Consideration and Approval of Agreement:   Intergovernmental Agreement (IGA) with Arizona Department of Revenue for Transaction Privilege (Sales) Tax Auditing through December 31, 2015 (IGA for Sales Tax Auditing)

Approve IGA with Arizona Department of Revenue for Transaction Privilege (Sales) Tax Auditing through December 31, 2015.  

A recent state law requires the Arizona Department of Revenue (DOR) to takeover local transaction privilege tax administration, auditing and collection on behalf of cities.  On October 7, 2014, DOR officially postponed the implementation of the single point of administration provisions of Transaction Privilege Tax (TPT) Simplification for one additional year, until January 1, 2016. Specifically, the City will continue to issue local TPT licenses for now.  However, ADOR did not postpone and will be responsible for local tax auditing effective January 1, 2015, with the exception that the City may continue to audit businesses which are only engaging in business within the City ("single taxpayers").  State law requires that DOR and the City enter into an intergovernmental agreement regarding their respective responsibilities.  The proposed Modification merely tracks the language of state law, and is considered to be an interim agreement.  The Modification enables the City to continue to audit single taxpayers.   A comprehensive and permanent IGA with DOR is being negotiated by municipal representatives and DOR and will be brought to Council before December 31, 2015.  The Modification modifies an existing agreement with DOR related to sharing of taxpayer audit information. DOR is in the process of locating the earlier agreement, it is possible City never updated its 1990 IGA with DOR, in which case DOR may be requesting the City also adopt a more recent form of IGA, along with the Modification.

Subsidiary Decisions Points: None.

If the City chooses to not approve the IGA and not have the authority to audit taxpayers, the City could lose revenues gained from the auditing function.  In addition, the City will not be able to educate taxpayers on correcting mistakes that led to the audit, compounding the loss of revenues by taxpayers filing incorrect returns.

No.

1)  Approve the agreement and audit taxpayers through December 31, 2015.  The Arizona Department of Revenue and the City of Flagstaff will coordinate audits beginning January 1, 2016.
2)  Do not approve the agreement and do not audit taxpayers through December 31, 2015.  The Arizona Department of Revenue and the City of Flagstaff will coordinate audits beginning January 1, 2016.

In May, 2012, Governor Jan Brewer issued Executive Order 2012-01 calling for the creation of a Transaction Privilege Tax Simplification Task Force.  The Task Force was charged with:

      ...reviewing, identifying, or developing proposals that would simplify the TPT code and TPT practice in order to alleviate taxpayer frustration, improve compliance, and avoid redundancies.  Specific areas of focus shall include, but not be limited to:

               a. options for a single point administration to avoid redundancies;
               b. identification of differences between state statute and the Model City Tax Code; and
               c. standardization of definitions of taxable transactions between taxing authorities.

All three areas noted above were significantly modified by state legislation since the completion of the Task Force, as noted below.

               a. options for a single point administration to avoid redundancies;  
               
Original legislation called for the single point administration changeover to take place on January 1, 2015.  The postponement by the Arizona Department of Revenue provision has moved the date to January 1, 2016.

               b. identification of differences between state statute and the Model City Tax Code; and
               c. standardization of definitions of taxable transactions between taxing authorities.

These two areas have been modified by multiple updates to the Model City Tax Code and the State of Arizona tax codes over the past few years.  More modifications are expected in the future as the Cities and State continue to work through the simplification process.

If the City chooses to not approve the IGA with the Arizona Department of Revenue, the City will not have the authority to audit taxpayers, resulting in a loss of revenues.  In addition, the City will not be able to educate taxpayers on correcting mistakes that led to the audit, compounding the loss of revenues by taxpayers filing incorrect returns.

None.

Inform