STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
A PERFORMANCE AUDIT
OF THE
DEPARTMENT OF REVENUE
SALES TAX PROGRAM
FEBRUARY 1981
A REPORT TO THE
ARIZONA STATE LEGISLATURE
REPORT 81 - 2
DOUGLAS R. NORTON. CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
February 6, 1981
Members of the Arizona L e g i s l a t u r e
The Honorable Bruce Babbitt, Governor
M r . J. E l l i o t t Hibbs, D i r e c t o r
Department of Revenue
Transmitted herewith is a r e p o r t of the Auditor General, A Performance
Audit of the Department of Revenue, Sales Tax Program. This report is i n
response t o the June 19, 1979, r e s o l u t i o n of the J o i n t L e g i s l a t i v e Budget
Committee.
The blue pages present a summary of t h e r e p o r t ; a response from the
Department of Revenue is found on the yellow pages preceding the
appendices.
My s t a f f and I w i l l be pleased to discuss o r c l a r i f y items i n the r e p o r t .
Respectfully submitted,
~ o u ~ l & R. sN orton
Auditor General
S t a f f : Gerald A. S i l v a
Dwight A. Ochocki
Brian C. Dalton
Randolph D. Gross
Karen C. Holloway
Martha B. R a w l s
Dawn R. S i n c l a i r
Enclosure
LEGISLATIVE SERVICES WING SUITE 200 STATE CAPITOL PHOENIX. ARIZONA 85007 255- 4385
OFFICE OF THE AUDITOR GENERAL
A PERFORMANCE AUDIT OF THE
DEPARTKENT OF REVENUE
SALES TAX PROGRAM
A REPORT TO THE
ARIZONA STATE LEGISLATURE
REPORT 81- 2
TABLE OF CONTENTS
Page
INTRODUCTION AND BACKGROUND
FINDINGS
FIMDING I
The Department of Revenue has not f u l f i l l e d i t s
s t a t u t o r y r e s p o n s i b i l i t y t o e s t a b l i s h adequate
procedures f o r safeguarding and processing s a l e s
tax payments. A s a r e s u l t , the S t a t e may have
l o s t a n e s t i m a t e d $ 1.1 m i l l i o n a year i n i n t e r e s t
income, and a s i g n i f i c a n t amount of money is exposed
to l o s s through d e f a l c a t i o n o r accident.
CONCLUSION
RECOMMENATIONS
FINDING I1
DOR has not developed a systematic a u d i t s e l e c t i o n
procedure s i m i l a r t o those of other tax a d m i n i s t r a t i o n
a u t h o r i t i e s . A s a r e s u l t , DOR may not be maximizing
revenues from its s a l e s and use tax a u d i t function.
In a d d i t i o n , DOR has overstated revenues generated by
its a u d i t function i n budget documents submitted t o
the L e g i s l a t u r e .
CONCLUSION
RECOMMENDATIONS
FINDING I11
The DOR s a l e s and use tax a p p e a l s p r o c e s s is
fragmented and uncoordinated. A s a r e s u l t , the
process is excessively long, and not properly
documented or monitored.
CONCLUSION
RECOMMENDATIONS
FINDING I V
Page
61
DOR is not consistently imposing penalties on
l a t e payments of sales taxes as required by s t a t u t e .
A s a r e s u l t , DOR is not complying with State law or
treating taxpayers equally, and a substantial amount
of State revenue i s lost.
CONCLUSION
FINDING V
DOR collection procedures are inefficient.
CONCLUSION
RECOMMENDATIONS
FINDING V I
Improvements are needed in DOR's financial
transaction controls and documentation.
CONCLUSION
RECOMMENDATIONS
FINDING V I I
Because Arizona does not tax the construction of
power- generating f a c i l i t i e s as other s t a t e s do,
by 1986 Arizona w i l l lose s u b s t a n t i a l s a l e s and
use taxes related to the construction of the
Palo Verde nuclear generating f a c i l i t y and other
power- generating f a c i l i t i e s .
