There have been a number of questions about the tax changes made during the 2007 Legislative session and how they will impact Utah cities and towns. In particular, there have been questions about what action cities may have to take in response to legislative actions.
It should be noted that virtually all of the tax changes were part of the comprehensive and voluminous tax bill which incorporate virtually every tax change made during the session. This bill was Second Substitute Senate Bill 223 sponsored by Sen. Niederhauser. The bill incorporated not only all of the sales tax related changes but also the income tax reform. It also included a number of special business tax changes. The principal exception was the municipal telecommunications tax change that was done through House Bill 238 by Rep. Wayne Harper.
The following information outlines the primary changes that affect our cities. Obviously all cities are not impacted by every tax change. However, there was enough of an overlap that we chose to outline all of the tax changes in this single letter.
The Removal of Food from the Specialty Taxes
Non-prepared food was exempted from the sales tax base for the specialty tax levies (previously referred to as the “boutique taxes”). In some instances there have been attempts at offsetting revenue increases. All sales tax changes take effect on January 1, 2008. Be aware that the actual impact of the food removal will vary from community to community and will depend entirely on what portion food sales represent of your community’s tax base.
Municipal Local Option Tax (1%)
This municipal local option tax was not affected by the partial removal of sales tax from unprepaired food items. There will be no revenue implications associated with this revenue source.
Municipal Transportation Tax Levies and Transit Levies
There are a number of specialized transportation levies that were impacted by the removal of food. To offset the impact of the food removal the tax rates were raised on the remaining tax base. The increase will take place automatically on January 1, 2008. No action is required by cities or towns.
Resort Community Tax
The legislation authorized an increase in the base resort community tax rate cap from 1% to 1.1% to minimize the impact of removing food. Since this action involves an increase in a rate cap, cities will have to pass a new ordinance to implement the new rate cap. Be aware that although the law change itself does not take effect until Jan. 2008, current law requires a 90 day notification to the tax commission prior to implementation. As such, impacted cities should not delay making decisions and necessary ordinance change. Lastly, there was no offsetting rate increase on the additional .5% resort tax dedicated for debt reduction.
ZAP/RAP
Generally this tax rate is imposed at the county level. However there are a few cities that impose the tax. The legislature did not authorize any offsets for the elimination of food. Therefore, impacted communities should anticipate a loss of revenue.
Generally speaking, the offsets that were provided in the legislation cover any anticipated losses that would be associated with a reduction in the tax base. While this is predicated on the composition of the tax base for each affected community, it is fair to say that most cities and towns will see little or no negative impact related to the removal of sales tax on food, and in many circumstances the net result will be revenue positive.
Municipal Telecommunications Tax
All of our cities and towns have been on notice for some time that eventually the rate cap of 4% for the Municipal Telecommunications Tax would be lowered. This is the year it happened. Beginning July 1, 2007 the new rate cap will be 3.5%. It is important to note that the legislation incorporated language authorizing the Utah State Tax Commission to automatically make the adjustment for cities imposing the tax at the 4% cap. As such, cities do not need to go through the process of changing the ordinance and notifying the tax commission. (Cities will probably want to adjust their ordinance anyway to reflect the actual rate cap. However, you are not under the tight time frames associated with meeting the July 1st deadline. Regardless of what you do – beginning July 1st you will only receive revenue associated with a 3.5% cap.)
This automatic process does not apply to a city that: (a) is currently at 4% and wants a rate other than 3.5%; (b) a city not currently at 4% that wishes to change its current rate; or (c) a city that currently does not impose the tax. These cities will need to enact the appropriate ordinance and notify the tax commission. Please note for these cities action will need to be taken very quickly in order to meet the appropriate deadlines.
These two bills, SB223 and HB238, generally capture all of the statutory tax changes made during the 2007 session. It is not, however, reflective of all legislation effecting municipal revenues. If you have questions regarding these two bills and their impacts or any other legislation please do not hesitate to call Lincoln Shurtz at the ULCT office - 801.328.1601. All in all it was a very good year for local government on Utah’s Capitol Hill. Please check your mailboxes soon for additional insights on the 2007 legislative session. In addition, please plan on attending the ULCT Midyear Conference in St. George on April 12-13 for a great post-legislative session recap.
Sincerely,
The Utah League of Cities and Towns Lobbying Team.
