Memorandum

City of Lawrence

Finance

 

TO:

Thomas Markus, City Manager

FROM:

Kristy Webb, Utility Billing Manager

CC:

Casey Toomay, Assistant City Manager

Jeremy Willmoth, Finance Director

DATE:

December 13, 2018

RE:

Sales Tax collections

 

Summary

On May 1, 2018, Kansas Department of Revenue brought to Finance staff’s attention that Utility Billing has not been collecting or remitting the TDD sales tax on water sales from 18 accounts that fell in the TDD special tax districts. In the process of reviewing the sales tax situation, Finance staff discovered that sales tax was being collected and remitted incorrectly on poly carts and yard waste carts for solid waste services. All identified sales tax issues have been resolved going forward, and the appropriate sales tax will be collected and remitted. The over-collected taxes on the poly-carts is in the hands of the State of Kansas.

 

Sales tax for utility services applies in the following instances:

Service Type

Sales Tax Applicable

Water - Residential

No

Water - Commercial

Yes

Sewer - Residential & Commercial

No

Solid Waste Services (hauling, tonnage charges) - Residential and Commercial

No

Rental or sales of waste collections bins or dumpsters, if not associated with charges for hauling of the contents. This includes roll-off dumpsters, yard waste carts, and compost bins

Yes

 

Background

A transportation development district (TDD) adds an additional sales tax to the base sales tax for the purpose of generating revenue to reimburse the project for certain transportation-related expenses associated with the development. In Lawrence, there are three authorized Transportation Development Districts. There is currently a 1-cent TDD sales tax in the following locations:

 

 

 

The Oread Hotel located at 12th and Indiana, the City Commission approved a 22-year TDD for this project in April of 2008. The TDD sales tax will be in place for 22 years starting October 2009, and will be used to help pay for up to $8.5 million in developer-paid, transportation related public infrastructure expenses. There is one utility account associated with this tax district.

 

Bauer Farms located at the northeast corner of the intersection of 6th and Wakarusa Streets. Approved by the City Commission in October of 2008, Bauer Farms provides a variety of retail stores for residents of western Lawrence. The TDD sales tax will be in place for 22 years starting April 2009, and will reimburse up to $5 million in developer-paid, transportation related public infrastructure expenses. There are 15 utility accounts associated with this tax district.

 

9th & New Hampshire - a 1% TDD sales tax was authorized in April 2014 by the City Commission to support a new, mixed-use hotel with retail space and underground parking in the South Project Area (located within the southeast quadrant of the 9th & New Hampshire intersection) and a new, mixed-use apartment complex with commercial space and underground parking in the North Project Area (located within the northeast quadrant of the intersection). The 22 year TDD, which started in January 2015, will reimburse up to $3 million, with the first $850,000 used to pay back bonds on the public parking garage located in the 900 block of New Hampshire Street and the remainder to reimburse developer-paid, transportation related public infrastructure expenses. There are three utility accounts associated with this tax district.

 

TDD Collection Issue

On May 1, 2018, Kansas Department of Revenue brought to Finance staff’s attention that Utility Billing has not been collecting or remitting the 1-cent TDD sales tax on water sales from 18 accounts that fell in the TDD special tax districts. This resulted in the developers of those associated developers not receiving the 1-cent TDD on commercial water sales within those tax districts. Water sales are only taxable on commercial uses. Finance appropriately collected and remitted the state, county, and city sales taxes from those 18 commercial water accounts. Finance staff, in cooperation with the Kansas Department of Revenue, corrected the problem going forward by adding an additional rate schedule to the billing system, which applies to only the accounts that fall within each TDD tax district. There were system limitations of the current billing system that required system changes to make the correction. The identified TDD sales tax issues were corrected effective with all June billings. There is no record of Utility Billing ever having collected or remitted any of the TDD sales tax since their inception in 2009 and 2015. The amount of TDD sales tax that should have been collected since September 2013 for each tax district is listed below.