CONCLUSION
RECOMMENDATIONS
WRITTEN RESPONSE TO THE AUDITOR GENERAL'S REPORT
APPENDICES
APPENDIX I -
APPENDIX I1 -
APPENDIX I11 -
APPENDIX I V -
APPENDIX V -
APPENDIX V I -
APPENDIX V I I -
APPENDIX V I I I -
APPENDIX I X -
APPENDIX X -
APPENDIX X I -
APPENDIX X I 1 -
APPENDIX X I 1 1 -
APPENDIX XIV -
Memorandum from a DOR o f f i c i a l regarding
improvements i n the document and revenue flow
Arizona L e g i s l a t i v e Council memorandum -
October 2, 1980
October 20, 1980, memorandum from a DOR o f f i c i a l
regarding document processing
September 9, 1980, l e t t e r from a DOR o f f i c i a l
regarding document- processing workload
Arizona L e g i s l a t i v e Council memorandum -
October 7, 1980
Arizona L e g i s l a t i v e Council memorandum -
October 17, 1980
December 15, 1980, memorandum from the Director
of the Department of Revenue regarding
improvements i n the s a l e s t a x a u d i t program
Arizona L e g i s l a t i v e Council memorandum -
December 5, 1980
Arizona L e g i s l a t i v e Council memorandum -
August 15, 1980
December 15, 1980, memorandum from the Director
of the Department of Revenue regarding
improvements i n the a d m i n i s t r a t i v e hearing
process
Arizona L e g i s l a t i v e Council memorandum -
November 28, 1980
Arizona L e g i s l a t i v e Council memorandum -
August 15, 1980
L e t t e r to Auditor General s t a f f from Office of
Attorney General regarding penalty abatements
December 15, 1980, memorandum from the Director
of the Department of Revenue regarding
improvements i n the c o l l e c t i o n a d m i n i s t r a t i o n
APPENDIX XV - December 15, 1980, memorandum from the Director
of the Department of Revenue regarding
improvements i n the accounts receivable process
APPENDIX XVI - DOR s a l e s tax master f i l e r e t e n t i o n schedule
APPENDIX X V I I - Tax s t a t u s of s t r u c t u r e s a t the Palo Verde
nuclear generating s t a t i o n
APPENDIX X V I I I - Correspondenct between APS o r its
r e p r e s e n t a t i v e s and Auditor General s t a f f
regarding requests f o r cost information
APPENDIX XIX - L e t t e r from S a l t River Project o f f i c i a l
regarding cost of generating f a c i l i t i e s
APPENDIX XX - Arizona L e g i s l a t i v e Council memorandum -
October 31, 1980
SUMMARY
The Office of the Auditor General has conducted a performance a u d i t of the
Department of Revenue - Sales Tax Program i n response t o a June 19, 1979,
r e s o l u t i o n of the J o i n t L e g i s l a t i v e Budget Committee. The performance
a u d i t report presented herein was prepared under the a u t h o r i t y vested i n
the Auditor General by Arizona Revised S t a t u t e s ( A. R. S.) $ 41- 1279 e t seq.
The a u t h o r i t y to administer the s a l e s tax program was t r a n s f e r r e d from the
now- defunct S t a t e Tax Commission t o t h e Department of Revenue ( DOR) when
DOX was formed on July 1, 1974. The s a l e s tax program, as administered by
DOE, includes the c o l l e c t i o n of s i x separate taxes. In a d d i t i o n to
t r a n s a c t i o n p r i v i l e g e , education excise and s p e c i a l excise tax f o r
education, which a r e commonly r e f e r r e d t o a s s a l e s t a x e s , DOR a l s o
c o l l e c t s use, bingo and r e n t a l occupancy taxes.
I n 1979, D O R ' s a d m i n i s t r a t i o n of t h e S a l e s Tax Program received a g r e a t
deal of public c r i t i c i s m and, s i n c e t h e n , DOR has made a concerted e f f o r t
to improve the program. Nevertheless, a d d i t i o n a l improvements are s t i l l
needed and are addressed i n seven major findings:
1. The Department of Revenue h a s n o t f u l f i l l e d its s t a t u t o r y
r e s p o n s i b i l i t y t o e s t a b l i s h adequate procedures f o r safeguarding
and processing s a l e s tax payments. A s a r e s u l t , the S t a t e may
have l o s t an estimated $ 1.1 m i l l i o n a year i n i n t e r e s t income,
and a s i g n i f i c a n t amount of money is exposed to l o s s through
d e f a l c a t i o n or accident. ( page 13)
2. DOR has not developed a systematic a u d i t s e l e c t i o n procedure
s i m i l a r t o those of other tax a d m i n i s t r a t i o n a u t h o r i t i e s . A s a
r e s u l t , COR may not be maximizing revenues from its s a l e s and use
tax a u d i t function. In a d d i t i o n , DOR has overstated revenues
generated by its a u d i t function i n budget documents submitted t o
the L e g i s l a t u r e . ( page 27)
3. The DOR s a l e s and use tax appeals process is fragmented and
uncoordinated. A s a r e s u l t , the process is e x c e s s i v e l y l o n g , and
not properly documented or monitcred. ( page 41)
4. DOR is not c o n s i s t e n t l y imposing p e n a l t i e s on l a t e payments of
s a l e s taxes as required by s t a t u t e . A s a r e s u l t , DOR is not
cornplyi~ g with S t a t e law or t r e a t i n g taxpayers equally, and a
s u b s t a n t i a l amount of S t a t e revenue is l o s t . ( page 61)
5. DOR c o l l e c t i o n procedures a r e i n e f f i c i e n t . ( page 71)
6. Improvements a r e needed i n DOR' s f i n a n c i a l t r a n s a c t i o n controls
and documentation. ( page 91)
7. Because Arizona does not tax t h e c o n s t r u c t i o n of power- generating
f a c i l i t i e s as other s t a t e s do, by 1986 Arizona w i l l lose
s u b s t a n t i a l s a l e s and use taxes r e l a t e d t o the c o n s t r u c t i o n of
t h e p a l o Verde nuclear generating f a c i l i t y and other
power- generating f a c i l i t i e s . ( page 105)
It is recommended t h a t :
- The L e g i s l a t u r e approve DOR's request f o r funds t o purchase
e l e c t r o n i c payments processing equipment.
