The City of Sedalia and Pettis County will be spending the next three years making payments to the Missouri Department of Revenue after a local business overpaid sales tax.
The local business, which has not been identified due to state confidentiality laws, made a clerical error on its tax returns, causing the company to overpay sales taxes for about a three-year period. Due to this mistake, the city, county and State of Missouri must now pay back a combined roughly $6 million to DOR, which will then return the money to the business.
City Administrator Gary Edwards said the city owes almost $2 million, and Pettis County Presiding Commissioner David Dick said the county owes about $830,000. Both payments will not include interest.
“It will have an impact — that’s a significant amount of dollars and we have to repay it,” Dick said. “… Now that we’re back in a positive stance (compared to previous years’ sales tax figures), we should be able to budget ourselves so there’s not a loss of service. That’s our first goal.”
Edwards said the company found a loophole in the tax law that allowed them to pay less in taxes. Once that loophole was found, DOR audited the company to determine if the claim was accurate — it was, hence the repayment from the city, county and state.
“This is a major issue here,” Edwards said. “We’re hoping (state Rep.) Nathan Beard or the legislature closes this loophole. They will be getting a refund of approximately $6 million from city, county and state. They don’t have to give it back to the people who paid that sales tax, they can just keep it in their pocket. That is a loophole. DOR acknowledged during the meeting that that is a loophole in the law.
“We have no idea if maybe (the company) will reimburse it, we don’t know. That’s confidential between them and their clients, but they don’t have to. That is a loophole that needs to be closed in one way or another. It puts an incredible burden on a city to receive that news.”
The same business caused sales tax revenue to decline about three years ago. Edwards said at the time they were unaware what was causing the decline until the city asked DOR to step in and analyze sales tax figures. DOR determined the company had found a sales tax exemption, causing a decline in the city’s sales tax revenue “because they contribute a lot,” Edwards said.
While specifics about the company cannot be legally released, Edwards noted “it’s not a name you would recognize. … Nobody would, they wouldn’t know this business exists in town.”
The city’s budget was adjusted at the time for the decline, and then Finance Director Kelvin Shaw received a phone call in June from DOR stating the city needed to send a check for about $1.9 million to DOR to reimburse a local business. The county commission received a similar phone call the same day saying they needed to pay back $832,987.
“Because a company miscalculated, they made a mistake in their office and they paid more (sales tax) than they should’ve, so the Department of Revenue had been paying us those sales tax dollars and they should not have been,” Edwards said.
The county and city quickly requested a meeting with DOR representatives so they could fully understand the situation and their options were regarding repayment. Originally DOR requested the money immediately, then allowed three months.
“We’ll pay, that’s not the issue. We’re asking DOR to give us, since you never told us this was happening, a little more flexibility in paying it back,” Edwards explained. “It’s taken three years to amass that amount of money, we’re requesting three years for payback.”
About two weeks ago, DOR, the city and county agreed to the three-year payment plan.
After the meeting with DOR, Edwards said he and Shaw immediately sat down with city department heads to discuss budget cuts so they could accommodate for the $1.9 million, as the three-year deal had not yet been agreed to.
“In 15 minutes we already scheduled a meeting with department heads to say ‘your budgets are cut dramatically and all the things you planned to do, forget about it. You can’t do it,’” Edwards said.
Because the three-year plan was approved, it eased the impact on the city’s budget. In addition, City of Sedalia voters passed the new use tax. While taxpayers won’t see the benefits of the use tax revenue for three years, it prevented significant cuts to the current and upcoming city budgets.
“Because of those two elements, the three-year payment and passing the use tax, it’s going to have a smaller impact on our budget than what would have been the case,” Edwards said. “The use tax was already on the ballot when this came forward. The two are not related in any way, it just so happened it came up. Now that it passed, it came up at the right time. I don’t know what we would’ve done. It would’ve been very, very difficult. It’s not any fault of the city, the county or the state, it’s a mistake other people made that we have to make good on.”
During the Aug. 17 Sedalia City Council meeting, Shaw explained to council how it would be reflected in financial reports.
“Since we hadn’t issued our audit statements or financial report yet, we have chosen, and I think appropriately so, to make a prior period adjustment,” he said. “So in essence what we’re going to do is restate the financial statements and the audit report like the over-payment never happened, like it wasn’t ever paid to us because now we know it wasn’t earned. We’re going to reduce the fund balance in previous years and recognize we owe this back now to the state and ultimately to this business that overpaid.”
As for the county, it will also have a small impact on the budget. Since citizens pay two separate county sales taxes — road and bridge fund and general revenue — the repayment will be split between the two accounts.
“We can comfortably budget this. I won’t say we won’t make some cuts, but we will be able to budget it,” Dick said. “We will watch what the sales tax revenue is; I think most month’s collection will more than cover the repayment, but with county budgets you adopt that in January and can’t really adjust it until November or December. We’re married to it until we can adjust it. Right now we have to take it out of unpaid revenue and in November/December we will see where unspent money is and use that to make the payment.”
Nicole Cooke can be reached at 660-826-1000 ext. 1482 or @NicoleRCooke.