STATE OF WEST VIRGINIA
FULL PERFORMANCE EVALUATION OF THE
DEPARTMENT OF TAX AND REVENUE

Exchange of Tax Information
Would Enhance the Collection
of Local Tax Revenue

OFFICE OF LEGISLATIVE AUDITOR
Performance Evaluation and Research Division
Building 1, Room W-314
State Capitol Complex
CHARLESTON, WEST VIRGINIA 25305
(304) 347-4890


ISSUE AREA 1: An Exchange of State Tax Information by the Tax Department to Local Governments Would Enhance the Collection of Local Tax Revenue.

Currently, the West Virginia Tax Department does not provide local governments with state-level tax information on businesses that operate within local government jurisdictions. It would be beneficial to local governments that impose the Business and Occupation (B&O) tax to receive state-level tax information on its local businesses to ensure the maximum amount of revenue is being collected at the local level. For example, a list of all businesses registered with the State Tax Department could be used to cross-reference against local registration lists to ensure that the local government is collecting the B&O tax from every business within its jurisdiction. Also, any information resulting from the Tax Department's audits of local companies may change the company's local B&O tax liability. Without an exchange of state-level tax information from the Tax Department, local governments are without a valuable resource that will enhance the recovery of local tax revenue.

The Chief Inspector Division of the State Auditor's Office estimated municipalities will collect $124,200,079 in FY 2000 from local B&O taxes shown in Table 1 below. The ability to share information with local governments would help enhance the recovery of revenue. A one percent increase in collections would generate an additional $1,240,000 in revenue, and a five percent increase in collections would generate an additional $6,200,000 in revenue for municipalities.
 

Table 1

Estimated B&O Collections for FY 2000

Class I & II Municipalities*

$94,164,595

Class III Municipalities

$22,901,967

Class IV Municipalities

$7,133,517

Total

$124,200,079

* Classes I & II Municipalities were combined in report from Auditor's Office

The Legislative Auditor received a list of companies that are registered with the Tax Department for the city of Huntington. A list of companies that are registered with Huntington was also obtained from the city. The Tax Department's list was generated based on Huntington zip codes. The difference between the two lists is 15,856 (see Table 2). The difference may be explained by the fact that companies on the Tax Department list includes more than one location for the same business, while for the city list the company is counted once. Also, some companies on the Tax Department's list may be exempt from Huntington's B&O tax, or some companies with a Huntington zip code are not strictly located in Huntington and therefore are not liable for the B&O tax. A review of the two lists did show many companies were on both lists, however, there were companies on the Tax Department's list that are not on the city's list, and companies on the city's list are not on the Tax Department's list. It is conceivable that there are companies liable for Huntington's B&O tax that are not paying because Huntington does not have them on its list. This would be determined by an exchange of tax information. The obvious implication is a loss of revenue to the city.
 

Table 2

Number of Registered Businesses in Huntington

City of Huntington List State Tax Department's List
5,019 20,875

The reason the Tax Department does not share taxpayer information with local governments is because local governments do not have as stringent of penalties for breaching the confidentiality of tax information as those of the Tax Department. The penalty for violating these confidentiality and disclosure restrictions for the Tax Department are stated in West Virginia Code▀11-10-5d:

Any officer or employee (or former officer or employee) of this state who violates this section shall be guilty of a misdemeanor, and, upon conviction thereof, shall be fined not more than one thousand dollars or imprisoned for not more than one year, or both, together with costs of prosecution.

By law (WVC ▀8-11-1), municipalities have authority to impose penalties for violations, however, any penalty that involves confinement in a county or regional jail cannot exceed 30 days. This restriction prevents municipalities from imposing a penalty that is equal to the penalties for state employees of the Tax Department. The Tax Department is willing to exchange tax information with local governments only if the penalty for breaching confidential tax information is the same for local government workers as it is for employees of the Tax Department.

The Tax Department proposed legislation this year to allow local, municipal, and government subdivisions to be covered under the same confidentiality restrictions and penalties as the Tax Department (See Appendix A for draft legislation). The proposed legislation would have modified West Virginia Code ▀11-10-5d(Criminal Penalty section listed below):

Any officer or employee(or former officer or employee) of this state or of any county, municipality or government subdivision who violates this section shall be guilty of a misdemeanor, and, upon conviction thereof, shall be fined not more than one thousand dollars or imprisoned for not more than one year, or both, together with costs of prosecution.

If local governments had the same penalties as the Tax Department for breaching confidential tax information, the Tax Department has stated it would exchange important tax information to local governments. Consequently, local governments would probably collect additional revenue legally owed to them.

Recommendation 1:
The Legislature should consider a statutory change to impose the same penalty on state and local government employees for breaching confidential tax information.