- DOR implement a d d i t i o n a l s e c u r i t y p r e c a u t i o n s , including:
1) storage f a c i l i t i e s t h a t provide safeguards to prevent l o s s
from t h e f t , f i r e , sprinkler- system damage and o t h e r a c c i d e n t s ,
and 2) r e s t r i c t access to areas i n which r e t u r n s and payments
a r e processed.
- During the time required to implement e l e c t r o n i c processing, i t
is recommended t h a t DOR e i t h e r :
o Provide f o r the deposit of a l l checks with t h e S t a t e
Treasurer within 24 hours of r e c e i p t by separating checks
from r e t u r n s a t the time r e t u r n s a r e opened and s o r t e d , o r
o Adopt the use of lockbox s e r v i c e s .
In a d d i t i o n , it is recommended t h a t :
- DO2 expedite t h e implementation of an a u d i t s e l e c t i o n system
s i m i l a r t o those c u r r e n t l y used i n Texas and C a l i f o r n i a .
- The L e g i s l a t u r e consider amending A. R. S. $ 541- 1327.~ and
42- 1414. F to allow f o r f u l l 35- month a u d i t s as conducted by the
c i t i e s of Scottsdale and Phoenix.
- DOR increase i t s e f f o r t s t o coordinate its a u d i t a c t i v i t i e s with
those of the f i v e l a r g e s t c i t i e s i n Arizona.
- DOR maintain more a c c u r a t e r e c o r d s of a u d i t assessments and
report such information to the L e g i s l a t u r e i n a manner which w i l l
more accurately r e f l e c t a c t u a l revenues generated by its audit
a c t i v i t i e s .
It is f u r t h e r recommended t h a t DOR:
- Establish a time l i m i t a t i o n f o r each s p e c i f i c s t e p i n the appeals
process by adopting r u l e s and r e g u l a t i o n s s i m i l a r t o A. C. R. R.
R16- 3- 107 of the S t a t e Board of Tax Appeals or Rule 12( a) of the
Rules of C i v i l Procedure.
- Adopt r u l e s and r e g u l a t i o n s d i r e c t i n g t h e Hearing Officer to
schedule hearings f o r taxpayers who have postponed, without good
cause, a h e a r i n g beyond t h e e s t a b l i s h e d time.
- Document appeals according t o A. R. S. SS42- 1338, 42- 1415 and
41- 1009 ( ~ d m i n i s t r a t i v eP rocedure ~ c t ) .
- Fully implement c e n t r a l i z a t i o n of the appeals process i n the
Hearing Office, a s outlined i n the D i r e c t o r ' s September 19, 1980,
memorandum.
- Prepare monthly management r e p o r t s on the s t a t u s of protested
a u d i t assessments including explanations f o r excessive delays.
Additionally, we recommended t h a t :
- The L e g i s l a t u r e amend A. R. S. $$ 42- 1322 and 42- 1327 t o provide
c l e a r s t a t u t o r y guidelines on the imposition and waiver of
penalty.
- DOR promulgate r u l e s e s t a b l i s h i n g s p e c i f i c c r i t e r i a f o r the
imposition b f t h e t e n and 25 percent p e n a l t i e s provided i n A. R. S.
§ $ 42- 1722. D, 42- 1327. B and 42- 1727. C.
- DOR impose a p e n a l t y and i n t e r e s t on a l l taxpayers who f a i l to
pay t h e i r taxes when due.
- Subject t o the three- year s t a t u t e of l i m i t a t i o n s , DOR a s s e s s
p e n a l t i e s and i n t e r e s t which it f a i l e d to a s s e s s i n the past.
- DOR include i n its annual report a summary of penalty abatements
granted. The summary should include the amounts involved and
reasons f o r the abatements.
With regard to DOR c o l l e c t i o n p r a c t i c e s it is recommended t h a t :
- DOR cease combining data on l a t e taxes and current taxes
c o l l e c t e d f o r budget information reports.
- The s p e c i a l c o l l e c t i o n s s e c t i o n generate, a t the minimum, the
same types of s e r v i c e measurements a s t h e c o l l e c t i o n s s e c t i o n .
- DOR mail n o n f i l i n g n o t i c e s 25 days a f t e r a taxpayer becomes
delinquent.
- DOR r e f e r nonfiled accounts to a c o l l e c t o r before the account
becomes over two months old.
- DOR b i l l accounts receivable taxpayers monthly.
- DOR n a i l a second n o t i c e to a n o n f i l i n g taxpayer within 55 days
a f t e r the due date.
- DOR r e f e r accounts receivables of more than $ 100 to c o l l e c t o r s a s
soon a s an account is due and payable.
