After review, city identified 18 businesses or organizations it says shouldn't have been on the tax exempt list. BBEDC and Nushagak Cooperative protested, saying as non-profits should be exempt from paying city's six percent sales tax.
The city of Dillingham is looking to either change part of is municipal code or start requiring more non-profits in town to pay the six percent sales tax. The city says the current definition of “charitable” does not include several organizations, including BBEDC, that have been granted tax exempt status in the past. No changes to code have yet been made, but enforcing the regulations the way they are written now has met with some resistance.
Audio Transcript: The city’s municipal code has a more narrow definition of who qualifies for tax exempt status than has been applied in the past. A letter was recently sent to 18 businesses or organizations notifying them that their tax exempt status had been revoked. Some, like Knik Construction, Icicle Seafoods, and most air taxis in town, seemed obvious, Mayor Alice Ruby said at the last Finance and Budget committee meeting.
"A lot of those didn’t qualify, at least obvious to us. Many of those just didn’t fit the code as far as being charitable organizations," said Ruby.
At stake is whether or not those organizations pay the city's six percent sales tax when making purchases in town.
"Nowhere in the code does it identify not-for-profits," said Finance Director Navin Bissram, addressing the discrepancies staff discovered with a fresh look at the code versus the tax exempt list. "It identified religious, charitable, and governmental. The question came, ok so we’re familiar with what is religious, [but] charitable? Not exactly sure. The attorney provided guidance in determining and providing a definition of what exactly is meant by charitable.”
Defining charitable is probably where city staff made mistakes in the past regarding the non-profits. According to the IRS, 501(c)(3)s are recognized as charitable, but there are quite a few other 501(c) non-profit designations, like 501(c)(4)s that are listed as “social welfare” organizations. On that list in Dillingham is the Bristol Bay Economic Development Corporation, which strongly protested the city’s notification that it would need to begin paying sales tax in town.
Keggie Tubbs addressed the committee on behalf of BBEDC.
"We believe the city staff exceed their authority by unilaterally changing the interpretation of code without due process to organizations affected by this decision and without what appears to be the full council consultation or approval," he said. "While splitting hairs, BBEDC is a not-for-profit in the eyes of the IRS, and as such should continue to qualify for the exemption as a 501(c)(4)."
The city says to do that it would need to change its municipal code to clarify or expand the definition of charitable, or add more exempted classifications.
The only other entity to protest the city’s tax exempt status revocation was Nushagak Cooperative, which is a 501(c)(12).
"As an electric and telephone cooperative, NETC is exempt from "state and local ad valorem, income, and excise taxes that may be assessed or levied," a lawyer wrote on behalf of the Dillingham-based utility cooperative. An attorney for Dillingham argued back that an "excise tax is usually considered to be quite different from a general sales tax" used by the city.
The city council agreed to waive a handful of non-profits for now while the matter is referred to the Code Review Committee.
The city has not yet estimated how much new revenue will be collected as it enforces the six percent sales tax on the list of businesses and organizations it says had been incorrectly granted tax exempt status. In fiscal year 2016, the city collected $3,081,594 in sales tax out a total revenue of a little more than $13,000,000. The sales tax revenue is higher than real and personal property taxes, which raised $2,496,326.
At the same committee meeting, members discussed other sources of increased revenue, including higher landfill fees, adding a tobacco tax, and taxing the sale of alcohol purchased at Anchorage retailers and shipped to town.
The city council meets this Thursday at 7:00 p.m., and the Code Review Committee meets Thursday, February 9 at 5:30 p.m.
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