Specialist Company Will Likely Handle East Lansing’s Income Tax
It is looking likely that next Tuesday, East Lansing’s City Council will hire a specialized company to handle the City’s new income tax. Under state law, City Council is also going to have to set up a citizen Board of Review to hear appeals from City income taxpayers and soon designate someone in the City the official “Administrator” of the tax. What it will all cost remains to be seen.
Although implementation of East Lansing’s municipal income tax will not officially begin until next year, City Council was briefed this week by Finance Director Jill Feldpaush and Innovative Software Services President Rick Carpenter regarding decisions that need to be made now so that administering the tax can go smoothly for staff, employers, and taxpayers.
Feldpausch and Carpenter described some of the foreseeable complications involved with the implementation of the income tax. Taxes will in some cases start to be withheld from East Lansing residents’ and employees’ paychecks in January 2019. The first set of returns will be due in April of 2020.
Some key elements, such as notifying employers of the need to withhold tax and the formation of the Income Tax Review Board, need to be hammered out before the end of the year. State law governs implementation of municipal income taxes, and specifies, for example, that City Council choose three citizens for the Board to hear appeals from local income taxpayers.
East Lansing has not yet decided on who will handle the City’s income tax, with a choice essentially between the State of Michigan (which is constitutionally required to administer the tax if requested to do so) and Carpenter’s company, Innovative Software Services.
Feldpausch (above) described phone calls her office has been receiving from employers and payroll software providers asking for forms and policies that haven’t been developed yet. She made clear Council needs to make key decisions fast.
So far Feldpausch’s efforts to reach out to the State have not been fruitful. She explained to Council that she’s called several times to look into what State administration would look like, and has spoken with an employee who assured her that the message had been relayed to the proper people, but that so far she has not heard back anything substantive.
She also said that “anecdotally” she’s heard that the City of Detroit – the only Michigan city whose income tax is currently being administered by the State – has not been satisfied with the way it was being handled.
In response to Feldpausch’s description of her attempts to contact the State without success, Mayor Pro Tem Erik Altmann responded “Well, it looks like we have our decision then.”
Rick Carpenter (above) then took the podium to describe his company’s approach to income tax administration, providing a bulleted list of services that the city could select from if his company was chosen to administer the tax. (See his handout to Council here.) Innovative Software Services currently administers income taxes for 23 Michigan cities and 35 cities in Ohio, using Carpenter’s software program, “City Tax.”
According to Carpenter, one of the complexities of administering a city tax is that every taxpayer’s situation is unique, with a different combination of residency, city of employment, and total income, which can come from multiple sources. His company helps cities try to figure out who needs to be notified that they may owe income tax, and typically handles notifications, withholding payments, returns, and refunds. Carpenter’s company uses State of Michigan tax records, along with property tax records and GIS (geographic information systems) data, to determine who should be filing.
In response to the presentation, Council Member Ruth Beier commented that, in a lot of cases, the amount of money that might be owed as a refund was so small that residents might not bother to request a refund. She used her own experience as an example, saying, “If the city owes me eight dollars, I don’t request a refund.”
Carpenter responded that there are some cities which offer residents the opportunity to donate their overpayments. A spreadsheet provided to ELi by Feldpausch showed some of the funds to which overpayments can be given in other Michigan cities. These include funds for libraries, community firework celebrations, or charities like the United Way.
Council Member Aaron Stephens suggested that residents could be given the opportunity to donate overpayments to some of the local community nonprofit organizations that used to be supported in East Lansing through direction of HUD Community Development Block Grants funds, since City Council has decided to use those funds to pay down the debt on Avondale Square instead. City Attorney Tom Yeadon said that he would look into that possibility.
Carpenter’s presentation outlined the systems his company uses to process returns, scan checks, audit returns, and communicate with filers by mail about any corrections that need to be made. He said his company scans all of the paperwork into an electronic database and then destroys the physical documents after one or two years, depending on the preference of a municipality.
Building the database to determine who owes the taxes is complicated, since not only residents but any person or business earning money within the City is subject to the tax. Employers within the city can be required to withhold tax funds from their employees’ paychecks, but residents who work in other cities would have to request that East Lansing income taxes be withheld, or file estimated payments, so that they aren’t potentially subject to late fees.
East Lansing also needs to designate an employee to be the City’s official Income Tax Administrator, since there is a lot of confidential data involved, and anyone with access to that data must pass a State-issued test to assure they understand the laws governing confidentiality.
Feldpausch said that she felt the workload of all the current employees was such that there was no one currently working with the City who could absorb those additional duties into her or his schedule. That means the City may have to expend funds to pay a new staff member to take on this role.
There is no clear estimate yet for cost to administer the tax, but in a follow-up email Feldpausch says she expects to have an estimated cost available next week. In 2016, an external consultant’s report suggested an East Lansing income tax might cost $400,000 to administer per year. But whether that is an accurate figure remains to be seen.
City Council will have to vote on whether to authorize Eaton Rapids-based Innovative Software Services to administer the tax. Because it’s not known how many total returns will be involved, and many of the company’s services are charged per piece, the resolution authorizing the contract will likely be phrased in such a way as to allow for payment up to a certain amount rather than giving an exact figure.
City Council is expected to vote on a contract with Innovative Software Services at its meeting next Tuesday, September 18. Citizens wishing to weigh in on the matter can speak during public comment at that meeting or write to email@example.com.