- A l l accounts receivable of l e s s than $ 100 be r e f e r r e d t o a
c o l l e c t o r within t h r e e t o four months a f t e r they a r e due and
payable.
- DOR c o l l e c t i o n supervisors monitor accounts r e f e r r e d to
c o l l e c t o r s , a c t i o n s taken against taxpayers and the d a t e s a c t i o n
is taken.
- C o l l e c t o r s c o n t a c t a l l of the taxpayers assigned t o them provided
it is cost e f f e c t i v e to do so, and DOR e s t a b l i s h time l i m i t s f o r
making such c o n t a c t s .
- DOR e s t a b l i s h guidelines f o r when s p e c i f i c c o l l e c t i o n a c t i o n s
should be taken and e s t a b l i s h procedures to ensure the guidelines
are followed.
- DOR standardize p a r t pay procedures within t h e c o l l e c t i o n s
s e c t i o n . Once procedures a r e standardized, c o l l e c t i o n
supervisors should monitor employees and determine t h a t p a r t pay
agreements a r e f u l f i l l e d by taxpayers.
- The DOR c o l l e c t i o n s e c t i o n require its c o l l e c t o r s t o use the
telephone as the primary mode of taxpayer c o n t a c t . Travel t o the
taxpayers' places of business should be kept t o a minimum and be
used only when taxpayers a r e unresponsive t o l e t t e r s and
telephone c a l l s .
- DOR evaluate the o p p o r t u n i t i e s t o expand c o l l e c t o r d u t i e s so t h a t
a l l c o l l e c t o r s can use t h e c o l l e c t i o n techniques of each.
Regarding D O R ' s recording of f i n a n c i a l t r a n s a c t i o n s we recommended t h a t
DOR :
- E s t a b l i s h a n i n t e r n a l a u d i t s t a f f , reporting to the DOR Director.
- Conduct an indepth review of current accounting procedures and
develop w r i t t e n p o l i c i e s and procedures which a r e i n compliance
with S t a t e s t a t u t e s and good accounting procedures.
- P r i o r to e n t e r i n g accounts receivable i n t o the new automated
system:
e Determine the c o l l e c t i b i l i t y of a l l r e c e i v a b l e s more than a
year old and purge those accounts deemed t o be u n c o l l e c t i b l e .
@ Determine the e r r o r r a t e i n c o l l e c t i b l e r e c e i v a b l e s by
conducting an indepth review of a s t a t i s t i c a l l y valid sample
of the r e c e i v a b l e s ,
cs If the e r r o r r a t e e s t a b l i s h e d through the review exceeds an
acceptable l e v e l , review and c o r r e c t a l l c o l l e c t i b l e
r e c e i v a b l e s , and
e Report the r e s u l t s of t h i s review, including the acceptable
e r r o r r a t e e s t a b l i s h e d by the Department, to the Joint
L e g i s l a t i v e Budget Committee and/ or the Special Committee on
the Department of Revenue.
We a l s o recornmended t h a t the L e g i s l a t u r e consider s t a t u t o r y changes to
allow f o r a f u l l independent a u d i t of the Department of Revenue.
F i n a l l y , it is recommended t h a t :
- The L e g i s l a t u r e evaluate the agreement among the Attorney
General, DOR and APS to determine i f it is c o n s i s t e n t with
l e g i s l a t i v e i n t e n t . If expansion of the exemption is deemed
a p p r o p r i a t e , A. R. S. $$ 42- 1312.01 and 42- 1409 should be revised to
define the conditions under which buildings may be s u b j e c t t o
exemption. If the expansion of the exemption is considered
inappropriate, DOR should i n i t i a t e c o r r e c t i v e measures to ensure
timely assessment and c o l l e c t i o n of taxes due.
- The L e g i s l a t u r e review exemptions c u r r e n t l y granted by the
s t a t u t e s and DOR r u l e s and regulations.
- DOR include information regarding t h e a u d i t s of s u p p l i e r s and
c o n t r a c t o r s of the Palo Verde p r o j e c t i n its annual report.
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance a u d i t of the
Department of Revenue - Sales Tax Program i n response t o a June 19, 1979,
r e s o l u t i o n of t h e J o i n t L e g i s l a t i v e Budget Committeex-. The performance
a u d i t report presented herein was prepared under t h e a u t h o r i t y vested i n
the Auditor General by Arizona Revised S t a t u t e s ( A. R. S.) 541- 1279 e t seq.
The a u t h o r i t y t o administer t h e s a l e s t a x program was t r a n s f e r r e d from the
now- defunct S t a t e Tax Commission to the Department of Revenue ( DOR) when
DOR was formed on July 1, 1974. The s a l e s tax program, a s administered by
DOR, includes t h e c o l l e c t i o n of s i x separate taxes. In a d d i t i o n to
t r a n s a c t i o n p r i v i l e g e , education excise and s p e c i a l excise tax f o r
education, which a r e commonly r e f e r r e d t o a s s a l e s taxes, DOR a l s o
c o l l e c t s use, bingo and r e n t a l occupancy taxes.
