In light of the city shutdown that was in place throughout most of April, city officials are still bracing for what could be rough sales tax figures.
Due to a multitude of factors happening at the state level, City Administrator Stephanie Ellwein said the official sales tax figures and revenue for the month of April will likely be provided to the city of Mitchell around August, complicating the City Council’s upcoming budget hearings. Ellwein provided a detailed update on the sales tax projections Monday night during the Mitchell City Council meeting.
“The way the city reports those sales tax numbers is based on when we receive the revenue from the state of South Dakota,” Ellwein said. “We have been lobbying to the state about getting a better, more timely report on sales tax numbers. As you’ve heard me say this before, we don’t see what the actual sales are until two or three months after they are done when the state posts the information.”
The timeliness of receiving the city’s official figures for April is a concern for Council Vice President Dan Allen, who is anticipating significantly lower revenue than average.
“I don’t believe April will be very good. But how do we as a council budget when we don’t know what we will have?” Allen asked.
According to Ellwein, roughly 73% of the city’s tax revenue comes from sales tax, which helps fund city services and operational costs for divisions of the city such as the Department of Public Safety, the James Valley Community Center and the public library, to name a few.
“Our South Dakota Municipal League Association made a request to the governor’s office to allow us to change our budget hearing time frames to November instead of September,” Ellwein said. “Initially, they told us they would consider a bill if they held a special session, but the governor announced they are not going to have a special session on it. I would anticipate the city will have to pass a budget that is extremely lean, and then look at how we end the 2020 year, and then consider a supplemental appropriation for the next year.”
Finance Officer Michelle Bathke provided estimates for the first, second and third-penny sales tax report, which shows the city could see an 11.2% increase for the first- and second-penny tax for the month of April, along with a 9% increase for the third-penny sales tax. However, Ellwein pointed out those figures regarding the city’s penny taxes are the payments that the state recently sent to the city, which would represent the actual sales in the months of January and February, not April.
“But if you were to look at the actual sales reports that retailers are saying their sales are, it shows we are up 1.3% from last year at the same frame,” Ellwein said.
The city collects a 2% sales tax on most purchases, and that is where the first- and second-penny references apply. In addition, the city collects a third of the percentage with the third-penny tax that is added for the city's entertainment sales tax, which applies to prepared food, alcoholic drinks, ticket sales and lodging and is commonly referred to as the "bed, board and booze" tax.
Ellwein said the tax revenue from the city's 2020 budget is anticipating a 5% decrease from the actual amounts received in sales tax in 2019. Therefore, if the city sees the expected 5% decrease in sales tax revenue by the end of 2020, the city would have achieved a structurally balanced budget. Another factor contributing to the decreased 2020 budget is the $287,000 loss in internet sales tax revenue, which was implemented by the state.
According to the conference calls the city has participated in with the state Department of Revenue, Ellwein said the department has stated it is “really short on sales tax collections.” Considering the economic damages brought on by COVID-19, Ellwein said the Department of Revenue is not actively enforcing those that are delinquent, rather seeking to receive collections by the end of the state's fiscal year.