State relies on local collections to close revenue gap

NASHVILLE — Tennessee won’t formally take over local business tax collection from city and county governments until Jan. 1, but Revenue Commissioner Reagan Farr said oversight compliance for businesses required to file by Nov. 30 will begin sooner.

As a result, Mr. Farr said, state government will meet estimates of generating $21 million for recession-battered state coffers by taking over collections.

“The clerks are collecting all of the necessary data for us,” Mr. Farr said. “Contractors who should be paying but aren’t will still be assessed by the state with the state’s enhanced collection and enforcement powers.”

Lawmakers in the spring transferred administration and enforcement of local business taxes to the state. Mr. Farr said the state’s database, which includes federal Internal Revenue Service information, gives Tennessee officials more tools to enforce compliance.

Tennessee Municipal League Deputy Director Chad Jenkins said there is an “inherent flaw” with current enforcement of local business collections. Local officials have had “very limited ability to verify what was being reported and the accuracy of what was collected,” he said.

The statute took effect July 1 and gives the state until Oct. 10, 2010, to decide how and when the changeover is implemented. Tax revenue will continue to be shared between state and local governments.

There are five classifications of businesses that pay local business taxes, and they file at different times of the year. Those is classification four — primarily businesses with contracting licenses — have until Nov. 30 to file tax returns with county clerks and city clerks or equivalent officials.

State officials said they believe a number of subcontractors currently are either not reporting or underreporting revenues and taxes. The state expects this classification will provide a substantial amount of the $21 million expected to be collected.

Local governments expect to receive an additional $24 million.

Mr. Farr disputed a report in the TML’s Tennessee Town & CIty newspaper that stated the takeover was postponed until Jan. 1.

TML’s newspaper reported in its Sept. 21 edition that “the department has been unable to complete the development of the database and technical tools required for implementation within the desired time frame. As such, the department has been forced to postpone the transition.”

Mr. Farr said his department did not plan to administer and collect 2009 returns for Classification 4 businesses.

As currently planned, businesses with local contracting licenses will file their local business tax returns and payments with cities and counties for the 2009 tax year. The returns, which cover Oct. 1, 2008, to Sept. 30, 2009, remain due by Nov. 30.

Assumption of all administrative and collection responsibilities by the state begins Jan. 1 with filings by Classification 1 businesses. Returns for these businesses, which include grocery and hardware sales as well as wholesale sales of gas and diesel, cover the period Jan. 1, 2009, to Dec. 31, 2009. They are due by Feb. 28, 2010.

Before Mr. Farr’s remarks, TML’s Mr. Jenkins said switching administration and collection duties to the state requires creating an extensive communications infrastructure between state and local government computer systems since locals have responsibility for issuing business licenses.

“It’s a pretty grand project,” said Mr. Jenkins said, who complimented state officials for having “extensively” consulted with local governments.

Hamilton County Clerk Bill Knowles said the changeover “is a big task and it takes time to implement such a change. I can understand they need some input from the county clerks.”