The Transaction P r i v i l e g e Tax is l e v i e d on those engaged i n business
a c t i v i t y i n Arizona, and is assessed on gross r e c e i p t s , l e s s c e r t a i n
deductions, a s s e t f o r t h by the L e g i s l a t u r e . The p r i v i l e g e tax came i n t o
being i n 1935. E f f e c t i v e i n 1959, an Education Excise Tax was imposed
and, i n 1968, a Special Excise Tax f o r Education was added. Table 1
presents a summary of t h e d i s t r i b u t i o n of current s a l e s t a x r a t e s .
* The performance a u d i t of the s a l e s tax program was delayed because the
Office of the Auditor General was s t a t u t o r i l y denied access t o the
s a l e s tax records. House B i l l 2003, signed by the Governor on
January 10, 1980, granted the Auditor General access t o s a l e s tax
records.
TABLE 1
SUMNARY OF THE DISTRIBUTION
OF CURRENT SALES TAX RATES
Taxable
A c t i v i t i e s
Mining - o i l and gas
production
Transporting and towing
U t i l i t i e s
Communications
Railroads and a i r c r a f t
Publishing
P r i n t i n g and a d v e r t i s i n g
P r i v a t e c a r / p i p e l i n e s
Contracting
Timbering
Restaurants and bars
Amusements
Rentals of r e a l property
Rentals of personal
property
Feed, wholesale
R e t a i l
Special
P r i v i l e g e Education Excise Tax Combined
Tax Excise Tax f o r Education Tax
Percentage Percentage Percentage Percentage a
The Use Tax a p p l i e s t o the use, storage or consumption i n t h i s S t a t e of
tangible personal property unless the purchaser can prove t h a t the tax has
been c o l l e c t e d by an authorized r e t a i l e r . The Use Tax r a t e is four
percent.
Rental Occupancy Tax is imposed on a tenant f o r t h e p r i v i l e g e of occupancy
of r e a l property when the r i g h t t o occupy the property r e s u l t e d from a
w r i t t e n l e a s e entered i n t o before December 1, 1967 ( p r e - e x i s t i n g l e a s e ) .
The amount of t h i s tax is two percent of r e n t paid to the landlord.
The Bingo Tax imposes a two- and- a- half percent tax on the n e t p r o f i t s
derived from bingo games.
Table 2 presents a summary of the gross s a l e s t a x e s c o l l e c t e d , by type,
f o r f i s c a l years 1975- 76 through 1979- 80.
P-+- Nr- t- Ln
coda c o o ~ r n r- ma audd
as.. .. ..
d N C U coo
om ad
m CU
Mr- m Tt
co cu mr-a)
co\ o c - - -
1coa
r- MCU
t- coo0
m....
dr- 0
Tt Tt
CU CU
- 62-
a3
O d- 0 3- loo
mou
C-- r- M
a*..
r i d - L n
Tt M
MM
- tFt
no
-+(\ I
W
t-
I
Ln . 0-
WU7
o r 0 0 3
F L n O m....
dt- 4
a3 a3
d rl
42-
The Department of Revenue is authorized to administer the s a l e s tax
program of any Arizona c i t y or town by entering i n t o a w r i t t e n contract
with the incorporated community to receive payment of l o c a l s a l e s taxes,
perform l o c a l a u d i t s , make c o l l e c t i o n c a l l s on delinquent c i t y accounts,
r e t u r n amounts c o l l e c t e d to the c i t y or town weekly and suggest changes i n
c i t y ordinances. These a c t i v i t i e s a r e performed by the Department without
charge. During 1979- 80 the Department c o l l e c t e d , on behalf of 52 c i t i e s
and towns, a t o t a l of $ 24,024,045.
The f i v e l a r g e s t c i t i e s i n Arizona - Mesa, Phoenix, S c o t t s d a l e , Tempe and
Tucson - do not have DOR c o l l e c t t h e i r l o c a l s a l e s taxes.
The Office of the Auditor General expresses its g r a t i t u d e t o the Director
and employees of the Department of Revenue and the o f f i c i a l s of numerous
Arizona c i t i e s f o r t h e i r cooperation, a s s i s t a n c e and c o n s i d e r a t i o n during
the course of t h i s a u d i t .
FINDING I
THE DEPARTMENT OF REVENUE HAS NOT FULFILLED ITS STATUTORY RESPONSIBILITY
TO ESTABLISH ADEQUATE PROCEDURES FOR SAFEGUARDING AND PROCESSING SALES TAX
PAYIIENTS. AS A RESULT. THE STATE MAY HAVE LOST AN ESTIMATED $ 1.1 ; ITILLION
A YEAR I N INTEREST INCOME, AND A SIGNIFICANT AMOUNT OF MONEY IS EXPOSED TO
LOSS THROUGH DEFALCATION OR ACCIDENT.
