Council Hires Company to Manage New Income Tax

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Wednesday, September 26, 2018, 7:16 am
By: 
Jessy Gregg

Above: Finance Director Jill Feldpausch and a page from the Lansing individual income tax form.

The East Lansing City Council has officially authorized the City Manager to sign a contract with Innovative Software Services Inc., a Michigan-based company, to manage the new East Lansing income tax. But some uncertainty necessarily remains about what we’re looking at in terms of numbers of returns, costs, and revenue.

The decision to authorize the contract with ISSI was passed unanimously at the September 18 meeting of City Council as part of the consent agenda, meaning that there was no discussion of the matter, and no disagreement from any Council Member. Four members of Council were present, with Mayor Mark Meadows still on vacation in Spain.

In 2016, an Income Tax Feasibility study by Plante Moran was commissioned as part of the work by East Lansing’s Financial Health Team. That study estimated the cost of administering a Municipal Income Tax at $400,000 annually.

But many of ISSI’s services are billed by the piece, and it’s not known exactly how many returns will be processed, since East Lansing has never had a municipal income tax before.

Jill Feldpausch, East Lansing’s Finance Director, asked in a memo that Council authorize the contract with ISSI for an amount “not to exceed $450,000,” which Council did.

The current total estimated cost from ISSI is $503,530. The largest single line item on the estimate calls for $90,000 to have an ISSI employee stationed at City Hall to assist with the tax administration. In her memo, Feldpausch noted, “Our intent is to postpone this option [of having an ISSI employee stationed here] until a determination can be made on the necessity of this function.”

That decision largely explains the difference in cost between the ISSI estimate and the amount authorized by Council.

ISSI’s estimate shows 25,300 paper returns being entered into the software system for East Lansing, at a cost of $1.96 each. (About 14,000 additional returns are estimated to be electronically filed by taxpayers.) Some of the additional services included in ISSI’s estimate are auditing returns, issuing refunds, issuing 1099 forms, and processing payments.

Rick Carpenter, President of ISSI, presented a summary of his company’s services to Council at their discussion meeting on September 11. There he outlined some of the anticipated complications inherent in administering a tax which applies to both residents and non-residents.

ISSI manages municipal income taxes for all other Michigan cities which currently levy a tax, except Detroit, which has its tax administered by the State. The alternative to hiring ISSI would be to have the Tax Processing Bureau of the State of Michigan administer the tax, which they are constitutionally mandated to do if they are asked.

Feldpausch wrote in her advance memo to Council, “To date, I have not received any response [from the State] to my multiple phone calls.” At a previous meeting, Feldpausch told the Council that “anecdotally” she had heard that Detroit was not satisfied with the State’s administration of their tax.

According to State law, East Lansing still needs to designate a City employee to be the “Income Tax Administrator” and needs to appoint a three-member Income Tax Board of Review.

There is also a possibility that Council could vote to allow residents to donate the amount they are owed in tax refunds to a City project or local charity. Return amounts on municipal taxes are often quite small, and residents of some other Michigan cities are given the option of donating their refunds to things like the local library or fireworks displays.

Feldpausch tells ELi, “I am hoping to get anything that requires Council action, such as the Board of Review and allowing donations, completed prior to the end of the calendar year.”

She explains that estimates about such things as numbers of filers and costs “will be refined as we start seeing things come through in calendar year 2019.”

The tax will begin to take effect on January 1, 2019, with the first set of annual returns due in April 2020.

 

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