Consideration and Approval of Agreement: Intergovernmental Agreement (IGA) with the Arizona Department of Revenue for Uniform Transaction Privilege (Sales) Tax Administration. (IGA for Uniform Sales Tax Administration)

Approve the intergovernmental agreement between the City of Flagstaff and the Arizona Department of Revenue regarding the uniform administration, licensing, collection, and auditing of transaction privilege tax, use tax, severance tax, jet fuel excise and use tax and rental occupancy taxes imposed by the State or cities or towns.

The proposed IGA is a culmination of the efforts between state and local tax administration officials to simplify tax administration and to codify state legislation. The proposed IGA is exactly the same for each of the cities and towns in Arizona. The terms of this IGA run on an annual basis from July 1, 2015 through June 30, 2016 and it renews automatically each year.  The IGA is a comprehensive agreement related to local tax licensing, administration, auditing and collections.  Under the IGA the ADOR must develop an electronic system/software to capture data with sufficient specificity to meet the needs of all taxing jurisdictions.  If is system is not ready by September 1, 2015, the "non-program" cities including City of Flagstaff (all those cities which have self-collected local taxes in the past)  will continue to handle local tax licensing and collection pursuant to the existing temporary agreement for another year (through December 31, 2016). 

The agreement itself will not result in any budgetary impact to the City of Flagstaff.  However, the City will have to pay the Arizona Department of Revenue (ADOR) approximately $160,000 for general administration and for upgrades to the existing tax administration system. Staff accounted for this cost by not budgeting a City sales tax revenue increase. These costs are expected to be taken out of the City's allocated revenue share that is received from ADOR. In addition, staff budgeted a one-time $150,000 in contingency to cover possible revenue decreases that may result from the de-centralized ADOR collection structure.

No, not on this specific IGA. However, the topic of the takeover of tax administration by the Arizona Department of Revenue has been discussed many times over the past few years. Council has approved several changes to the City Tax Code related to the takeover.  Council has approved a temporary IGA with ADOR which authorizes the City to continue TPT licensing and collection through December 31, 2015.

1) Approve the intergovernmental agreement between the City of Flagstaff and the Arizona Department of Revenue.
2) Do not approve the agreement between the City of Flagstaff and the Arizona Department of Revenue. Please note: The IGA is required under State statute. If Council does not sign the IGA, the Arizona Department of Revenue will still provide the statutorily required services in the manner described in the IGA. If Council decides not to approve the agreement it might only serve to limit the City's ability to enforce its rights and authorities outlined in the IGA.

This intergovernmental agreement (IGA) was negotiated with the Department of Revenue (DOR) by city representatives including a finance director, a tax administrator, and two attorneys, along with assistance from the League of Arizona Cities and Towns. Additionally, several attorneys and tax experts from many cities and towns reviewed and commented on the language during the process, resulting in a document that provides the maximum level of information and assurances for the cities possible.
 
Local Transaction Privilege Tax (TPT) administration is governed by A.R.S. § 42-6001. This statute was recently modified for the purpose of tax simplification with the passage of House Bill 2111 in 2013 and House Bill 2389 in 2014. This statute now requires the Arizona Department of Revenue (DOR) to administer the transaction privilege and use taxes imposed by all cities and towns and to enter into a new inter-governmental agreement (IGA) with each city and town to reflect these changes and clearly define the working relationship between DOR and Arizona cities and towns.
 
State administration for the current self-collecting cities is predicated on DOR having the capability to provide an electronic means for collecting and distributing detailed taxpayer information including specific gross receipts and deductions by classification and by business location. This IGA intends to cover all aspects of administration after DOR takes over for all cities and towns, but it also includes language allowing self-collecting cities to continue their own tax and license programs until such time that DOR is able to perform the administrative functions documented in statute.
 
Although tax simplification will have the greatest impact on those cities and towns that are currently self-collecting local taxes, there are also considerable improvements for cities and towns in the State collection program as a result of simplification, particularly in the form of receiving much more detailed taxpayer data.
 
The IGA covers all aspects of local tax administration. First and foremost, the IGA addresses confidentiality, including the authorized handling of confidential taxpayer information, expectations for the discreet use of taxpayer data to prevent unauthorized disclosure, and the process we will follow in the event of a disclosure. There is also clarified and simplified guidance on the use of aggregated taxpayer data for public reporting and analysis.
 
The IGA includes clear direction regarding the sharing of general taxpayer license information, legal interpretations and written guidance, rate and fee tables, and any other pertinent tax information that needs to be shared between the cities and towns and DOR.
 
Importantly, the IGA identifies exactly which license and tax return data fields must be provided by DOR, and identifies in detail a series of new reports DOR will soon provide to all cities, both of which will serve to greatly expand the data available to the city for analysis purposes.
 
The first changes related to tax simplification that went into effect were new rules dealing with auditing, which DOR and the cities began following in January 2105. The IGA formalizes both the concepts included in statute and the main concepts used in practice by auditors in the field.
 
Key factors include a commitment to audit for all jurisdictions whenever any audit is being done; the continued authority for any city or town to perform an audit of a taxpayer that is engaged in business only in their town; the general guidance that DOR will lead all multi-jurisdictional audits, coupled with the option for DOR to delegate actual audit performance to a city or town when circumstances indicate it would be the most efficient means of completing the audit.
 
The IGA also provides guidance for handling voluntary disclosure by taxpayers, closing agreements in lieu of litigation, and sets up the responsibilities and authorities of both parties in terms of code or statute interpretations and legal support for protests.
 
Most importantly, the new IGA provides for a formal review process using the new "State and Local Uniformity Group" made up of four city and four DOR tax experts who will work together to iron out any problems or conflicts between the cities and the State.
 
The terms of this IGA run on an annual basis from July 1, 2015 through June 30, 2016 and it renews automatically each year. Either party has the right to reopen and renegotiate the terms according to provisions within the agreement.

The IGA is required under State statute. If Council does not sign the IGA, the Arizona Department of Revenue will still provide the statutorily required services in the manner described in the IGA. If Council decides not to approve the agreement it might only serve to limit the City's ability to enforce its rights and authorities outlined in the IGA.

None.

Inform