 

TDD Sales Tax Not Collected

Year

Bauer Farms

The Oread Hotel

9th & New Hampshire - North

9th & New Hampshire - South

2013

$83.94

$14.81

$0.00

$0.00

2014

$298.08

$48.79

$0.00

$0.00

2015

$385.85

$89.42

$0.71

$29.84

2016

$478.81

$191.32

$27.60

$44.37

2017

$422.76

$373.76

$125.82

$52.74

2018

$186.26

$119.98

$43.95

$23.06

TOTAL

$1,855.70

$838.08

$198.08

$150.01

 

 

Solid Waste Collection Issue

In the process of reviewing the current sales tax situation, Finance staff discovered that sales tax was being collected and remitted incorrectly on poly carts and yard waste carts for solid waste services. Poly carts are used when the customer requests an additional cart for their solid waste services. Typically this is used by a residential customer, but there are a few commercial accounts that request a poly cart. The charges for these carts are associated with charges for hauling of the contents, therefore sales tax should not apply to these services, however sales tax was being collected and remitted. For certain this had been occurring as far back as billing records go in our current billing system, September 2013. Typical monthly sales tax charged on a poly cart for a residential customer was $.34 on 65-gallon cart, based on current Solid Waste and sales tax rates. Solid Waste also provides roll-off dumpster containers for commercial and residential applications. Charges for roll-off dumpster containers are broken down into rental, hauling, and tonnage charges. The container rental charges are sales tax applicable, per Kansas Department of Revenue. The state, county, and city sales taxes were collected and remitted appropriately for roll-off dumpster container rental charges. There below chart shows the sales tax collected and remitted over the last three years to the State for poly carts that should not have been collected and remitted, as well as the number of utility billing accounts affected by this.

 

 

2016

2017

2018

City Tax

$1,292.21

$1,420.98

$527.03

County Tax

$851.40

$992.40

$363.74

State Tax

$5,506.00

$5,989.20

$2,263.55

Total

$7,649.61

$8,402.58

$3,154.32

# of Accounts

1,777

1,654

1,393

 

Yard waste carts are for residential use only. Customers purchase the carts and place their yard waste in them for weekly pickup by Solid Waste. This is a sale of a tangible item, therefore sales tax should apply to this item, however sales tax was not being collected nor remitted. Yard waste carts are purchased for $60, which should have had an additional $5.43 in sales tax collected with each sale (at current sales tax rate of 9.05%). This had been occurring as far back as when yard waste carts started being sold in 2012. Prior to 2017 there were 13 yard waste carts sold. In 2017, customers could no longer use their own carts to dispose of yard waste, which increased the number of yard waste carts sold. There have been 2,290 yard waste carts sold in 2017 and 2018 to date. All of the identified sales tax issues related to Solid Waste charges were corrected effective with all June 2018 billings and moving forward.

 

Compost bins are a point of sale item sold from the Solid Waste office. This is also a sale of a tangible item, therefore sales tax should apply to this item, however sales tax was not being collected nor remitted. Compost bins are purchased for $40, which should have had an additional $3.62 in sales tax collected with each sale (at current sales tax rate of 9.05%). This had been occurring as far back as when yard waste carts started being sold in 2005. There have been 844 compost bins sold since 2005. Starting in June 2018, sales tax is being collected and remitted on all compost bin sales.

 

Resolution

All identified sales tax issues have been resolved going forward, and the appropriate sales tax will be collected and remitted. The resolution for each issue presented above is summarized below.

 

Issue

Resolution

TDD Sales Tax

·         The City does not plan to collect and remit any uncollected TDD sales tax from sales prior to June 2018.

·         No further action is needed on this issue. The issue was reported for the purpose of full transparency.

Poly Carts

·         All tax that was over-collected was remitted to the State of Kansas.

·         The City has no legal obligation to refund the customers directly, but if the City is contacted directly by customers who over paid on sales tax, the City will accept their request for a sales tax refund.

·         Requests for refunds on over-collected sales tax must be filed within three years from the date the tax was due.

·         This amounts to approximately $4.08 per year for the typical customer that purchased an additional poly cart.

Yard Waste Carts/Compost Bins

·         The City does plan to remit to the State of Kansas the $11,509.34 in sales tax that should have been collected and remitted for all yard waste cart sales and the $546.62 that should have been collected and remitted for all compost bin sales in the last three years.

 

To prevent similar sales tax issues in the future, the Finance Department recommends that any City department, offering a new item available for purchase, should request a pre-sale review from the Finance team for a sales tax evaluation.