Borough tax situation causes frustration

Some say proposed amendment unfair

Posted: Monday, November 25, 2002

Members of the local recreational industry say a proposed amendment to the borough's sales tax code is arbitrary, targets recreational sales unfairly and will put their businesses at risk by forcing their customers to pay more in sales taxes than they do now.

It's just one of a host of amendments recommended to the Kenai Peninsula Borough Assembly by a sales tax committee that has been studying possible revision for more than a year. Those revisions, the committee said, aim to simplify the code and make it more equitable. Boosting revenues was not the driving force behind the revisions, they added.

But that's exactly what would happen if proposed changes are made to the way recreational sales are taxed, opponents say. It's the most controversial revision included in Ordinance 2002-39, which already has had four public hearings and will get a fifth Dec. 10.

At issue is the way taxes for recreational sales are computed. It would require fishing charter operators, for instance, to tax customers on a per-person, per-day basis. That means charter companies would have to charge each passenger the cost of a seat on the boat and compute the sales tax for each seat.

Sales that package clients under just one bill, such as those paid for by a company treating its employees to a day on the water, essentially would cease to exist as far as computing sales taxes is concerned.

Today, it is possible for a charter to sell its service to a package buyer or deal with one person who pays with one check the cost of the boat for a day. Here's how.

Say it costs $2,400 for a boat out of Homer Harbor for 16 passengers. The sales tax on that one transaction is just $27.50 because the sales tax is capped. It is only applied to the first $500.

That same boat, filled with 16 individuals paying separately, would collect a total of $132 in sales tax -- 16 times the 5.5 percent tax on each $150 seat customers would pay in Homer. (That includes the 2 percent charged by the borough and the 3.5 percent charged by Homer).

The proposed amendment would treat all sales as individual sales, eliminating the ability to charge the minimal $27.50 on a $2,400 package.

It's a loophole that needs to be filled, said assembly member Chris Moss of Homer.

"It comes back to what was the intent of the sales tax," he said. "It was not to have people buy large packages to avoid sales taxes. This plugs up a loophole I don't think was ever intended to be there."

For the company buying its employees a fishing trip, paying $27.50 or $132 isn't likely to make that much difference. Chances are the trip would be written off as expenses in any case, Moss said.

Neither does he see individuals bent on bagging a halibut in Kachemak Bay or Cook Inlet balking at paying the $8.50 in sales taxes applied to individual seats.

The sales tax itself has never been the issue for Sean Martin, owner of North Country Halibut Charters in Homer. In fact, he said he doesn't think the tax changes would impact his business at all. Customers will still flock to Homer to catch the big ones.

What does bother him is the way the borough treats different products. Currently, the tax law views sales of goods, sales of services and rental sales as different animals. Somewhat different rules apply to each.

He sees little real difference between someone walking into Spenard Builders Supply and purchasing washers and dryers for six units in an apartment building and paying just $27.50 on the entire transaction and six people walking onto his boat for a day on the water. It's really just one sale, he said.

"It's all just semantics. They're both products," he said. "I don't have another product."

Martin said that by and large in his business, he charges sales taxes on individual seats, though on his largest vessel, a large percentage of his business is generated by groups. He offers a boat rate, except in July.

Services are treated differently from goods for some very good reasons, said Moss. For all practical purposes, people buying goods like appliances can find lower prices by traveling to jurisdictions that have no sales taxes, such as Anchorage. That was the basis for having a cap on sales taxes in the first place -- so taxation wouldn't drive all the business to the big city.

Services enjoy the same cap. However, they essentially provide for a captive audience. You can't get a Kenai River king salmon anywhere but the Kenai River. One can't hook a Kachemak Bay halibut anywhere but Kachemak Bay. And in that sense, goods and services are different.

"There are characteristics of the sale of goods that are different than the sale of services," said borough attorney Colette Thompson. "Point of sale, for instance. That's being addressed, too" in the proposed amendments.

"There are differences in how they are delivered and differences in how they are taxed. That said, I understand the concern (of opponents). We are interested in being fair, too. I think assembly members are taking those concerns seriously."

"My wheels are definitely turning," said assembly President Pete Sprague, who also chaired the sales tax committee. "We've heard quite a bit, and there has been a lot of concern. Everything proposed is subject to small, even large changes."

Sprague said he has no data suggesting that charter operators are packaging groups of people otherwise unfamiliar with each other into tours simply to avoid charging the group more in sales taxes. But that would theoretically be possible, and perhaps even be an effective marketing tool.

"I'm not suggesting that there are any charger operators doing that, but it seems fair to me to charge everyone for their seats on the boat. The bottom line to me is that the borough's levy all goes to education. I see that as being a good thing."

Sprague said there was discussion among committee members about simply raising the tax cap on services from $500 to $1,000 or more as a way to guarantee capturing more taxes. But the idea was rejected for precisely that reason -- it smacked of being a change simply to derive more revenue. That wasn't the aim of the proposed amendments, he said.

Sportfishing guides are trying to avoid any perception that they are using the maximum sales tax limit as a marketing tool to get charters, Martin said. His concern remains that the new sales tax regime would be arbitrarily applied to recreational sales when perhaps it should be applied more broadly, if at all.

"Our industry is being singled out as being treated differently," he said. "The tax itself is not an issue for me."

Diane Borgman, owner of Homer Ocean Charters, said the potential impacts go well beyond just the sportfishing charter fleet.

"The recommendation is about all recreational sales," she said. "That means water taxis, kayaks, tour operators, fishing charters and more. We're only one part of it."

The impact of the change will mean charging customers significantly more in taxes, which might hurt sales, Borgman said. She provides transportation packages for hunters. She estimated that over the course of a season's worth of trips, she would have to collect nearly $10,000 in taxes, a far cry from the roughly $1,700 she collects now.

"I'm only one vendor out of many," she said. "If the borough doesn't need the money, why are they doing this?"

She said the changes would affect travel agencies by altering the way they charge taxes on elements of tour packages.

"This is way more far-reaching," she said.

Last year, recreational sales topped $30 million gross. Borgman said the sales taxes collected on that show the industry already is paying "its fair share."

Ron Rainey is a member of the Kenai River Sport Fishing Association board, a past president of the Kenai Visitors Association and, until last year, owner of Ron's Alaska Lodge off Beaver Creek Road. He said he thought the borough was engaged in a reasonable exercise examining its sales tax ordinance.

"But I think the borough should listen carefully to all the vendors and be sympathetic about the impact it will have on the industry," he said.

Any increase in taxes won't drive customers away, he said.

"It isn't going to kill the golden goose, obviously," he said. "You can argue both points. The industry will say it may have some impact on the industry that the industry would like to avoid. But in fairness, go anywhere in the country and tourism is taxed more heavily than any other industry. Here it is not."

Rainey said bundling a group of clients under one bill probably had some weak points. He said he doesn't know anywhere else in the country where a variety of services are combined and only pay one capped sales tax.

Moss said the recreational sales revision probably has a 50-50 chance at this point.

"We're still listening to arguments," he said. "Nothing is cast in stone."

If it does become law, it shouldn't be implemented until 2004. Trying to go back to customers already booked for next season and tell them their quoted prices must be amended would be too hard, he said.

At some future time, the tax cap itself may come up for review and change. But that isn't likely until the borough begins to face real financial challenges. The decline of the oil and gas fields could force that issue, though, in 10 years or so, he said.

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