Report: Cities and towns missing out on tax revenue from state projects

CHARLESTON — Cities and towns in West Virginia are being stiffed on tax revenue by subcontractors working on state projects, according to the Legislative Auditor’s Office.

In a letter released Tuesday to Senate President Mitch Carmichael and House Speaker Roger Hanshaw, Post Audit Division Director Justin Robinson said his office was following up on a 2017 report that found that out-of-state subcontractors working on state projects were not registering with local municipalities where the work was being done. By not locally registering, the municipalities were missing out on tax revenue.

“This report underscored the fact that the primary cause for cities’ inability to collect taxes owed for projects under state contract is that they were unaware of the contract itself or that the contractor or subcontractor was performing this work in their area,” Robinson wrote. “To the best of the Legislative Auditor’s knowledge neither the agency through which the contract is executed, nor the Purchasing Division, is required to notify the municipalities of the contract after it is awarded.”

According to a fiscal year 2018 report from the Purchasing Division, the state entered into 22,065 new contracts awards worth more than $490 million. Each contract was worth on average more than $175,000, with 54 percent of in-state vendors receiving contracts. However, the total financial value of the out-of-state contracts was more than $364 million.

Robinson said factoring in a 2 percent Business and Occupation tax rate many cities have, the amount of taxes due was approximately $4,510 per contract.

“A conservative estimate of the (Business and Occupation) taxes potentially due from all state contracts in 2018, assuming 50 percent of those contracts are subject to…tax at a rate of 2 percent, would have totaled approximately $4.9 million,” Robinson said.

Since 2017, Robinson said the Purchasing Division has modified its terms and conditions to require contractors to inform all subcontractors to register with local governments. However, there are no state laws requiring either the state agency doing the work in the municipality or the Purchasing Division itself to notify the city or town that work is going on. While the Purchasing Division’s terms and conditions require the contractor and subcontractor to notify the cities, there is no enforcement.

To remedy the issue, the Legislative Auditor believes the agency executing the contract, which is aware of the work to be performed and where it will be performed, should be required to provide formal notice to the municipality where Business and Occupation taxes…are applicable,” Robinson wrote. “It is the opinion of the Legislative Auditor that the entities contracting on behalf of the State have a fiduciary duty to notify those municipalities that work through a state contract is being performed.”

Another enforcement mechanism recommended by the Legislative Auditor’s Office includes requiring a $1 million surety bond for state contracts to ensure that contractors and subcontractors pay taxes local municipalities.

“The Legislative Auditor recognizes there are multiple ways to accomplish this goal; however, a surety bond for local taxes would be the least cumbersome option for the state to incorporate into the purchasing process, while also removing the financial burden of noncompliance from the state and local governments,” Robinson wrote. “While this may be burdensome for smaller contractors, this recommendation can be applied in a practical manner using a predetermined threshold that would trigger such a requirement, such as imposing this requirement for state contracts that exceed $1 million in value or greater.”


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