Borough sales tax code under review; recommendations expected later this year

A matter of dollars and sense

Posted: Tuesday, August 20, 2002

A borough committee is weighing a list of proposed changes to the Kenai Peninsula Borough's sales tax code that are meant to level the sales tax field for businesses, make application of the code more efficient and, in some cases, eliminate exemptions.

Some changes would have no impact at all on revenues, but others could mean significantly more money for the borough and its cities.

The borough's Sales Tax Review Committee, which is comprised of members of the Kenai Peninsula Borough Assembly and members of the administrative staff, have been working on revisions to the code for several months. They are expected to make code revision recommendations to the full assembly sometime later this year.

Among the changes currently under discussion is one that would begin taxing certain nonprofit organizations that compete directly against for-profit operations.

Jeff Sinz, borough finance director, said an example is daycare facilities organized under federal tax laws as nonprofit (501c) agencies that now enjoy a competitive advantage over for-profit daycare operations because, under borough law, their nonprofit status exempts them from the borough's 2-percent sales tax. The committee is considering whether that advantage should be eliminated.

The code revision would redefine exemptions as those transactions that are part of "a casual and isolated fund-raising activity preregistered and approved by the borough administration." The borough would have the flexibility to consider granting an exemption on a case-by-case basis.

An example of a fund-raising effort that is not a target of the proposed code change is the selling of cookies by the Girls Scouts. That nonprofit would not be required to collect and remit sales tax, Sinz said.

"We think we have come up with some language that strikes a balance there and gets at what we want to get at without getting at organizations we aren't really trying to impact," Sinz said.

Another change being looked at is a proposal to increase the maximum amount on which the borough's 2-percent sales tax can be applied. Currently, the tax applies only to the first $500 of the purchase price of goods or services. That means someone buying a $20,000 automobile pays no more sales tax than someone purchasing a $500 washer and dryer. Likewise, someone paying $2,000 for the services of a house painter pays only on the first $500, the same as someone buying only $500 worth of services.

The committee is considering raising that limit to $2,000, but applying it only to services, not to goods, which would remain at the $500 maximum.

If adopted, the new $2,000 tax limit for services would increase sales tax revenue across the borough, and especially in Homer and Seward in the recreational sales arena, the committee said. Oil companies and others receiving a large amount of services within the borough would pay more sales tax. Borough finance figures predict the borough could collect nearly $1.1 million more, while the cities together could see another $703,000.

The committee already has approved several possible changes to the sales tax code. If eventually approved by the full assembly, they would include the following:

Exempt all state licensed medical and psychological service providers and the prescriptions they write. This change allows the borough to recognize professions newly licensed by the state. Currently, the borough has no way to broaden the field of medical practices it already recognizes. There would be no revenue impact.

Exempt services performed under warranties and service agreements.

Currently, service providers often are unable to collect sales taxes from customers getting work done under manufacturers' warranties, nor get the manufacturers to reimburse them for the sales taxes service providers must remit to the borough. The warranty issuers have argued that the original sales price included a charge to cover anticipated warranty work, and thus a sales tax already has been applied. No revenue impact is expected, the committee said.

Allow lodging and meals to be eligible for treatment as resale transactions and exempt them from the sales tax. The change would simplify some transactions under the code, the committee said. The change also would remove reference to an "Intermediate Service Certificate," which the borough does not use.

Reduce the cost of an owner builder card and include services under an existing exemption. According to the committee, there is an inequity in the code.

General contractors typically acquire a borough resale card for purchasing building materials and services and pay only a small amount of sales tax at the time of closing -- $10, $25 or $27.50 depending on the taxing jurisdiction, while an owner builder pays $200 to the borough in lieu of sales taxes for an owner builder card which exempts only materials. The owner builder must pay sales taxes on all services purchased in the construction of their home. The revenue impact to the borough is expected to be minimal, according to the committee.

Define the taxability of vending machine sales on a per-transaction basis. This is expected to have no revenue impact, but does clarify that machine transactions are considered single transactions.

Clarify how installment sales and vehicle leases are to be treated under the code. It would have no revenue impact, but anticipates such provisions as seasonal sales taxes by applying the sales

tax in effect at the time of the sale, even though installments would be made over periods of varying tax levels. Seldovia has such a seasonal sales tax.

Tax recreational sales on a per-person, per-day basis. Sinz said this would level the application of sales tax on recreational service sales and avoid taxing differently depending on how services are packaged. Breaking all services down to a per-person, per-day basis, would do this. It would affect such things as guiding, charters, outfitting or equipment rentals and temporary lodging.

The impact is hard to estimate, the committee said, because of limitations of the sale tax system, but is expected to mean "a substantial revenue boost" to all taxing jurisdictions with a lot of recreational sales.

Provide for the taxation of services based on the invoicing practice of the provider. The current code does not adequately address services such as contingent legal services, auto body repair, aircraft repair and the like, the committee said. The aim is to simplify matters for businesses that provide services over time, Sinz said.

Make the point of sale of goods, the retail outlet from which they were sold. This addresses the complications caused by multiple sales tax jurisdictions by clarifying the location of sale.

Make quarterly filing the standard (rather than monthly) and increase the flexibility in filing sales tax returns. Among other things, the change would also allow businesses reporting less than $6,000 in the preceding year to file annually upon approval of the borough. The change is expected to have no fiscal impact other than the timing with which sales tax revenues are received.

The committee rejected some proposals, including a 3-percent seasonal sales tax rate, a utility sales tax exemption and a food tax exemption.

As for exempting food, an ongoing initiative drive to repeal the sales tax as it applies to nonprepared foods has successfully acquired the necessary certified signatures and a ballot measure will appear of the Oct. 1 municipal ballot.

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