City mulls use tax on building materials
Necessary capital improvements and projected budget shortfalls have prompted the Aspen City Council to seek ways to increase revenues.Council members placed one measure on November’s ballot asking for an increase in the city’s sales tax to cover parking and transportation needs, but they nixed a proposal to impose a use tax on construction materials.The recent conversation at City Hall focused on imposing a 5 percent Construction Materials Use, or CMU, tax for use only on voter-approved transportation improvement projects. That could cover a number of projects, from parking garage repairs, to increased bus service, to funding some sort of solution to the Entrance to Aspen.Councilwoman Rachel Richards entertained the idea of a use tax, but she was reluctant to put the question to voters without stating exactly how the city would use the revenues.”If a constituent asks me how much of the money is going to go toward parking and how much toward mass transit, I’d have to say, ‘I don’t know,'” she said.She was particularly leery of applying the tax toward the Entrance to Aspen before knowing the exact solution to the problem.”I don’t think you ask for the increase first and promise a solution later,” she said.Richards also had concerns about relying on a use tax to fund ongoing operations, such as bus service. Because the CMU tax is tied to the amount of construction activity at any given time, the amount of revenue it generates can vary widely. Estimates for a 5 percent CMU tax in the city vary from $2 million to $6 million annually, depending on the amount of construction in a a given year.”To ever link annual operations to a growth-generator would be folly,” Richards said.Nonetheless, she’s not opposed to placing a use tax question on future ballots, if it’s not earmarked for operational expenses and the city is clear how the revenue would be used.How a use tax worksBen Gagnon, a special projects planner for the city, recently outlined the history and mechanics of the CMU tax in a memo to Chris Bendon, director of Community DevelopmentWhen the city issues a building permit, it would estimate the amount of construction materials to be used, and the contractor would immediately pay the tax based on that estimate. At the end of the project, when actual costs are known, the city can either reimburse a contractor if costs were overestimated or require an additional payment if costs were underestimated.Gagnon said materials generally make up 50 percent of a project, while labor usually makes up the other 50 percent. Contractors who buy construction materials elsewhere would not be double-taxed if the city imposes a use tax.”Sales taxes that would otherwise be collected at the point of purchase would be reduced by the same rate as the CMU tax to be collected in the City of Aspen,” he wrote in the memo. Furthermore, “without a CMU tax in Aspen, a contractor may avoid any and all sales taxes if the contractor has materials shipped to the job site in Aspen, thereby avoiding the sales tax in the originating municipality.”A brief history of the CMU taxThe CMU tax “was originally established as a way for cities, towns and counties to eliminate the ability of contractors to avoid local taxation by purchasing construction materials ‘out of town’ and avoiding sales taxes,” Gagnon wrote.Imposing a CMU tax in Aspen would serve more as an impact fee than a deterrent to buying out of town, since the bulk of construction materials in Aspen already come from downvalley. That means those towns might benefit from sales taxes, while Aspen suffers the impacts of construction. Because the city doesn’t profit from the sales of those materials, imposing the CMU tax would allow the city to tax a currently untaxed sector of the economy.More than 60 percent of Colorado municipalities that impose a sales tax also impose a use tax, according to Gagnon. Nearby municipalities with CMU taxes are Carbondale (3.5 percent), Glenwood Springs (3.7 percent) and Rifle (3.5 percent). Steamboat Springs and Mount Crested Butte impose CMU taxes of 4.5 percent and 3.33 percent, respectively.Winter Park collects a 5 percent use tax on products used in businesses, but construction materials are specifically exempt from sales and use taxes.Abigail Eagye’s e-mail address is email@example.com
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