The Department of Revenue ( DOR) is responsible f o r c o l l e c t i n g and
processing approximately $ 800 m i l l i o n a year i n s a l e s taxes. Our review
of DOR procedures f o r safeguarding and processing payments revealed t h a t :
1) t h e t i m e l i n e s s of D O R ' s deposit of s a l e s tax payments is not i n
compliance vrith s t a t u t o r y requirements and is d e f i c i e n t i n c o n t r a s t to
o t h e r p u b l i c and p r i v a t e e n t i t i e s , and 2) m i l l i o n s of d o l l a r s of
unprocessed s a l e s tax payments are l e f t unprotected on shelves i n D O R ' s
mailroom. A s a r e s u l t , t h e S t a t e may have l o s t an estimated $ 1.1 million
a year i n i n t e r e s t income, and a s i g n i f i c a n t amount of money is exposed t o
l o s s through d e f a l c a t i o n o r accident.
TIMELINESS
DOR has a s t a t u t o r y r e s p o n s i b i l i t y t o deposit s a l e s tax payments with the
S t a t e Treasurer on the day they a r e received. Our a n a l y s i s revealed
t h a t : 1) s t a t u t o r y requirements notwithstanding, DOR has taken a s long a s
eleven days to deposit s a l e s tax payments with the S t a t e T r e a s u r e r , and
2) other public and p r i v a t e e n t i t i e s make same- day deposits of payments
c o l l e c t e d . Although s u b s t a n t i a l improvements have been made r e c e n t l y , * if
DOR were i n compliance with s t a t u t o r y law o r on a p a r w i t h o t h e r e n t i t i e s ,
t h e S t a t e could earn an estimated $ 1,089,222 a year i n a d d i t i o n a l i n t e r e s t
inc ome .
* Appendix I contains a memorandum from DOR o f f i c i a l s o u t l i n i n g recent
improvements i n the payments- processing function.
S t a t u t o r y Requirements
Arizona Revised S t a t u t e s ( A. R. S.) require t h a t s a l e s tax revenues be
deposited d a i l y with the S t a t e Treasurer. A. R. S. $ 42- 1341.02(~) s t a t e s :
"... the department s h a l l each day remit a l l
revenues c o l l e c t e d . . . t o the s t a t e t r e a s u r e r . . . "
According to a L e g i s l a t i v e Council Opinion dated October 2, 1980:"
" . . . i n t h e f a c e of an apparent i n t e n t to require
prompt processing and t r a n s f e r of the monies t o
t h e t r e a s u r e r t h e processing and t r a n s f e r of
payments t o the t r e a s u r e r ' s o f f i c e should be
completed p r i o r t o the close of the next calendar
day. "
Analysis of Sales Tax Processing
Analysis of DOR payment- processing procedures revealed t h a t the Department
is not i n compliance with A. R. S. $ 42- 1341.02(~), since it has taken up to
eleven days f o r DOR t o deposit payments with the c a s h i e r . In a d d i t i o n to
untimely processing, current procedures lack s u f f i c i e n t i n t e r n a l c o n t r o l s ,
because n e g o t i a b l e i n s t r u m e n t s are handled by numerous i n d i v i d u a l s p r i o r
to deposit.
A t the Phoenix DOR f a c i l i t y , the mail is picked up twice each day from the
post o f f i c e and brought to the mailroom, where it is opened and sorted.
Returns accompanied by checks a r e separated from those without checks and
a l l of them a r e placed i n bundles i n mail t r a y s . The t r a y s a r e flagged to
i n d i c a t e i f checks a r e included with the r e t u r n s and t h e d a t e the mail was
opened. A l l t r a y s a r e stored on open shelves i n the mailroom.
* Appendix I1 contains the f u l l t e x t of t h i s opinion.
The DOR documents processing section is responsible for verifying the
mathematical accuracy of a return, determining that a l l applicable
sections of a return have been completed and agreeing the amount of the
check with the amount due as indicated on the r e t u r n . I f the amounts do
not agree, the amount due is deleted on the return by placing a blank
s t i c k e r over i t , and the amount of the check i s written on the s t i c k e r .
Checks then are separated from returns, batched and sent to the cashier,
accompanied by a calculator tape indicating the d o l l a r t o t a l of each
batch. The cashier v e r i f i e s tape t o t a l s , and the tape produced by the
cashier is sent back to the documents- processing area, where it is
attached to the corresponding returns. The returns and tape are then sent
to data processing, where the information from the returns is entered into
the computer system. The c a s h i e r ' s tape then is balanced against the
d o l l a r t o t a l of the returns entered by data processing.
The DOR office i n Tucson receives sales tax remittances by mail and from
individuals who choose to pay i n person. The payments are deposited daily
with the S t a t e ' s servicing bank. The returns, deposit s l i p and a memo
itemizing d o l l a r s received, by taxpayer's account, are s e n t d a i l y to the
DOR c a s h i e r ' s office i n Phoenix, where they are balanced against each
other. The returns are then sent to the documents- processing area.
