City, state differ on sales tax refund rules, despite recent changes

As of this month, the city of Sidney will finally receive one year of advanced notification before the state takes refunds out of the city’s local sales taxes.

In the past, if companies qualified for sales tax refunds on projects, they would file an application from the state. The city received no information on this.

Every month retailers collect sales tax and send it to the department of revenue in Lincoln. Then, each month the department of revenue sends a check for local sales tax to Sidney, sometimes with large refunds subtracted from the original amount.

“Some of those months, we lost a substantial amount of that check, if not all of it, because one of these refunds would show up,” said city manager Gary Person.

This left the city unable to properly budget because it depended on certain amounts of sales tax each month, which it may or may not have received. In the 2009-2010 fiscal year Sidney lost around $770,000 in local sales taxes to the state and around $650,000 in the 2008-2009 fiscal year.

Large refunds taken out of local sales tax hurt the city’s finances so badly in the past that it had to cut budgets and projects and was unable to fill critical positions in its staff.

“It was just really ugly times,” Person said. “And it was nothing we did at fault.”

At that time, the city was trying its best to make the community grow.

“No notification was killing us because we didn’t know how to plan,” Person said.

After the city raised concerns about losing so much tax revenue without warning, the state agreed to give cities 30 days notice before taking the refunds. Since the city prepares for each fiscal year during the summer, one year at a time, it had no way to prepare for large refunds with only 30 days notice, Person explained.

If the city projects $2 million in sales tax revenue for one year, then distributes that to city departments and the state takes almost half of it with not notice, this creates enormous problems.

“It’s taken us a long time to educate the state senators on this issue,” Person said.

According to a revised statute of Nebraska state sales tax and use law, this one year advanced notification law went into effect in January 2014.

Because the city lags two months behind in receiving sales tax revenue—the state pays out funds collected in January during March—this is the first month Sidney might be notified of a possible refund it must pay out at this time next year.

“The intent was to give us a one year notice in the budget cycles,” Person said. “That’s not really the way it came out in the law.”

The city prepares a budget for its fiscal year, which begins in October, every summer. It has to guess about refunds for which it will get notification after it completes budgeting for the next fiscal year.

Person suggested that maybe this could be corrected in the future. The city has not received any notification about refunds it must pay back next year as of yet, but local sales taxes aren’t usually paid out by the state until the end of the month.

The city still differs philosophically from the state on this issue.

“These were local sales taxes, voted on by local constituents for a local purpose,” Person said. “What right does the state have to take that away from them?”

Person believes taxes are always better in the hands of local people, rather than the state informing the cities what’s best for them.

“We need that revenue to continue to sustain ourselves and to pay for all this stuff,” Person said. “And that’s why you’ve got to leave the local dollars here.”

The city has no knowledge of which companies receive these sales tax refunds.

There are most likely more than 10 qualifying companies in the area, Person said.

This new statute also allows every municipality to assign one person to travel to Lincoln and look over the sales tax records to make sure the refunds that the city paid out went to companies who collected that tax in its city. This person can’t copy any of the documents or tell anyone which companies received the funds.