City of Sedona to Audit Sedona Businesses

Get ready Sedona business owners because the City is setting sights on your books.
At its Jan. 12 meeting the Sedona City Council gave staff the go ahead to set wheels in motion to enable the City to audit sales tax collections. According to staff, this is the first step towards the implementation of the council’s top priority to achieve and maintain financial stability based on their November 12, 2009 retreat.

At that retreat the council also discussed the possibility of the City collecting sales taxes instead of the State in order to gain further control over the revenue.
At the Jan. 12 meeting this goal was not discussed. Auditing business sales taxes is the first step in the plan. According to Sedona Economic Planner Jodi Filardo, City Staff has been working with representatives from the League of Arizona Cities and Towns to modify the City’s tax code and to create the necessary related ordinance and resolution enabling the City to pursue the local auditing of sales tax collection. She noted deep staff reductions at the Arizona Department of Revenue, combined with the decline of City sales tax collection levels necessitate participation in sales tax audits at the local level.

Filardo said at the meeting 42 Arizona cities have supplementary local audit authority, including Camp Verde, Chino Valley, Cottonwood, Holbrook, Prescott Valley, Williams, and Winslow.
She said that the auditing could be accomplished by contracting outside professional auditing agencies instead of using City Staff. “For every dollar we spend we can get back three,” Filardo said. “It can go up to $8 for every $1 spent depending on the city and circumstance.”
She said these firms can be contracted for a flat fee per year, pointing out Bullhead City spends approximately $60,000 per year for these audits.

Sedona resident Sandy Moriarty during public comment urged the council to take into consideration the current economic situation and its impact on businesses. She noted many businesses might not know how to properly pay their taxes.
“I’ve seen comments in the media that doing audits on businesses in distress can hurt them,” she said. “People might not understand what they are supposed to do. Once they have been informed and audited, they will comply.”

According to Filardo, businesses that have been audited and haven’t paid their taxes are required to pay them. They must also pay interest on the owed amount. She said fining them is optional.

“Presuming we have conducted an audit and you have a finding, there is interest associated with the collection,” she said. “There is a penalty part but we are not required to make them pay a penalty.”

Councilwoman Nancy Scagnelli agreed people can make mistakes and some businesses owners might need to be educated so they can comply in the future. “A lot of people don’t understand,” she said. “I don’t want to penalize people at this time and put them out of business.”
City Manager Tim Ernster said leniency is an option. “We can make it as lenient as possible by waiving a fine and creating a payment plan,” he said. Councilman Jerry Frey asked when was the last time the State audited anyone in Arizona for sales tax evasion.
Assistant City Manager Allison Zelms said in 2008 and 2009 there were two audits and only because complaints had been made to the State.“Then the State did not come out on its own,” Frey noted. Staff agreed. Ernster spoke of the possibility of an audit finding a business overpaid it sales tax. “There are times where the tax is over collected,” he said. “We have to pay them back with interest.”

Councilor Cliff Hamilton asked if a business can refuse a tax audit.
Filardo said they can’t refuse. “We can audit them,” she said.
Ernster said that licensing of business will also be a requirement.
“First we get the sales tax in place by budgeting money and beginning the audits in July,” he said. “Then we have all businesses acquire formal licenses. Then we work towards collecting sales taxes ourselves rather than the State. This will take a lot more work but hopefully we can begin by November at the earliest.”

Several business owners expressed concern that their financial information would become public knowledge to their competitors. Wishing to remain anonymous, one said he fears competitors would use this information against him. “Many service businesses negotiate various prices with their customers,” he said. “Competitors could use pricing and earnings information against each other. The City is trying to act like IRS. An easier way to do this is to determine if a business has a Sales Tax Transaction Privilege License where they could compare who is filing and who is not rather than intrude on law abiding businesses that are paying their taxes.”