Date Requested: March 06, 2015
Time Requested: 11:27 AM
Agency: State Tax & Revenue Department
CBD Number: Version: Bill Number: Resolution Number:
2078 Comm. Sub. SB323
CBD Subject: Municipalities


FUND(S):

Municipal governments

Sources of Revenue:

Other Fund Municipal governments

Legislation creates:

Neither Program nor Fund



Fiscal Note Summary


Effect this measure will have on costs and revenues of state government.


    The purpose of this bill is to extend municipal home rule to all Class I, Class II, and Class III cities and allow participation of Class IV municipalities.
    
    This fiscal note relates solely to the additional authority for municipalities to impose a local sales tax if the municipality agrees to either eliminate or reduce its local municipal business and occupation tax.
    
    Under current Law, municipal governments who do not impose a local municipal business and occupation tax and municipal governments who elect to fully eliminate their municipal business and occupation tax already possess the authority to impose a local sales tax without going through the home rule process. Therefore, the provisions of this bill generally apply to municipal governments who choose to reduce their municipal business and occupation tax. The provisions of this bill would initially affect up to 50 cities depending on future population trends with an eventual potential application to all 232 municipalities in West Virginia. We have no information to fully determine how many municipalities may choose to reduce their municipal business and occupation tax in order to add the additional local sales tax. Therefore the net increase in local municipal tax revenues cannot be measured.
    
    The home rule provisions allow municipalities to retain some portion of their local business and occupation tax when deciding to impose local sales taxes. There are no set rules regarding the level or type of reduction in municipal business and occupation in the home rule Law. However, there is a provision requiring the municipality to not subsequently reinstate or raise the municipal business and occupation tax it previously reduced or eliminated. This added provision may have the unintended consequence of preserving a greater level of municipal business and occupation taxation than otherwise desired by a local government. Municipalities are likely to be more conservative with their level of planned reduction in municipal business and occupation tax given these restrictions on the use of the local sales tax.
    
    The costs of expanding local sales taxes to up to 232 municipal governments in West Virginia will be significant to both businesses and the State Tax Department. Small service sector businesses and retailers with multiple locations will face a significant increase in compliance costs related to reporting separate sales tax information for up to 232 different municipalities. In many cases, these businesses will now have to collect and account for local sales taxes in addition to continuing their filing and paying of local municipal business and occupation taxes. In some, but not necessarily all cases, they may benefit from lower business and occupation taxes.
    
    Estimated additional administrative cost to the Tax Department could be as high as $1.0 million in FY2016 and as high as $1.85 million in each subsequent year depending on the number of municipalities that choose to participate. Potential upfront costs may not be fully funded by the Tax Department's local sales tax retainage fee. However, the fee should be sufficient to offset continuing costs after start-up. Other states with local sales tax collection responsibilities at the State level (e.g., local county sales taxes in Ohio) generally require all payers to electronically file their periodic returns to help lower costs of processing. The West Virginia Tax Department may likewise seek such a requirement in the future if the number of local taxing jurisdictions increases by a significant margin.
    



Fiscal Note Detail


Effect of Proposal Fiscal Year
2015
Increase/Decrease
(use"-")
2016
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 0 0
Personal Services 0 0 0
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 0 0
2. Estimated Total Revenues 0 0 0


Explanation of above estimates (including long-range effect):


    This fiscal note relates solely to the additional authority for municipalities to impose a local sales tax if the municipality agrees to either eliminate or reduce its local municipal business and occupation tax.
    
    Under current Law, municipal governments who do not impose a local municipal business and occupation tax and municipal governments who elect to fully eliminate their municipal business and occupation tax already possess the authority to impose a local sales tax without going through the home rule process. Therefore, the provisions of this bill generally apply to municipal governments who choose to reduce their municipal business and occupation tax. The provisions of this bill would initially affect up to 50 cities depending on future population trends with an eventual potential application to all 232 municipalities in West Virginia. We have no information to fully determine how many municipalities may choose to reduce their municipal business and occupation tax in order to add the additional local sales tax. Therefore the net increase in local municipal tax revenues cannot be measured.
    
    The home rule provisions allow municipalities to retain some portion of their local business and occupation tax when deciding to impose local sales taxes. There are no set rules regarding the level or type of reduction in municipal business and occupation in the home rule Law. However, there is a provision requiring the municipality to not subsequently reinstate or raise the municipal business and occupation tax it previously reduced or eliminated. This added provision may have the unintended consequence of preserving a greater level of municipal business and occupation taxation than otherwise desired by a local government. Municipalities are likely to be more conservative with their level of planned reduction in municipal business and occupation tax given these restrictions on the use of the local sales tax.
    
    The costs of expanding local sales taxes to up to 232 municipal governments in West Virginia will be significant to both businesses and the State Tax Department. Small service sector businesses and retailers with multiple locations will face a significant increase in compliance costs related to reporting separate sales tax information for up to 232 different municipalities. In many cases, these businesses will now have to collect and account for local sales taxes in addition to continuing their filing and paying of local municipal business and occupation taxes. In some, but not necessarily all cases, they may benefit from lower business and occupation taxes.
    
    Estimated additional administrative cost to the Tax Department could be as high as $1.0 million in FY2016 and as high as $1.85 million in each subsequent year depending on the number of municipalities that choose to participate. Potential upfront costs may not be fully funded by the Tax Department's local sales tax retainage fee. However, the fee should be sufficient to offset continuing costs after start-up. Other states with local sales tax collection responsibilities at the State level (e.g., local county sales taxes in Ohio) generally require all payers to electronically file their periodic returns to help lower costs of processing. The West Virginia Tax Department may likewise seek such a requirement in the future if the number of local taxing jurisdictions increases by a significant margin.
    



Memorandum


    



    Person submitting Fiscal Note: Mark Muchow
    Email Address: kerri.r.petry@wv.gov