Governor’s Tax Simplification Task Force Overview and Impact on City of Phoenix Presentation to Phoenix Chamber of Commerce January 15, 2013

Governor’s Tax Simplification Task Force May 2012, Governor Brewer establishes a Transaction Privilege Tax Simplification Task Force Issued a report of findings and recommendations to the Governor, Speaker of the House and Senate President on December 13,

Task Force Recommendations SUPPORTED MEASURES (Loss of $450,000) –Standardize tax base between the state and the cities –Keep a standardized tax base in the future –Standardize TPT licensing –Monitor federal legislation on online sales –Study impact on tax of online retail and remote sales –Position Arizona to benefit from taxation of online retail sales –Complete a portal to allow tax license applications and returns be filed in one place for all jurisdictions MAJOR CONCERNS (Loss of $28 to $43 million) –Exempt construction activities and tax materials at the point of sale –All audits performed by the state –State will collect sales tax for all cities 2

Exempt Construction Activities Potential Loss of $11 - $25 million $43 million in construction tax in FY 2011 –Only a portion will be recouped by a tax on materials at the point of sale Estimated loss of up to $25M will impact multiple funds –General Fund $8.4 million (70% Public Safety) –Convention Center $11 million (not part of the retail tax distribution) –Transit $2.8 million –Dedicated Public Safety Funds $2.1 million –Parks & Desert Preserve $700,000 3

All Audits Performed by the State Potential loss of $10 million State auditors concentrate on State issues State does not focus resources on local matters (Loss of $10 million) –Payments to incorrect city are not identified –Commercial & Residential Rental –Food for Home Consumption –Advertising City focuses on noncompliance to provide a level playing field to businesses Current law gives the taxpayer options –Taxpayer can avoid multiple audits by choosing a joint audit for state and cities 4

State Collects All Sales Tax State lacks the resources and systems –State takes three weeks to deliver list of taxpayers who paid –No reporting of taxpayer balances due or collections actions –Large refunds, amendments, and adjustments are identified after they have already occurred –Payments to the wrong city are not identified –Errors on city returns are a low priority –Business classifications with the same tax rate are not reported separately –Some cities who were in the state system opted out State must add resources to achieve city service levels –System enhancements/replacement –Personnel 5

State Collects All Sales Tax Minimum loss of $7 million State takes weeks to process city payments (Loss of $5 million in interest revenue) Lost licensing fees of $2 million Other Concerns –Customer service –Limited taxpayer education –Taxpayer fairness and equity –Limited taxpayer enforcement activities 6

What’s at Risk  AAA credit rating  Inability to reliably forecast revenues  Compliance with voter approved dedicated sales taxes  Less financial flexibility  More difficult to evaluate Public & Private Partnership project impacts  Revenue Impacts $28 to $43 million 7

Proposed Alternative Solution To Areas of Concern Continue standardization of Tax Codes Develop “Trades” construction contracting exemption –Develop trades definition in tax code and allow those small businesses to pay taxes on materials –Meet with large contractors to develop more simplified reporting Require all auditors to audit on behalf of all jurisdictions as Single Audit –Joint training requirement for all auditors (ADOR and cities) –All audits meet common standards –Joint audit planning to leverage limited resources to assist State and cities in compliance Implement Online Portal that allows single point for license and payment for all jurisdictions. 8