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Loveland Use Taxes History and Overview |
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During a 2004 study session the Loveland City Council decided to implement an audit program on the collection of Use Taxes
to determine whether building projects within the city were paying the true 3% cost of their building materials. It wasn’t until
Alan Krcmarik joined the city in 2006 that the internal audit program began in earnest relative to Use Taxes.
The state statute of limitations for Use Tax collections is three years so audits conducted in 2006 and 2007 reached back three
years to determine whether the city was, in fact, collecting the full taxes due on new development projects. According to the city’
s “Finance Master Plan” of that year, “
"Sales and use taxes are the most significant revenue source for the City’s general operations. Overall since 2000,
these taxes have increased on average of 6.4%. Sales taxes and auto use tax tends to increase more consistently than
use tax on building materials."
Source: Loveland 2006 Master Finance Plan
While the report suggested building cycles may be responsible for the Use Tax slow growth (not necessarily commensurate with
new growth) other factors appear to have been in play that were later revealed by the internal audits. Use taxes constitute
roughly 10% of the general fund revenue for the city but are likely to drop in 2008 and 2009 as the number of new building
permits is dropping.
In late 2006 the council was informed that the some 4,000 building permits audited for the past three years (accounting for
roughly 1,000 per year) revealed the city wasn’t collecting the true 3% cost of building materials on new developments. Among
the reasons offered was an outdated table being used by city staff to estimate the cost of new construction. City staff was
estimating the total project cost (at lower than actual given by the dated table) and calculating the materials to be roughly 50% of
the cost as required by the city ordinance.
Every building permit issued during that same time contained a large paragraph explaining the Use Tax amount collected was
only an estimate and that adjustments may be required during construction and certainly after the project was completed. In
addition, staff provided an odd colored (so it would be noticed) form called the “Use Tax Reconciliation Form” that was to be
used to later calculate the actual amount of Use Tax owed on that specific building permit.
This is also the practice in Larimer County. The county displays the following disclaimer on their website for all applicants of
building permits, “For most building material use tax, a deposit of use tax will be collected at the issuance of the building permit.
Then after the project is complete, a Project Cost Reports is required to determine if a refund or additional taxes are due.”
The problem is the disparity between what was estimated and what the true costs of the projects were in the end. Unlike the
county, Loveland has no automatic follow-up procedure with building permit applicants to determine if the deposit paid towards
Use Taxes was adequate. While city staff will point to city code which puts the burden of this responsibility squarely upon the
applicant, it is difficult to imagine some of the lack of follow-up by builders was accidental.
As an example, council and staff referred to one instance where the builder paid a deposit based upon an estimate of project
cost around $200,000 but the final was more than $750,000. Some on council speculated it was due to last minute upgrades
but other motives might be at play. Some within the city speculate that a builder who is presented with an unrealistically low
estimate (regardless of the reason) will gladly pay the lower upfront cost. In this case, for example, the upfront deposit for Use
Tax, if accurately calculated, would have been a tax of $22,500 instead of the $6,000 the builder paid. The motive for the
builder in not later correcting the error would seem obvious.
Another practical problem is where the control of the information lies within the city. If a homebuilder decides to upgrade the
cabinets and kitchen surface at a cost of $40,000, there is no requirement to change the building permit but the cost of materials
(thus the amount of the Use Tax) would need to be upwardly adjusted.
In either case, the increased value of the project was not properly disclosed to the city and unpaid taxes were the result.
to determine whether building projects within the city were paying the true 3% cost of their building materials. It wasn’t until
Alan Krcmarik joined the city in 2006 that the internal audit program began in earnest relative to Use Taxes.
The state statute of limitations for Use Tax collections is three years so audits conducted in 2006 and 2007 reached back three
years to determine whether the city was, in fact, collecting the full taxes due on new development projects. According to the city’
s “Finance Master Plan” of that year, “
"Sales and use taxes are the most significant revenue source for the City’s general operations. Overall since 2000,
these taxes have increased on average of 6.4%. Sales taxes and auto use tax tends to increase more consistently than
use tax on building materials."
Source: Loveland 2006 Master Finance Plan
While the report suggested building cycles may be responsible for the Use Tax slow growth (not necessarily commensurate with
new growth) other factors appear to have been in play that were later revealed by the internal audits. Use taxes constitute
roughly 10% of the general fund revenue for the city but are likely to drop in 2008 and 2009 as the number of new building
permits is dropping.
In late 2006 the council was informed that the some 4,000 building permits audited for the past three years (accounting for
roughly 1,000 per year) revealed the city wasn’t collecting the true 3% cost of building materials on new developments. Among
the reasons offered was an outdated table being used by city staff to estimate the cost of new construction. City staff was
estimating the total project cost (at lower than actual given by the dated table) and calculating the materials to be roughly 50% of
the cost as required by the city ordinance.
Every building permit issued during that same time contained a large paragraph explaining the Use Tax amount collected was
only an estimate and that adjustments may be required during construction and certainly after the project was completed. In
addition, staff provided an odd colored (so it would be noticed) form called the “Use Tax Reconciliation Form” that was to be
used to later calculate the actual amount of Use Tax owed on that specific building permit.
This is also the practice in Larimer County. The county displays the following disclaimer on their website for all applicants of
building permits, “For most building material use tax, a deposit of use tax will be collected at the issuance of the building permit.
Then after the project is complete, a Project Cost Reports is required to determine if a refund or additional taxes are due.”
The problem is the disparity between what was estimated and what the true costs of the projects were in the end. Unlike the
county, Loveland has no automatic follow-up procedure with building permit applicants to determine if the deposit paid towards
Use Taxes was adequate. While city staff will point to city code which puts the burden of this responsibility squarely upon the
applicant, it is difficult to imagine some of the lack of follow-up by builders was accidental.
As an example, council and staff referred to one instance where the builder paid a deposit based upon an estimate of project
cost around $200,000 but the final was more than $750,000. Some on council speculated it was due to last minute upgrades
but other motives might be at play. Some within the city speculate that a builder who is presented with an unrealistically low
estimate (regardless of the reason) will gladly pay the lower upfront cost. In this case, for example, the upfront deposit for Use
Tax, if accurately calculated, would have been a tax of $22,500 instead of the $6,000 the builder paid. The motive for the
builder in not later correcting the error would seem obvious.
Another practical problem is where the control of the information lies within the city. If a homebuilder decides to upgrade the
cabinets and kitchen surface at a cost of $40,000, there is no requirement to change the building permit but the cost of materials
(thus the amount of the Use Tax) would need to be upwardly adjusted.
In either case, the increased value of the project was not properly disclosed to the city and unpaid taxes were the result.
| Problems Collecting the Proper Amount of Use Tax |