City tax audit on phone companies finds $700K gain

An ongoing audit of taxes paid by telephone companies operating in Spokane has turned up $700,000 in unexpected funds for the city, including more than $500,000 in unpaid taxes, interest and penalties from CenturyLink. Along with funds from T-Mobile, the money discovered so far comes from just two companies, and city officials say there’s likely more to come, though they couldn’t predict how much in unpaid tax remains.

“That’s a number I can’t even tell you. There’s no way of knowing,” said Tim Dunivant, the city’s budget director, noting that every telephone company operating in Spokane will have its tax bill examined. “All the big ones. Even some of the small ones. Verizon we just completed, and everything was fine.”

The audits began well over a year ago, when Dunivant hired the Tacoma-based Tax Recovery Services to audit all 10 of the utilities the city taxes. At the time, Dunivant said he expected to find up to $1 million in uncollected taxes from the past four years. But with three companies down and close to three-quarters of million dollars found, the recovered revenue could be substantial.

Council President Ben Stuckart, chairman of the city’s Finance Committee, said the council requested an audit of telephone utility companies in 2013 after the city projected a $600,000 shortfall in expected revenue from those taxes. The tax, which includes a 6 percent toll on telephones, also taps into money raised by the use of water, natural gas, electricity, the sewer system and cable TV.

Council members said their suspicions were further aroused as cellphone revenue continued dropping while more people adopted cellphones and bills increased. Under a quirk in the federal law governing the Internet, smartphone data charges are exempt from local utility taxes, as is satellite TV. So when companies separate talk, text and data charges on a bill, they shrink the slice of the bill that’s taxable. Though the city had accounted for such variables, their projections remained short.

“It came after years of our projections on cellphone revenue not coming in on target,” Stuckart said. “I’m just happy that the audit shows they owed money and we weren’t out of our heads thinking there was money missing.”

Dunivant said the missing taxes is a knotty issue, but it basically stems from a utility provider “grossing up” the bill. For instance, the city has a 6 percent utility tax on the gross receipts of the utility provider. If a company has $100 in revenue and increases the bill by 6 percent to pay for the city’s utility tax, the customer is paying an extra $6. But that violates the spirit of the tax.

“It’s not a tax on the utility customers. It’s a tax on the utility provider,” Dunivant said. “If they do that, they owe us the 6 percent on the 6 percent,” or something like $6.36.

Kerry Zimmer, a spokeswoman with CenturyLink, wouldn’t comment, pointing to company policy preventing her from speaking on tax issues.

Under the recovery contract with the city, the auditing company keeps 25 percent of whatever is received.

Stuckart said the newfound money will join two other unexpected caches of revenue that will likely be funneled into the city’s reserves.

Aside from the uncollected utility taxes, the city reaped about $1.3 million from its investments last year. Also, the city is expecting a bump in expected sales tax revenue from 2014, collecting around $1.6 million more than what was projected.

Gavin Cooley, the city’s finance officer, said the city is focused on building its reserves back up after drawing them down during the recession and for various one-time uses. Currently, the city has about $15 million in reserves, but it has a goal of putting away almost $23 million.

Adding to the city’s savings account is just one gain from the audit, Dunivant said.

“The big benefit is it’s going to change how much we get every month going forward,” he said.