The procedures followed for depositing and processing payments received i n
the Tucson office i l l u s t r a t e that retaining checks with returns through
the e n t i r e review process is not e s s e n t i a l . Separation of checks from
returns prior t o e n t r y of a l l returns i n t o the documents- processing flow
would expedite the deposit of monies and reduce the opportunity for l o s s
or defalcation by limiting access to checks.
DOR receives an average of 52,000 sales t a x r e t u r n s a month.
Approximately 30,000 returns, or 60 percent, are received during the f i v e
working days preceding the sales tax due date and the five calendar day
grace period following it. This heavy volume of s a l e s tax returns during
a r e l a t i v e l y short time creates a processing backlog.
Processing Delays
Audit s t a f f inventoried the number of t r a y s of unprocessed m a i l stored i n
the DOR mailroom four times over an eight- day period which the DOR
Assistant Director f o r A d m i ~ i s t r ~ + i ccnh aracterized as " . . . r e p ? e c e ? i a C i ~
i n terms of mail r e c e i p t s ..." There was an average of 18 t r a y s of
unprocessed s a l e s t a x r e t u r n s , 12 of which contained checks. During our
review it was observed t h a t some t a x payments remained i n the DOR mailroom
f o r as long a s eleven days.
I n July 1980, DOR e s t a b l i s h e d a document processing u n i t by consolidating
t h r e e f u n c t i o n a l u n i t s . This reorganization r e s u l t e d i n s i g n i f i c a n t
personnel changes, a s noted i n an October 20, 1980, l e t t e r * from the
A s s i s t a n t D i r e c t o r of the Division of Administration:
" Only two employees i n the Document Processing
Unit are continuing t o perform the function they
did p r i o r t o July 1 as the ' p r e - a u d i t ' u n i t i n the
Revenue Control Section. That function is
s e r i a l i z a t i o n . The other eighteen have taken on
the d u t i e s of e d i t i n g a l l r e t u r n s ( s a l e s , income,
corporate, p a r t n e r s h i p s , e t c . ) and making
necessary c o r r e c t i o n s f o r processing, including
some decision making, which was not previously
p a r t of t h e i r function. I n a d d i t i o n , p r i o r work
experience was limited to s a l e s documents and did
not include e i t h e r the adjustment or handling of
trouble documents. It had been expected t h a t i n
t h e t r a n s f e r of the function and some personnel
from Taxation t h a t the e x p e r t i s e of t h i s
processing would a l s o come with the u n i t , t h i s did
not prove so due t o promotions, r e s i g n a t i o n s ,
e t c . , i n t h a t u n i t p r i o r t o its t r a n s f e r . I n
a c t u a l i t y , only one employee from the u n i t i n
Taxation has been assigned on a limited b a s i s to
a s s i s t i n t r a i n i n g .
* Appendix I11 contains the f u l l t e x t of t h i s l e t t e r .
" With reference to a c t u a l vacancies experienced i n
the u n i t , I have supplied a recap below f o r J u l y ,
August and September.
"?, lonth Authorized FTE* Vacant FTE*
July 20 7
August 2 0 3
September 20 1
" I. le have found t h a t the use of temporaries is not
a f e a s i b l e a l t e r n a t i v e ; because of the complexity
of t h e t a s k and the high turnover r a t e i n
temporary employees, a high e r r o r r a t e r e s u l t s on
documents."
I n addition to the r e o r g a n i z a t i o n , the change i n the due date f o r the
monthly s a l e s and use tax r e t u r n s from the 15th of the month to the f i r s t
of the next month has had an impact on the document processing u n i t ' s
workload. In a September 9, 1980, l e t t e r , * * t h e A s s i s t a n t D i r e c t o r
commented:
" Normally we w i l l receive between 60 and 70
percent of the s a l e s t a x r e t u r n s i n a one week
period, the week a f t e r the required postmark
date. Our p r a c t i c e has been t o employ temporaries
f o r such peak f i l i n g periods t o handle t h i s type
of i n f l u x . I n August the due date f o r s a l e s tax
returns changed from the 15th of August t o
September 1. We a n t i c i p a t e d t h a t a l a r g e r
percentage of our taxpayers would recognize the
l a t e r due date and thus planned f o r temporary help
to b o l s t e r document processing i n the l a s t week of
August and the f i r s t week of September.
" In a c t u a l p r a c t i c e most taxpayers continued
f i l i n g a t the old due date and we thus had a
l a r g e r than a n t i c i p a t e d workload develop i n
August ..."
* F u l l time equivalent p o s i t i o n s .
3HC Appendix I V contains the f u l l t e x t of the l e t t e r .
Additional Income Lost
A t r a y of unprocessed s a l e s t a x r e t u r n s with checks, which was stored i n
the DOR mailroom, was s e l e c t e d randomly and the checks were t o t a l e d . The
tray contained 857 checks t o t a l i n g $ 1,129,280. The 857 checks remained
unprocessed f o r a t l e a s t seven days. For each day t h a t these checks
remained unprocessed and undeposited, the S t a t e l o s t i n t e r e s t revenues of
$ 303, based on the S t a t e T r e a s u r e r ' s average r a t e of r e t u r n earned on
investments of 9.81 percent during f i s c a l year 1979- 80.* Thus t h e S t a t e
l o s t a minimum of $ 2,126 i n i n t e r e s t revenues f o r the seven- day period
during which t h i s $ 1,129,280 i n tax payments remained unprocessed.
