More than 1,000 Tucson businesses could still be paying an expired tax on their buildings, not realizing the levy was abolished last year.
In 2013 the Arizona Legislature adopted a law prohibiting cities from collecting a 2.5 percent commercial lease tax on a business that leases a building from itself — something that often happens when a business owns a building under one corporate name and operates one or more separately incorporated businesses there.
City officials estimated 1,312 Tucson businesses could qualify for the exemption. So far only 195 have come forward and received the tax break.
If all the estimated businesses took the exemption, it would result in $1.2 million in lost revenue annually for the city. Last year, the city collected $14.8 million from the commercial lease tax.
City officials say they have tried to notify businesses, but so far few have responded.
Though the city will lose revenue, finance officials hope businesses claim the exemption sooner rather than later.
“We have no way of knowing who qualifies. The only way we know is if they come to us,” said Chief Finance Officer Kelly Gottschalk. “We have been putting the word out because I’m afraid people won’t realize it” until years later.
If that happens, the city could wind up repaying millions of dollars in tax refunds, placing further strains on its budget.
A person can claim a refund up to four years after the tax was paid.
Investor and developer Richard Studwell said businesses haven’t signed up in droves because governments have been slow to announce it.
“Nobody has made an effort to get it out there,” Studwell said.
Studwell applied for an exemption on one of his properties, but said he was denied because his partial ownership of the building didn’t meet the legal requirements.
The law, which took effect in July, used to apply only to corporations, said Steve Bosse, state and local tax expert with BeachFleischman, but the Legislature expanded it to include all other business types.
“A lot of people weren’t able to capitalize on the exemption before because people just don’t set up corporations that often,” Bosse said.
“You have a lot of LLCs renting to each other that are owned by the same individual,” he said. The way the old exemption was written, he said, “was discriminatory because it only allowed corporations, whereas with the change it opens it up to a lot more individuals” as long as they share 80 percent common ownership.
Bosse said it’s common for businesses to set up their buildings under a different entity as a precaution.
“It’s for asset protection purposes,” Bosse said. “If there is a lawsuit filed against an operating entity or they ran into other issues, the building would at least be protected from any legal” actions.”
So far, Bosse’s company has counseled about 50 companies on the change.
Bosse said the savings can be significant for businesses if they qualify for the 2.5 percent tax.
