Story last updated at 1:43 p.m. Thursday, November 14, 2002

Tax code changes rile businesses

Effect on nonprofit groups also questioned

by Chris Bernard
Staff Writer

Proposed changes to the Kenai Peninsula Borough's sales tax code were on the menu for Tuesday's Chamber of Commerce luncheon, but not everyone in attendance could stomach the fare.

Audience questions kept the speakers at the podium well after the luncheon's customary one-hour time limit had come and gone.

The meeting was one of the few remaining opportunities for borough residents to comment on the proposals. Another public hearing is planned for Tuesday in Soldotna, and the ordinance will appear before the borough assembly in December for a vote, said assemblyman Chris Moss of Homer.

The proposed changes were presented at the chamber meeting by Moss, borough sales tax auditor Deray Jones and borough controller Craig Chapman.

Most of the audience questions were detail-oriented requests of Jones to more clearly define the changes and apply them to specific examples.

The changes seek a simpler, more equitable and progressive sales tax. A committee looked at the existing code and drafted a series of recommendations based on public input from all five cities subject to the tax.

The most controversial recommendation presented at the meeting concerns the borough's recreational sales tax, which would change to a per-person, per-day basis. The change would increase borough tax revenues, but charter operators were vocal in their opposition to the proposal, which would discourage "package" deals.

Diane Borgman, who owns Homer Ocean Charters, said the change would not only increase sales tax charges disproportionately, but it would be nearly impossible to enforce.

"When I charter a whole boat to a single person, I charge them a package rate and the package sales tax of $27.50," she said. "They're charged the package price whether there's one person or 50, because it's a single person purchase."

But under the proposed change, Borgman would have to charge a sales tax to each person who goes along on the charter. That could raise the sales tax amount on a single charter by as much as five times, she said, from $27.50 to more than $175.

Because the package price is lower than it would cost to rent each seat individually, she'd also have to figure out what the per-person cost would be and charge each person a sales tax individually.

"It doesn't make any sense," Borgman said. "It's a single purchase. It doesn't matter how many people are on board. Most charters are seasonal businesses. We're trying to get people here to bolster the economy. If we have to tell people we have to charge $175 in taxes, they're going to start saying 'no way.'"

Other recommended changes are largely administrative in nature, and include:

* Exempting services performed under warranties and service agreements.

Currently, service providers often are unable to collect sales taxes from customers getting work done under manufacturers' warranties, or get the manufacturers to reimburse them for the sales taxes service providers must remit to the borough.

* Allowing lodging and meals to be eligible for treatment as resale transactions.

In Jones' example, a charter operator providing lunch for a client would bill the client separately for the meal, then buy the meal using a resale card, without paying a sales tax. The client would pay the sales tax to the charter operator for the sandwich, effectively transferring the point of tax without affecting the amount of the tax.

* Reducing the cost of an owner-builder card from $200 to $100, and including services under an existing exemption.

The revenue impact to the borough is expected to be minimal, Jones said.

* Defining the taxability of vending machine sales on a per-transaction basis.

* Clarifying how installment sales and vehicle leases are to be treated under the code. It would have no revenue impact, but it anticipates such provisions as seasonal sales taxes by applying the sales tax in effect at the time of the sale, even though installments would be made over periods of varying tax levels.

* Taxing recreational sales on a per-person, per-day basis.

The impact is hard to estimate, Jones said, because of limitations of the sales tax system, but it is expected to mean "a substantial revenue boost" to all taxing jurisdictions with a lot of recreational sales.

* Clarifying that the point of sale of goods is generally the retail outlet where they were sold.

In Jones' example, a delivered pizza is taxed at the pizza shop and not at the point of delivery.

* Providing for the taxation of services based on the invoicing practice of the provider.

This issue raised several questions from the crowd, which said the City of Homer bills moorage rates for an entire year, changing the amount of the sales tax.

Jones said he believes that had more to do with the way the city bills than it does with the borough's tax requirements.

One recommendation limits the tax-exempt seller status of nonprofit corporations when competing with for-profit entities, and requires all nonprofit corporations to register with the borough.

In Jones' example, the Alaska SeaLife Center gift shop in Seward sells the same T-shirts as the shop across the street. Because the gift shop is tax-exempt, the shop across the street must sell the shirts at a higher rate to cover the sales tax.

"This allows the borough to look at this on a case by case basis," he said. "Our goal is to give the borough some leeway."

But audience questions about what nonprofits would be taxed drew noncommittal responses from Jones.

"We don't want to charge sales tax to a fund-raiser," he said. "And we're not out to charge Girl Scouts or the Little League."

Borgman also spoke out against this recommendation at the meeting.

"You can only go so far in trying to make things equitable," she said. "This is going over the line. Nonprofits have been cut and cut and cut, and now they want to cut them again?"

Another committee recommendation would extend an existing sales tax exemption for nonprofit child-care and adult day-care facilities to all such facilities, regardless of their tax-exempt status. While the change is expected to lower borough tax revenues by almost $40,000, it will eliminate a possible unfair advantage enjoyed by nonprofit facilities.

There are about 7,000 businesses registered with the borough, Jones said. The sales tax brings about $15 million in revenue annually to the borough.

Chris Bernard can be reached at