BY DAN TELVOCK
The Virginia Department of Taxation says the state legislature can penalize businesses that do not accurately report which locality gets a portion of the sales tax they collect, according to a new report.
Sending sales tax revenue to the wrong localities has been a problem in Virginia since the tax was initiated in 1966, says the report to the General Assembly. The report was released Tuesday.
The problem occurs in counties such as Spotsylvania and Fairfax, both of which have mailing addresses that incorporate the name of a neighboring city.
Most of the confusion for businesses results from Virginia's unique local government structure that allows independent cities and counties. They are distinct political entities without any overlapping taxing authority.
The confusion is increased by mailing addresses that cross political boundaries. For example, some Spotsylvania residents and businesses use a Fredericksburg mailing address.
After Henrico County finance staff estimated $5 million in sales tax revenue was lost to the city of Richmond annually, the county went through an expensive and time-consuming campaign to change the address name of 16 ZIP codes from Richmond to Henrico County. The changes took effect this year.
The Spotsylvania County Board of Supervisors considered changing the Fredericksburg addresses, but local residents were not in favor of it and the plans were scrapped.
Deborah Williams, Spotsylvania County commissioner of revenue, reported last year that Fredericksburg received $400,000 of the county's sales tax money because businesses incorrectly reported a locality code for the city.
She said she hadn't read the Department of Taxation report and couldn't comment on it yet.
The department handles about 50 of these errors each month, out of about 92,500 monthly payments. The revenue goes into a special account and is distributed to localities based on their pro rata share of the local sales and use tax that is assigned to localities. One percent of the 5 percent state sales tax goes to the locality in which the tax is collected.
The report states that businesses could get a discount on the sales tax remittance if they use state-certified software to fill out the tax returns. The report also mentions a discount to retailers that properly register with the Department of Taxation.
The report states that the General Assembly can limit or eliminate the state dealer discount for businesses failing to use state-certified software. Businesses could also be fined for making mistakes on the tax filings.
State Sen. Edd Houck, D-Spotsylvania, said the report lacks clear direction. Houck said he would be hard pressed in this economy to support penalizing businesses. He said additional incentives may be a better option.
Mark Haskins, director of policy development for the Department of Taxation, said in an e-mail that none of the options is expected to solve the problem and none of the options is expected to be well-received by either the retail community or local governments, which is why the department declined to recommend a proposal to legislators.
Asked if it is the state's responsibility to ensure tax payments go to the correct locality, Haskins said the businesses are in the best position to catch the mistakes.
He said the Department of Taxation has increased its efforts to detect sales tax errors, including forming a team responsible for reviewing local distributions.
The department has also obtained new software that utilizes GPS technology to more accurately determine the assignment of locality codes to businesses during registration.
"Some of the changes that we put in place just went into effect in July, so we really haven't had a real sufficient time yet to see if the actions will have any dramatic effect on this issue," Houck said. "Let's just see how well things work with what they have done, particularly with the software."
Dan Telvock: 540/374-5438
Email: dtelvock@freelancestar.com