For several years, city made sales tax mistakes on water, trash bills; some customers may be due small refund
photo by: Chris Conde
The city of Lawrence recently discovered it has been incorrectly taxing as many as 2,000 solid waste customers, adding to a list of other billing errors that the city has discovered over the past two years.
Customers who requested an additional trash cart were mistakenly being charged sales tax for the cart, while other customers were not charged sales tax on the purchase of certain yard waste and other bins when they should have been. The city discovered the incorrectly assessed taxes for solid waste containers after a different sales tax error, discovered by the state of Kansas, prompted the city to review its utility billings, according to a city staff memo recently provided to the Lawrence City Commission.
In total, the city isn’t sure how much it overcharged in sales taxes because billing records for 2012, when the mistaken billing began, aren’t readily available. But between September 2013 and June 2018 — when the error was discovered — the city overcharged sales taxes by about $37,000. Customers who had an extra trash cart and were incorrectly charged the sales tax can apply for a refund, which in most cases will be about $4 a year, with a maximum of $12 in total.
This is not the first billing error to be discovered in the past couple of years, as the city discovered in 2017 that it failed to bill approximately $700,000 in lease payments and found in 2018 that the majority of downtown trash customers had been undercharged for years.
City Manager Tom Markus, who began his position in 2016, said that he was glad to see that city staff was re-examining billings and bringing errors to light. He said the city owns the faults whether they happened today or 10 years ago.
“These things were embedded for a long time, and unraveling the specific item and, then, tangential ones shows a higher degree of sophistication and a self-audit function,” Markus said. “And I appreciate that and I hope the community does too.”
Changeover to city-issued trash carts
A city review found that the city erroneously charged sales tax on the extra trash bins because they were misclassified as rentals. The taxing error on the additional trash carts relates to the fact that sales tax is applied to rentals or sales of trash carts and dumpsters, but not charged when associated with trash service, according to the memo.
Utility Billing Manager Kristy Webb said the errors date back to when the city converted to garbage trucks with automatic loaders in 2012, which required all residents to have a standard, city-issued trash cart. Prior to that, residents could use their own trashcans, with the option of renting a cart from the city if they didn’t want to provide their own.
Webb, who was not in her position with the city at that time, said she found in researching the error that those optional trash cart rentals were taxable, but when the city began requiring the city-issued carts, the sales tax continued to be charged when someone requested an additional cart.
“So it just carried over as a rental, and it didn’t get caught that that charge isn’t about the rental anymore, that charge is about the trash hauling,” Webb said.
Limits on data and refunds
Though the billing errors for the trash carts likely go back to 2012, the city can only readily access data following the changeover to the city’s current software system, in September 2013. Webb said the city would have to pay an outside contractor if it were to extract the data from the old system. However, she said that would not be necessary since state law limits corrections or refunds of incorrectly assessed sales tax to the past three years.
The city’s readily accessible records before the error was corrected — those from 2014 through 2017 — indicated an average of about 1,900 customer accounts each year were mistakenly charged sales tax for their extra trash carts, according to data the city provided the Journal-World. The tax cost those customers about $4 extra each year, meaning that the city erroneously collected about $8,000 extra each year. However, since state law limits sales tax refunds to three years, there is only about $19,000 worth of taxes that can be refunded, according to the memo.
No tax was charged on the sale of yard waste carts and compost bins, though it should have been. The city allowed customers to use their own yard waste bins until 2017, and Webb said very few people purchased the carts before that. There have been about 2,300 yard waste carts sold to date, and about $11,500 in sales tax that should have been collected but wasn’t.
About 850 compost bins have been sold since the city began selling them in 2005, totaling about $3,000 in uncollected taxes. The city only has to remit those taxes for the last three years, or about $550 of that amount.
Water taxing errors
The Kansas Department of Revenue informed the city in May 2018 that the utility department had not been collecting or remitting an extra one-cent sales tax on water sales for 18 accounts associated with three transportation development districts, according to the memo. The three districts — The Oread Hotel, Bauer Farms and 9th and New Hampshire — were initiated in October 2009, April 2009 and January 2015. From 2013 to 2018, the undercollection totaled about $3,000 for all three districts.
Webb said that the water accounts were not set up correctly when they were initiated, but that amount not collected through the water sales tax is nominal, especially compared to the sales tax collected by businesses throughout the districts. She said the uncollected amounts aren’t likely to affect the overall amount reimbursed to the developers through the TDDs, which are set up with the expectation of generating a specific dollar amount sometime within the 22-year period that the one-cent tax will be in place.
The Kansas Department of Revenue did not return calls from the Lawrence Journal-World regarding how the error was discovered or more details about requirements for correcting the sales tax errors related to the TDDs and solid waste services.
Webb said that because the uncollected TDD sales tax on water bill won’t affect the total amount paid back to developers over the long run, the city does not plan to collect any of the amounts that were undercollected.
The city will be remitting the sales tax that should have been collected on the yard waste carts and compost bins for the past three years, or about $12,000 total, according to the memo. The city will pay the $12,000 out of existing funds, Webb said. The city will not try to find past customers who weren’t charged the sales tax and try to charge them retroactively.
For solid waste customers incorrectly charged sales tax for additional trash carts, Webb said they can request a refund for the sales tax they paid on those carts dating back three years. Customers can do so by calling the Utility Billing Department at 832-7878 or emailing email@example.com.
Given the nuances of sales tax laws, Markus said that to prevent similar sales tax issues in the future, any city department offering a new item for purchase would have the finance department review the item to determine if sales tax should apply.
Speaking to the broader billing mistakes the city has identified over the past couple of years, Markus said he is trying to build a culture of transparency at City Hall. Specifically, he said the city is working to identify mistakes, report them to the public and correct the mistakes and the process that led to them.
Markus said human error is present in any organization and that he suspects additional mistakes will be identified as the city reviews its billing processes further.
“Understand that we expect criticism for this, but persons that are criticizing should understand that these things are happening in organizations that they participate in elsewhere,” Markus said. “What we’re trying to do is create a culture change so that we go after them and clean them up.”