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Bob Mercer
Bob Mercer

MERCER: SD audit uncovers millions in misappropriated bank taxes

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columns Mitchell, 57301

Mitchell South Dakota 120 South Lawler 57301

PIERRE -- When the state Department of Legislative Audit finished examining his department for 2012, Revenue Secretary Andy Gerlach knew he needed changes.

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The audit uncovered mistakes involving millions of dollars in banking taxes.

Sometimes payments came from banks without explanation, and no one tracked down answers.

Sometimes payments from banks received the wrong designations of franchise tax or credit card tax.

That is important. The state general fund gets 95 percent of card tax and 26.67 percent of franchise tax.

The rest goes to counties where the banking institutions are located, with money distributed locally using another formula.

Banking institutions pay quarterly estimated taxes and true-up the final amounts when they file their federal income taxes.

Consequently, amounts for any institution can be fluid, with under-payments or over-payments for the year.

Legislative Audit found some big problems.

From a $1.3 million remittance, the general fund was shorted $888,329. On a $1.5 million remittance, the general fund was short $325,005.

A group of remittances totaling $1.2 million came without explanation. Revenue staff designated it franchise tax but put 100 percent in the general fund.

It was actually card tax. The general fund received $60,000 too much.

An institution paid $6,448,503 but didn't specify the purpose or period it was supposed to cover. Revenue staff decided it was card tax. Then events turned odd.

The payment came in January 2012, but the institution didn't make another payment for the rest of the year, according Jason Dilges, state finance commissioner.

He said the institution instead filed for multiple years of refunds.

Dilges described the situation as uncomfortable.

"There was nothing that maintained the regularity of what we'd seen in the past," he said.

In June 2012 an institution remitted $7 million in card tax, but the money was held within a revenue account rather than sending $6,650,000 the general fund.

Dilges said the money was an advance payment meant for the third quarter. The complication was the 2012 state fiscal year ended June 30. Dilges decided the money should be held until July 2012 and booked in fiscal 2013.

Legislative Audit found other large discrepancies in how bank-tax revenue is recorded in state government's annual reports.

The auditors said estimated payments shouldn't be recognized as revenue until final calculations are made from federal tax returns.

The troubles cropping up stem from human error within the department, some systemic issues, and changing attitudes within parts of the banking sector, according to officials.

South Dakota's 30-year relationship with the credit-card banking sector seems to be evolving from an era of trust, where the Revenue Department relied on federal-income tax returns and didn't have bank auditors, to an era where officials will feel they now must sometimes verify.

"It is changing and we are changing," Gerlach said. "It's incumbent on us to do so."

As for the audit findings, Gerlach directed new controls be put in place. And, an automated electronic filing system for bank taxes is scheduled for completion in February 2014.

"They uncovered an area we needed to work on," he said.

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