After the Arizona Legislature adjourned in a flurry recently, cities and towns are left trying to sort out the impact of bills after the dust settles.

One question in particular is the impact of legislation related to the state sales tax (transaction privilege tax) as it relates to new construction.

During the construction boom times of eight to 12 years ago the Town of Fountain Hills was generating well over $1 million a year in sales tax from new construction.

That has changed with the recession, but the threat of losing the revenue from new construction could have been devastating for the town.

The law, however, leaves the formula of contractors paying sales tax on 65 percent of the total contract for new construction.

“It would have been a huge loss for Fountain Hills if changes had been made to the prime contracting whereby we would have gotten no sales tax money from new home construction,” Mayor Linda Kavanagh said.

“I am pleased that part of the original bill was removed and I credit our many meetings at the Capitol with the governor’s office for making that happen.

“We still have several areas of town awaiting development, and that sales tax money will be revenue for our general fund and our capital improvement fund.”

However, there were aspects of the law that did get changed that will likely prove costly to the town.

The new law exempts the gross proceeds from maintenance repair or replacement of existing property (but not modification activities). The contractor doing this type of work must pay the sales tax at point of sale.

In other words, the plumber replacing a toilet or sink will pay the sales tax when he purchases the fixtures and parts at the store, not on the project when it is done.

“I am disappointed that the trade industries will now be allowed to pay (sales tax) for their supplies at the point of sale, rather than in the town where the repairs would be done,” Kavanagh said.

“While we have an outstanding ACE Hardware store in Fountain Hills, with far better service than anyone can ever get at a Home Depot or Lowes, many trades people will choose to buy their supplies from big box stores.

“That will translate into a loss for Fountain Hills between $300,000 and $500,000.”

The town also has issues with aspects of the law as it relates to interaction between the town and merchants.

The law calls for the state Department of Revenue to collect and administer all privilege and use taxes from all cities/towns. It requires municipalities that are self-collecting to enter into an agreement with DOR for administration, collection, audit and licensing.

“This limits the ability of the town to conduct an audit of any taxpayer doing business in Fountain Hills,” Deputy Town Manager/Finance Director Julie Ghetti said.

“The town would only be authorized to conduct an audit of a local business that has only one location and would have to obtain permission from DOR to conduct audits with multiple locations.”

The town currently contracts with an independent sales tax auditor, but under the new law the town would be required to pay DOR for its audit staff, which is unknown how much they would be accountable to DOR rather than the town, according to Ghetti.

In a memo to council members sent this week Ghetti said the town supports the idea of sales tax simplification.

“The effect of (this law) is to remove local control of local revenues from the town and provide a tax break for a specific group of taxpayers,” Ghetti said.