jon Quinn voted in favor of the ordinance on first reading two weeks ago and expressed continued support late last week. Councilman Walter Magill, who missed the first vote, said Saturday that he intended to vote in favor of the ordinance on its second and final reading. Both changed their minds, and the ordinance, which would have prevented city accountants from reconciling building use-tax deposits on building permits issued prior to March 10, narrowly failed on a 4-3 vote Tuesday night.

Reconciliations have been a provision of the Steamboat Springs Municipal Code since 1991 but never have been enforced. With the addition of a use-tax auditor to its staff this year, the city's Finance Department hoped to reconcile all open permits issued since 2005. Tuesday's ordinance was in response to concerns - expressed most loudly by members of the local building trades - that it was unfair to begin enforcing the policy retroactively before March 10, the date the city first sent a letter to open permit holders signaling its intentions.

"I thought about it quite a lot over the weekend," Quinn said Wednesday. "My original stance was based on what I thought was the fairest way to approach it. In terms of fairness, I believe it is still not fair for us to do what we did. But in order for us to right this wrong, we would have had to do an even greater injustice."

Quinn said his original stance was based on his likening the situation to his own business, Northwest Data Services, and his belief that it would be unfair for the city to begin collecting a "keyboard tax" on computers he sold during the past three years.

"It's really not that simple with use tax because you have a transaction that is ongoing until you get a (certificate of occupancy)," Quinn said. "There's no reason any builder worth his salt wouldn't have the documentation."

Magill reasoned similarly. He said that he voted against the ordinance even though he thinks retroactively enforcing the long-standing, but ignored, policy is unfair to builders.

"However, it's the council's job and the city manager's job to collect the taxes that are on the books," Magill said. "There's a lot of large projects that are open right now. I'd like to see the city collect the use tax it's owed."

First in 17 years

City staffers strongly opposed the ordinance and estimated it would mean waving goodbye to about $4.6 million. Quinn noted that estimate is only for use-tax deposits that haven't been reconciled in the past three years.

"The bigger tragedy is, this has not been done properly for years," Quinn said. "If you really think about the number the city missed out on, it's probably phenomenal."

At Tuesday's meeting, Assistant Finance Director Bob Litzau said he has known about the uncollected revenue for a decade and said it was brought to the attention of previous finance directors and city managers.

"I have been trying to implement a system of auditing use-tax deposits for 10 years," Litzau said. "Why it was not carried forward, I cannot answer."

Prior to Tuesday's vote, Councilwoman Cari Hermacinski noted that, regardless of the outcome, the current council would be the first in 17 years to provide the resources to enforce the building use-tax code. Councilman Steve Ivancie noted Wednesday that the new use-tax auditor position was added in a 2008 budget crafted by former City Manager Alan Lanning and approved by the previous City Council.

Local contractors Ed MacArthur, of Native Excavating, and John Shively, of Shively Construction, expressed disappointment with Tuesday's outcome. Shively, who also is president of the Yampa Valley Construction Trades Association, said he doesn't think council members understand it is impossible for contractors to look at lump-sum contracts with subcontractors and know how much they spent on building materials.

"We can tell you that now, because we've got our system set up to do that," Shively said, "but we didn't three years ago."

Kim Weber, revenue supervisor for the city, said there is a mechanism in place for those who don't know how much they paid for building materials. In that case, use tax is assessed at 4.5 percent on 50 percent of the final cost of construction. Shively said that's not always a fair formula, and he cited the example of $500,000 excavation job that may have involved only $40,000 worth of materials.

360 fails

Also on Tuesday, the developers of 360 Village failed in their bid to extend the urban growth boundary when both the City Council and the Routt County Board of Commissioners denied their application.

The UGB is a provision of the Steamboat Springs Area Community Plan that delineates land appropriate and not appropriate for urban development. It is a precursor to annexation. The proposal for development of 350 acres west of Steamboat includes 240 acres outside the UGB.

