Vacationing in Ketchum a few days before he was scheduled to begin an audit of city local-option tax collections last February, auditor Robert Denning and his wife dined at local restaurants, shopped at local stores and browsed other business establishments.
Denning collected receipts from their purchases and looked carefully at their figures. Many businesses, he found, were charging the wrong amount in local-option taxes. Some were collecting too much, some too little. There seemed to be confusion as to what amount was just right.
"They discovered variances all over the place," said City Administrator Gary Marks. "He came in and met with the mayor and me with receipts in hand, showing that there are some discrepancies out there."
The City Council on Monday approved an agreement with Kalispell, Mont.,-based Denning, Downey and Associates for the second phase of a LOT audit.
"Having these audits is a very good thing," Marks said.
Ketchum imposes a 2 percent sales tax on lodging and by-the-glass liquor sales, and a 1 percent tax on retail sales and building materials. Businesses collect the tax and pass it on to the city.
So far this fiscal year, the city has collected $164,098 in local-option taxes.
Mayor Randy Hall said the city may be missing out on $30,000 to $40,000 each month in uncollected or underreported taxes.
"It's not an insignificant number," he said.
Much of that can be attributed to a misunderstanding of the ordinance, he said. An informational campaign can help resolve that.
"A lot of this can be education," Marks said. "Not all of it has to be on the enforcement side of it. We'd rather bring people into compliance through an educational process. That's a lot of what Bob is going to be doing."
Sometimes, issues arise simply because businesses aren't calculating the tax accurately, he said. Sometimes businesses are taxing items they don't need to tax.
"It isn't always a case where they didn't pay us enough," he said. "There are some instances where they paid too much. It's not always adverse to the business."
Thirty businesses will soon be getting notices that an audit will be performed to review their books. Most of those will be selected at random; approximately 10 will be follow-ups from the project's first phase earlier this year.
"Hopefully, we'll find that all the corrections have been made that had been requested," Marks said.
Denning also may test the city's accounting of the tax collections, which he did during the last phase.
"He's kind of free to do whatever he wants to make sure everybody's complying, and that even goes for the city," Marks said. "We want him to be independent. His overall goal is to be able to provide evidence that he has successfully raised the level of compliance across the board for businesses and for the city as well."
The next step in the process depends on what Denning finds, Marks said. The city could opt for an annual random testing of businesses "as a measure of good management."
"We really need to see what the results are," Marks said. "We just need to bring ourselves to a point of confidence that businesses are understanding how to comply."
The city will pay $10,000 to the firm for the audit, plus travel expenses not to exceed $2,000.
Denning plans to conduct the audit during the week of Aug. 22. He then will issue a report on his findings, possibly within a few weeks.
Rebecca Meany: rmeany@mtexpress.com
