Cities Still Adjusting to Streamlined Tax

So far, the streamlined sales tax process has been anything but, and the city of Springdale stands to lose the most from the state’s participation in the federal program.

Effective Jan. 1, the change in sales tax collection has created a need for new procedures by retailers, municipal budget officers and large consumers such as construction companies.

The change, an effort by the U.S. government to standardize sales tax rules across the country with the ultimate purpose of taxing Internet and mail-order purchases, is being undertaken by more than 30 states.

Tax revenue from out-of-state retailers selling inside Arkansas could reach $10 million this year and possibly $100 million annually once Congress gives the green light to taxing Internet sales – long a goal of state governors – according to the state Department of Finance and Administration.

The essence of the new method means goods are taxed at the rate of the city to which they are delivered, no longer at the point of sale. Simply put, the sales tax from a new bedroom set purchased in Springdale but delivered to Fayetteville will be collected by Fayetteville and vice versa.

Its effect in Northwest Arkansas has been decidedly mixed so far, and city budget directors are holding back from any declarative pronouncements while hoping for enough data to make accurate forecasts for 2009.

Volatile Revenues

When Rogers received its sales tax report for March, mayor Steve Womack blew a gasket after it initially appeared the city’s usually strong receipts had declined by 16 percent and told The Morning News he was “giving up” trying to forecast revenue because of the streamlined sales tax.

It later turned out the state DFA had misplaced a tray of sales tax receipts worth more than $5.5 million, city treasurer Jerry Hudlow said, but Rogers still hasn’t gotten a good explanation for what happened even after receiving an additional $360,000 in city and county sales tax remittances.

Overall, Bentonville is up a whopping 28 percent for the year compared to the first five months of 2007; Rogers and Fayetteville are at a more realistic 4 percent and 5.2 percent, respectively; and Springdale has continued to see its revenues decline by a rate of 10.6 percent compared to the same period of 2007.

“The volatility for us has been on the upside,” said Bentonville director of finance and administration Denise Land. “We’re way up. Streamlining is part of the reason, but the economy is picking back up. It’s a combination of things.”

That volatility Land referenced has been particularly pronounced in Springdale, which has seen its remittances from the state swing wildly from month to month, according to finance director Wyman Morgan, who said totals have been off as little as 5.78 percent and as much as 14.95 percent year-over-year.

Springdale, which has seen 19 consecutive months of sales tax declines, has been hit particularly hard by the real estate and commercial construction slowdowns in Northwest Arkansas.

In 2006, nearly 16 percent of Springdale’s sales tax revenue came from delivery-centric business such as home centers, furniture stores, office equipment dealers and household appliance stores.

Nearly half (10 of 21) of the largest office furniture/equipment dealers in the area are based in Springdale (see list here.)

According to city tax reports, 83 home center businesses accounted for $130.5 million in sales and $2.5 million in sales tax revenue for Springdale.

The school of thought was Springdale would bounce back when the market sorted itself out and home inventories were absorbed, but under the streamlined sales tax process even a realty recovery won’t necessarily give it the boost it needs.

Danny Funderburg, president and chief operating officer for National Home Centers, estimated as much as 50 percent of the sales at his two Springdale stores are delivered outside the city.

Mickey Mitchell, manager of Brashears Furniture in Springdale, estimated around 40 percent of the store’s sales are delivered elsewhere.

“We were getting 100 percent of the sales tax from home supply stores,” Morgan said. “Now when home construction picks back up, the tax won’t come to us, but to the taxing area.”

Morgan pointed out only 25 percent of the city sales tax goes into the general fund for operations, with the rest funded by county sales taxes, which he says have “leveled off” and should be a more reliable indicator for budgeting purposes.

Cities won’t start forecasting until August at the earliest, and Fayetteville finance director Paul Becker said he won’t feel comfortable until 2009 when he has a full year of data to analyze.

“It will have patterns like anything else,” Becker said. “We’ll start to get a feel for it. The economy seems to be pretty stable here in Fayetteville.”

Rebate Requests

City budget directors are also holding their breaths as they wait for the anticipated impact of sales tax rebates on revenue.

In order to comply with federal requirements, the state removed the cap on sales tax that previously limited it to the first $2,500 of a purchase (excluding boats, cars, mobile homes/RVs and aircraft).

Now, business owners pay the full sales tax on the purchase amount and must then apply for a sales tax rebate through the state. Businesses or individuals have six months after the purchase to apply for the rebates, and Land suspects Bentonville will see an eventual correction in its collections.

“Then the big story will be ‘Bentonville’s taxes drop off,'” she said. “But what we’ll see after that should be a more realistic number.”

One consistent complaint among city finance directors was the lack of transparency on sales tax reports. Because companies’ financial records are private, it is impossible to attribute a spike or dip to a large, one-time purchase or to rebates turned back to taxpayers.

Land noted that Bentonville can keep tabs on its population growth through other means, such as utility hook-ups, and she speculated that businesses may have first scrambled to comply with the new tax collection process while putting off new systems to apply for rebates.

“It’s so new for everybody,” she said. “I’m sure it took a while to get into a routine.”

Funderburg said National Home Centers is doing everything it can to provide the correct invoices to customers so they may apply for rebates.

It has been a difficult process for builders, many of whom make large orders while not taking delivery all at once or previously only received monthly invoices.

“It gets into confusing stuff,” Funderburg said. “The state is still feeling their way on this and right this minute, as I understand, it’s kind of up in the air.

“The burden has really fallen on the builders more than on us. We’re trying to help them where we can, but it’s still pretty clouded on what the state will require.”

One city official wondered just how the DFA would manage to audit all the rebate claims from thousands of businesses across the state.

DFA deputy director Tom Atchley said the state is authorized to hire up to 14 people to fill new positions for auditing all rebate claims, seven of which have been filled.

He said the number of rebate applications has grown steadily since Feb. 1, the first month individuals could apply for the rebates. Hudlow said Rogers doesn’t expect to see much of an effect from the rebates since its retail industry isn’t geared toward large purchases such as building materials, furniture or appliances.

“It’s too early to tell,” he said. “It’s a little bigger undertaking than [the Arkansas DFA] first imagined. It looked good up front, but the devil is in the details.”