TAX NEWS - June 2010

Vermont Tax: Manchester's local option tax income growing

MANCHESTER – Local option tax collection in the town showed strong growth for the first quarter of 2010, with the tax on retail sales growing by 14 percent and the tax on meals, alcohol and rooms growing by more than 40 percent over the first quarter in 2009.

Town Manager John O'Keefe said he thought the results were good news for the town and its business community.

"This really shows overall, strong economic activity. That's the best part about this whole thing. It actually shows direct economic growth in the best way we have to track it," he said.

Information from the Vermont Department of Taxes showed the town received about $156,303 from local option taxes processed between February and May. For the same period in 2009, the town received about $134,370.

The local option taxes on sales increased by $21,933 this year or about 14 percent.

The numbers for meals, alcohol and rooms show even stronger growth. For the first quarter of 2010, Manchester received about $67,676. In 2009, for the same time period, the town received about $39,996.

The town's local option tax income grew by about $27,680 or almost 41 percent.

In the first quarter of 2009, the Vermont Department of Taxes processed 1,487 returns for the sales tax and 180 returns for the meals, alcohol and rooms tax.

Those figures increased for the same time period in 2010 to 1,597 returns for the sales tax and 238 for the meals, alcohol and rooms tax. Sales returns increased by 110 or about 6.9 percent and meals, alcohol and rooms returns increase by 58 or about 24.4 percent.

The returns also reverse the situation from last year. In the first quarter of 2008, Manchester collected about $155,636 on sales taxes. For 2009, that meant the local option taxes on sales decreased by about $21,266 or about 13.7 percent.

There is no objective way to analyze why the local option taxes have increased for Manchester. The Vermont Department of Taxes does not provide towns with a breakdown that shows which businesses paid the tax or how much each business paid.

The results, however, still indicate a positive trend in Manchester because the returns were collected in the first quarter of the year which is traditionally the weakest time for the local economy. O'Keefe said the highest rate of returns was usually seen in the summer followed by the returns from the holiday shopping season.

Other than property taxes, the local option tax is the only tax that Vermont municipalities are allowed to enact. They must be proposed by the town's governing body and approved by voters.

A local option tax is a 1 percent tax that can be collected in three categories: retail sales; hotel and motel rooms; and meals and alcohol served by restaurants. A municipality can enact the tax, with voter approval, on any one of the categories, all of them or a combination of two. Manchester imposes the tax on all three categories.

The state collects the taxes and returns 70 percent of the total collected, minus a processing fee, to the towns.

In some towns, the income from local option taxes is dedicated to a specific project or department but Manchester has always kept the income in a dedicated fund to be used for municipal property tax relief. Every year, voters approve a specific amount from the fund to be used to defray municipal expenses.

While it's complicated to compare the state's payments to the town's budget, because the town looks at the income along its fiscal year from the beginning of July to the end of June while the state dispenses the money by calendar year, O'Keefe said the most recent return was more than expected according to the town's benchmarks.

Those benchmarks were developed so town staff and the Select Board could have some idea if the town was likely to receive what it expected from the local option taxes by looking at the performance of each quarter.

In the current fiscal year, which will end this month, the town's estimates for what it would collect from the local option taxes were about a third of 1 percent different from what was actually received.