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Updated Jun 13, 2013 - 8:06 pm

Deal cut on Gov. Jan Brewer’s sales tax overhaul

PHOENIX — The Arizona Legislature was poised to adopt a major overhaul of
the state’s complicated sales tax collection system in the final hours of the
session Thursday night after a deal with cities and towns removed a major
roadblock.

Municipalities led by the League of Arizona Cities and Towns were able to hold
off the overhaul after raising concerns they would lose revenue. But Gov. Jan
Brewer made major compromises and the measure finally appeared ready to pass the
Senate and House on Thursday night.

The overhaul would not impact what ordinary consumers pay at store checkouts.
Instead, it will make it easier for businesses that pay a so-called Transaction
Privilege Tax. The deal leaves in place a tax on new construction that funds
many city projects but eliminates it for companies that do home and other
repairs.

Municipalities could still lose revenue, but the compromise gives them better
ways to track revenue and clarifies how audits are done, said the sponsor. Rep.
Debbie Lesko, R-Peoria. The deal that was finally cut Thursday happened after
months of impasse.

“The League came to the table,” Lesko said. “The League came to the table
and gave us some reasonable language about what they wanted.”

The deal came together as the Legislature pushed out a budget and Brewer’s
Medicaid expansion plan and made a rush to finish work and adjourn Thursday
night.

The overhaul targets the state’s complex system where businesses are taxed on
their revenues, at different rates by different entities, including the cities,
counties and the state. The tax on contractors and other business transactions
is known as the Transaction Privilege Tax, and the state alone is estimated to
collect $3.8 billion of the state’s total revenue of $8.6 billion this budget
year. Businesses also were subject to multiple audits and had to file returns in
every city, county and town where they operated.

That system will be eliminated, with the state overseeing all those functions.

The biggest worry for cities and towns was the proposal to change how they
collect from builders and other contractors. Currently, they pay based on 65
percent of the cost of the total job, 35 percent of which is for labor costs.
Much of that tax now flows to the community where the building is done, helping
offset increased costs of providing services.

Brewer’s original proposal would have eliminated the contractor tax system in
favor of one where they pay taxes on supplies when they buy them and eliminated
tax on labor. That would have sliced a huge chuck of revenue from growing cities
which don’t have major retail or wholesale operations.

The approved compromise allows the construction sales tax to continue but still
follows the same principal for tradesmen who do home repairs like plumbers and
air conditioning repairmen. They would pay sales tax just on parts and equipment
when they buy it. All those taxes are eventually passed on to consumers.

The two other major parts of the overhaul _ a single point of administration
and auditing, move into a state-system of oversight. That will allow Arizona to
collect sales taxes on Internet sales if Congress passes a law being considered
allowing that collection.

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