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Bethel overcharged sales tax on property transactions since 2002

  • Author: Lisa Demer
  • Updated: September 30, 2016
  • Published March 10, 2016

BETHEL -- The city of Bethel has been overcharging sales taxes on home sales for 13 years because of a just-discovered clerical error, Mayor Richard Robb announced this week.

The mistake only impacted the tax on properties that sold for more than $275,000, about 30 percent of overall sales since 2002, according to city attorney Patty Burley. Just over $100,000 was overpaid, less than 10 percent of the $1.3 million collected on property sales from 2002 through 2015, city figures show.

Some 36 buyers or sellers overpaid the maximum of $1,000 or $1,200, depending on the sales tax rate at the time, Burley found. In all, 163 paid too much, the city's review has determined.

The city is working on procedures to notify individuals involved and refund the overcharges, Robb said in a prepared statement Wednesday evening. The City Council held a lengthy closed-door session Tuesday night on the matter.

Unlike bigger and wealthier communities such as Anchorage, Fairbanks and Juneau, Bethel doesn't levy property taxes, but has been charging a 6 percent sales tax for years on many goods and transactions: the 50-cent weekly newspaper, a gallon of milk, a Honda four-wheeler up to $3,500, rent checks and sales of real estate -- to a point.

The wrong cap on real estate transactions has been on the books since it was first approved in 2002, the city said.

Burley said she was looking for ways to simplify the sales tax code at the request of City Council members when an exemption to limit how much tax could be charged on real estate sales jumped out at her as particularly confusing.

It reads:

"That portion of the selling price of real property in excess of twenty (20) percent of the first (1st) three hundred seventy-five thousand dollars ($375,000) of the selling price is exempt. This exemption does not apply to rentals of real property. This exemption applies to all sales of real property, including casual and isolated sales."

That means a property is only taxed up to a price of $375,000, and only 20 percent of that value is taxed, the attorney said. So no matter how much a property sold for, it couldn't be taxed on more than $75,000 of the value, or 20 percent of $375,000, under the exemption.

But when she researched the city code, she found a significant problem. When the City Council set the cap back in 2002, it considered a proposal for $375,000, but amended it to set the cap for taxable property at $275,000.

Had the correct figure of $275,000 been used, the city could only have charged its sales tax on a maximum of $55,000 of the sales price

Only properties that sold for more than $275,000 were taxed at too high a rate, Burley said.

For example, if a home sold for $400,000, the city would have charged $4,500 in sales tax, when it should have only charged $3,300.

But for a home that sold for $210,000, there would have been no difference, because 20 percent of the entire sales price would have been subject to the 6 percent tax.

Bethel tax records reviewed so far by officials show that the city overcharged sales tax on 163 property sales out of 541 total tales, according to a summary put together by Burley. Sales tax on two properties that changed hands this year were put into escrow while the city sorted out the issue.

The maximum owed to any individual is $1,200; though for the first few years, the sales tax rate was 5.5 percent, leading to a maximum overpayment of $1,000.

The mistake appears to be a simple clerical error, city officials said. It's a different city council and administration than in 2002. The city manager at the time was Bob Herron, now the state representative for Bethel. Efforts to reach him Thursday were unsuccessful.

Burley said she was able to confirm what happened after reviewing the old meeting minutes from September 2002 dug up by City Clerk Lori Strickler.

The city will add interest of 3.5 percent a year to the refunds, Burley said. Procedures are still being worked out. The tax could have been paid by either the buyer or the seller, so individuals will need to prove they paid it, the attorney said.

The City Council intends to consider a procedure for refunds at its March 22 meeting.

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