Consideration and Adoption of Resolution No. 2014-24, and Consideration and Adoption of Ordinance No. 2014-16: A Resolution of the City Council of the City of Flagstaff, Arizona, Declaring that Certain Document Known as "The 2014 Use Tax Adoption and Related City Tax Code Amendments" as a Public Record, and Providing for an Effective Date; and an Ordinance of the City Council of the City of Flagstaff, Arizona, Amending the Flagstaff City Code, Title 3, Business Regulations, Chapter 3-05, Privilege and Excise Taxes, is Hereby Amended by Adopting "The 2014 Use Tax Adoption and Related City Tax Code Amendments" by reference as Set Forth in that Public Record on File with the City Clerk; Providing for Penalties, Repeal of Conflicting Ordinances, Severability, Authority for Clerical Corrections, and Establishing an Effective Date. (Adoption of local 1% use tax)

As part of the FY15 budget preparations, a list of possible revenue sources was presented to City Council.  After further discussion at FY15 budget retreats, City Council requested staff to proceed with steps necessary for adoption of a use tax at the base rate of 1%.  The public hearing, resolution adoption, and ordinance adoption are the formal procedures required to adopt the use tax. 

Subsidiary Decisions Points: None.

The City does not currently levy a use tax.  If the proposed resolution and ordinance are approved, the City will levy a use tax at a rate of 1%.  The estimated revenue for the first year is $100,000.  Future years are estimated at $250,000 per year.   

Effective governance.

Yes.  Use tax has been discussed multiple times during budget preparations for FY15. Public Hearing and first read of the ordinance was held on July 1, 2014, along with reading the resolution by title only.

1) Adopt the proposed resolution and proposed ordinance and set an effective date of October 1, 2014.
2) Do not adopt the proposed resolution and proposed ordinance and do not set an effective date of October 1, 2014.

Model City Tax Code; Use Taxes

Arizona cities and towns have had the ability to impose local taxes since before statehood.  Local taxes include local transaction privilege taxes, use taxes, license taxes, and property taxes. In 1987 the City of Flagstaff and other Arizona cities and towns approved the Model City Tax Code ("MCTC"), a uniform tax code that includes several options for imposition of a local transaction privilege tax, use tax, and some exemptions. Each city has the right to set its own tax rates. A copy of all MCTC options is located on the Arizona Department of Revenue website, www.azdor.gov.  The City of Flagstaff's adopted version of the MCTC is located at Chapter 3-05 of the City Code and can be accessed on the City website, www.flagstaffaz.gov.   The City imposes a local transaction privilege tax ("TPT"), which is a tax on gross income or gross proceeds from engaging in business within the City. This is a tax on certain businesses, although businesses may elect to "pass through" the tax to the customer. The City’s base TPT rate is currently 1.721% and there is an additional voter approved 2% levied on the restaurant/bar and the hotel/motel classifications ("BBB Tax").  The City Charter requires voters to approve any rate change in the TPT.

The City is considering adoption of a use tax. A use tax is a tax on storage or use of tangible personal property in the City. The use tax is similar to the local transaction privilege tax but is an "affiliated excise tax."  A use tax is imposed on the user, not the business that sold the item.  However in some instances the business may collect and remit the use tax. A use tax is typically imposed in the situation where a person has purchased an item outside the state of Arizona where there is no sales tax (such as Oregon), but uses the item within the City. The City will not collect a use tax from anyone who has already paid an equivalent local transaction privilege tax.  Many times, the use tax is considered an equitability tax because it creates a level playing field for all businesses.  Local businesses that are required to levy a transaction privilege tax will not have an unfair disadvantage over those non-City businesses that can sell products tax free.  The City Charter does not require or allow voters to approve a use tax.
 
Use tax is a common tax levied throughout the United States and within the State of Arizona.  The State of Arizona collects use tax.  52% of all Arizona cities collect a use tax.  Of Arizona cities with a population over 20,000, 73% collect a use tax.  Of Arizona cities larger than Flagstaff, 83% collect a use tax. 

Examples of Use Tax Remittance

Three examples of use tax remittance are noted below.

Example 1: New Car Sales from Outside the State of Arizona

A vehicle is purchased from an out-of-state car dealer and brought back to Arizona.  The purchaser did not pay any local sales tax in the other state.  The owner of the vehicle lives in Flagstaff and registers the car in Flagstaff.  The owner is subject to Arizona and Flagstaff Use Tax. 

Example 2: New Chain Restaurant Opens in Flagstaff

A new chain restaurant is opened in Flagstaff.  Fixtures and equipment are purchased from out-of-state and delivered to Flagstaff.  The purchaser did not pay any local sales tax in the other state.  The new store’s fixtures and equipment are subject to Arizona and Flagstaff Use Tax.

Example 3: New Equipment for Dental Office in Flagstaff

A dentist in Flagstaff purchases dental equipment from an out-of-state vendor. The purchaser did not pay any local sales tax in the other state.  The dentist is subject to Arizona and Flagstaff Use Tax.

Important Points

There are exemptions within the use tax category that will apply with a use tax adoption.  Key exemptions are noted below.

• New residents that move to Flagstaff and transfer their possessions from other areas are not subject to a use tax on such transfers.
• An item purchased by an individual for less than $1,000 for personal use and enjoyment is not subject to a use tax.
• Casual sales between individuals are not subject to a use tax.
• Purchases where an equivalent sales tax is paid are not subject to a use tax. 

Propose Use Tax Code Changes

Model Option 15             (Proposed City Code Division 3-05-006)

In order to implement a use tax, City Council must remove Model Option 15.  The removal of this option will allow the City to impose a use tax.

Local Option AA             (Proposed City Code Section 3-05-006-0660(X))

Staff recommends adopting Local Option AA and exempt cost of restaurant employee meals from use tax.  The amount of revenue from this portion of the use tax is projected to be relatively small and it may be an undue burden on businesses to report.

Local Option HH            (Proposed City Code Section 3-05-006-0660(Y))

Staff recommends adopting Local Option HH and exempt cost of charitable donations from use tax.  The amount of revenue from this portion of the use tax is projected to be relatively small and it may hamper future donations by individuals or businesses if there is a tax associated with the donation.

Local Option JJ (Information Only)      (Proposed City Code Section 3-05-006-0660(Z)(Reserved)

There is no decision for Council on Local Option JJ.  However, staff wanted Council to be aware that the City does not exempt itself from the remittance of use tax.  The City currently pays use tax to the state and if the resolution and ordinance are passed, the City will start paying use tax to itself.

If the Council adopts the proposed resolution and ordinance, staff will perform outreach to notify Flagstaff area businesses.  Examples of outreach staff will perform, include, but are not limited to: informational inserts in transaction privilege tax returns, mailers, newspaper releases, web notices, and tax information sessions.

None.

Inform.  The public has been made aware of the possible adoption of a proposed use tax via the following:  A use tax was discussed at the FY15 budget meetings held in April, which were public meetings, and information concerning budget discussions was reported in the local paper, the Arizona Daily Sun.  Notice of a proposed use tax has been posted on the homepages of the City website continuously since April 28, 2014.  In addition, notice of a public hearing on the proposed use tax was published in the newspaper at least ten (10) days prior to the July 1, 2014 Council Meeting.  The public hearing enables the public to voice their support or concerns.  In addition, City staff has personally contacted some taxpayers to discuss possible impact of the tax.