The development team urged elected officials to set their policy hesitations aside and consider the greater needs of the community, such as affordable housing. But policy incompatibilities, such as the presence of 1,000 acres of undeveloped land within the existing UGB, won out.

Comments

Scott Wedel 6 years, 3 months ago

The reason that reconciliations now have to be done with the use tax is because so many high end places are being built and their own promotional materials say much is being spent on the stuff inside the places. Thus, it is completely ridiculous to say that a one size fits all pre construction estimate is anywhere close to being accurate.

And I have a hard time understanding why it is so hard for the contractors to come up with the data. For the most part, it should be the invoice they billed. Is Shively saying that a $500,000 invoice for excavation is simply going to say "excavation $500,000"? In the real world the invoice is going to list everything done and include the materials purchased.

And the contractor is certainly going to keep that for his records because he is not going to spend $40,000 on materials without claiming it as an expense on his income taxes.

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JLM 6 years, 3 months ago

What a bunch of baloney.

Contractors routinely have a "job cost" system which ensures that all material invoices are coded to the correct job. In addition, the invoices themselves undoubtedly have an assigned job number or a purchase order number which correlates to a specific job. Normal vendor files can be used to identify all invoices from a single vendor and the time period in which they were incurred.

Contractors pay Federal taxes on their profits which are calculated on a "completed contract" or "percentage complete" basis. Believe me, they know their costs.

This is not a difficult problem to solve and the contractors are blowing smoke up your skirts.

Simple matter --- collect all taxes, collect them fairly, collect them fully.

If you fail to collect these taxes, you are effectively raising everybody else's taxes and that is not fair.

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Steve Lewis 6 years, 3 months ago

I have to thank Walter and Jon for changing their minds. Only by both changing their minds did they save us from a $4 million mistake.

That this was proposed in the first place is bad enough. That it still got 3 votes? Scary.

Voting to give developers a rebate while cutting services is a vote I should have expected from Scott or Cari. I know their record. But a seasoned councilman like Louie?

What kind of annexation deal will this council strike with 700? I'm more concerned than I was before, given this showing of council's colors.

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Alan Geye 6 years, 3 months ago

First may I say, I hate paying taxes, taxes of just about any kind, but we do because we need an effectively running government. OK, the fact that we're having this discussion may just indicate that our government isn't all that effective, but that's another discussion.

But let me see if I've got the facts straight:

  1. The Use tax statute has been active for quite a while and I suspect many or most contractors were charging their clients.

  2. This whole question is about auditing taxpayer records to ensure that the Use Tax was properly being remitted. Hmm, sounds a little like the IRS periodically auditing my income tax return to ensure reasonable compliance. I don't necessarily like it but it's something we all put up with. Yes, and those audits are generally 2-3 years after the fact and we are all required to maintain proper records.

  3. Now tell me again why any politician would effectively waive the right to audit compliance of a valid tax system? Could it be there might have been some sort of conflict of interest or perhaps undue influence by contractors that may have been taking advantage of a non-enforced tax?

Thank goodness these politicians who are supposed to be acting in our broader interest finally saw the light. By the way, in my book the only issue that might preclude auditing "old" years might be the statute of limitaton.

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JLM 6 years, 3 months ago

Bean, good post. In general the S of L on financial matters and record keeping is 7 years. You make a great point in that these contractors must maintain financial records for at least 7 years for IRS purposes under any circumstances. This alone would require them to be able to identify labor (for payroll tax purposes), subcontractors (for 1099 purposes) and materials costs. There is no good reason not to audit and collect on every contract.

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Steve Lewis 6 years, 3 months ago

Quinn stopped short of giving credit where credit is due: The prior Council stopped this "tragedy" of lost funding when they budgeted an auditor position.

Hermacinski pats her Council on the back for being the first Council to write checks to that auditor. Wonder how the Finance Department feels about that statement knowing their boss was fired in part for beginning these audits.

Have a nice, but real, day!

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