Story last updated at 2:05 p.m. Thursday, November 28, 2002

Borough tax situation causes frustration
by Hal Spence
Morris News Service-Alaska

Members of the local recreational industry say a proposed amendment to the borough's sales tax code is arbitrary, targets recreational sales unfairly and will put their businesses at risk by forcing their customers to pay more in sales taxes than they do now.

It's just one of a host of amendments recommended to the Kenai Peninsula Borough Assembly by a sales tax committee that has been studying possible revision for more than a year. Those revisions, the committee said, aim to simplify the code and make it more equitable. Boosting revenues was not the driving force behind the revisions, they added.

But that's exactly what would happen if proposed changes are made to the way recreational sales are taxed, opponents say. It's the most controversial revision included in Ordinance 2002-39, which already has had four public hearings and will get a fifth

Dec. 10.

At issue is the way taxes for recreational sales are computed. It would require fishing charter operators, for instance, to tax customers on a per-person, per-day basis. That means charter companies would have to charge each passenger the cost of a seat on the boat and compute the sales tax for

each seat.

Today, it is possible for a charter to sell its service to a package buyer or deal with one person who pays with one check the cost of the boat for a day. Here's how: Say it costs $2,400 for a boat out of Homer Harbor for 16 passengers. The sales tax on that one transaction is just $27.50 because the sales tax is capped. It is only applied to the

first $500.

That same boat, filled with 16 individuals paying separately, would collect a total of $132 in sales tax -- 16 times the 5.5 percent tax on each $150 seat customers would pay in Homer. (That includes the 2 percent charged by the borough and the 3.5 percent charged by Homer).

The proposed amendment would treat all sales as individual sales, eliminating the ability to charge the minimal $27.50 on a $2,400 package.

It's a loophole that needs to be filled, said Assemblyman Chris Moss of Homer.

"It comes back to what was the intent of the sales tax," he said. "It was not to have people buy large packages to avoid sales taxes. This plugs up a loophole I don't think was ever intended to be there."

For the company buying its employees a fishing trip, paying $27.50 or $132 isn't likely to make that much difference. Chances are the trip would be written off as expenses in any case, Moss said.

Neither does he see individuals bent on bagging a halibut in Kachemak Bay or Cook Inlet balking at paying the $8.50 in sales taxes applied to individual seats.

The sales tax itself has never been the issue for Sean Martin, owner of North Country Halibut Charters in Homer. In fact, he said he doesn't think the tax changes would impact his business at all. Customers will still flock to Homer to catch the big ones.

What does bother him is the way the borough treats different products. Currently, the tax law views sales of goods, sales of services and rental sales as different animals. Somewhat different rules apply to each.

He sees little real difference between someone walking into Spenard Builders Supply and purchasing washers and dryers for six units in an apartment building and paying just $27.50 on the entire transaction and six people walking onto his boat for a day on the water. It's really just one sale, he said.

"It's all just semantics. They're both products," he said. "I don't have another product."

Services are treated differently from goods for good reasons, Moss said. For all practical purposes, people buying goods, such as appliances, can find lower prices by traveling to jurisdictions that have no sales taxes, such as Anchorage. That was the basis for having a cap on sales taxes in the first place -- so taxation wouldn't drive all the business to the big city.

Services enjoy the same cap. However, they essentially provide for a captive audience. One can't hook a Kachemak Bay halibut anywhere but Kachemak Bay. In that sense, goods and services are different.

Borough attorney Colette Thompson said differences are being dealt with in the proposed amendments.

"There are differences in how (goods and services) are delivered and differences in how they are taxed. That said, I understand the concern (of opponents). We are interested in being fair, too. I think assembly members are taking those concerns

seriously."

"My wheels are definitely turning," said assembly President Pete Sprague, who also chaired the sales tax committee. "We've heard quite a bit, and there has been a lot of concern. Everything proposed is subject to small, even large changes."

Sprague said he has no data suggesting that charter operators are packaging groups of people otherwise unfamiliar with each other into tours simply to avoid charging the group more in sales taxes. But that would theoretically be possible, and perhaps even be an effective marketing tool.

"I'm not suggesting that there are any charter operators doing that, but it seems fair to me to charge everyone for their seats on the boat. The bottom line to me is that the borough's levy all goes to education. I see that as being a good thing."

Sport-fishing guides are trying to avoid any perception that they are using the maximum sales tax limit as a marketing tool to get charters, Martin said. His concern remains that the new sales tax regimen would be arbitrarily applied to recreational sales when perhaps it should be applied more broadly, if at all.

"Our industry is being singled out as being treated differently," he said. "The tax itself is not an issue for me."

Diane Borgman, owner of Homer Ocean Charters, said the potential impacts go well beyond just the charter fleet.

"The recommendation is about all recreational sales," she said. "That means water taxis, kayaks, tour operators, fishing charters and more. We're only one

part of it."

The impact of the change will mean charging customers significantly more in taxes, which might hurt sales, said Borgman, who provides transportation packages for hunters. She estimated that over the course of a season's worth of trips, she would have to collect nearly $10,000 in taxes, a far cry from the roughly $1,700 she collects now.

"I'm only one vendor out of many," she said. "If the borough doesn't need the money, why are they doing this?"

Moss said the recreational sales revision probably has a 50-50 chance at this point.

"We're still listening to arguments," he said. "Nothing is cast in stone."

If it does become law, it shouldn't be implemented until 2004. Trying to go back to customers already booked for next season and tell them their quoted prices must be amended would be too hard, he said.

At some future time, the tax cap itself may come up for review and change. But that isn't likely until the borough begins to face real financial challenges, he said.

Hal Spence is a reporter for the Peninsula Clarion.

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