Because DOR r e s o r t s and rebatches checks during processing, the exact date
DOR a c t u a l l y deposited these 857 checks w i t h t h e S t a t e Treasurer and the
r e s u l t a n t t o t a l d o l l a r s i n l o s t i n t e r e s t revenues could not be determined.
During f i s c a l year 1979- 80, DOR c o l l e c t e d $ 814,676,135 i n s a l e s tax
revenues, net of refunds. Of t h i s amount, $ 4,143,774 was deposited on the
day received by the DOR o f f i c e i n Tucson. The remaining $ 810,532,361 was
received and processed by the Phoenix mailroom and documents processing
section and was, t h e r e f o r e , s u b j e c t t o processing delays p r i o r to deposit
with the S t a t e Treasurer. For each day t h a t these tax payments were not
processed and deposited with the S t a t e Treasurer, the S t a t e l o s t
approximately $ 218,000 i n i n t e r e s t revenues. A s previously noted, our
a n a l y s i s revealed processing delays of up to eleven days. Elmination of
delays i n making deposits would produce s i g n i f i c a n t a d d i t i o n a l i n t e r e s t
revenues. Table 3 shows the i n t e r e s t income which would be earned if
processing delays were eliminated.
* The r a t e of r e t u r n of 9.81 percent a p p l i e s to the types of investments
tax payments a r e used to purchase. These investments a r e repurchase
agreements.
TABLE 3
ADDITIONAL INTEREST INCOME THAT WOULD BE
EARNED EACH YEAR IF DELAYS IB PROCESSING AND
DEPOSITING SALES TAX PAYMENTS \ nRE ELIBINATED*
Days of Processing
Delays Eliminated
Additional Interest
Income that Would
Be Earned Each Year
It should be noted that several trays containing income and withholding
tax returns and checks were also stored in the mailroom. Because access
to withholding tax information by Auditor General staff is precluded by
law, we were unable to determine the dollar loss associated with
processing delays for these tax payments.
* Based on revenues collected during the 1979- 80 fiscal year.
"* Average processing delay since reimplementation of special- handling
procedures. ( see page 23)
Other E n t i t i e s
During the course of our a u d i t we reviewed payment- processing procedures
used by the following corporations and c i t i e s : American Express, Valley
FTational Fank ( V N B ) , the City of Scottsdale and the City of Phoenix.
These e n t i t i e s a r e able t o process and deposit a l l payments within 24
hours of r e c e i p t . A comparison of t h e e f f i c i e n c y of these e n t i t i e s and
COR is presented i n Table 4.
TABLE 4
COMPARISON OF THE EFFICIENCY OF
DOR'S PAYMENT- PROCESSING DURING
FISCAL YEAR 1979- 80, WITH OTHER ENTITIES
E n t i t y
American Express
Valley National Bank
City of Phoenix*
City of Scottsdale*
DOR
Number of Payments
Received Per Month
Average
Time to
Deposit
( Days)
A s sho~ m i n Table 4, American Express processes approximately 1,500,000 to
2,500,000 payments each month u s i n g a n automated payments- processing
system. The system includes magnetic encoding of the check amount on the
bottom of both the payment card and check to allow e l e c t r o n i c capture and
v e r i f i c a t i o n . The use of an encoding machine provides economies by
eliminating manual agreement of payment documents and checks and by
simultaneously producing a tape t o t a l of each batch.
VliR manually agrees the amount of a remittance to the amount due. The
review and agreement function is performed by the employee who opens the
mail, thereby reducing the number of persons who handle checks. Account
posting and encoding, balancing, endorsing and microfilming of checks a r e
automated.
* These c i t i e s use lockbox s e r v i c e s f o r processing payments. Payments
received represent s a l e s t a x only.
The c i t i e s of Phoenix and Scottsdale use lockbox s e r v i c e s offered by VNB
f o r processing s a l e s tax r e t u r n s . A lockbox arrangement involves
c o l l e c t i o n and processing of payments by a t h i r d party. VNB picks up mail
from post o f f i c e boxes rented i n the c i t i e s ' names and processes it
according to t h e s p e c i f i c a t i o n s of the c i t y . The purchaser of the
s e r v i c e s defines types of payments which may be accepted, how documents
a r e to be batched and the means by which data i s t o be recorded and
reported. Both c i t i e s have requested t h a t i f the amount due indicated on
the return d i f f e r s from the amount remitted, both the document and the
check a r e to be returned t o the c i t y f o r in- house processing.
VNB does, however, have t h e c a p a b i l i t y t o process payments f o r which the
remittance d i f f e r s from the amount due. Differences would be noted on a
s a l e s tax r e t u r n and the document would be returned t o the c i t y so t h a t
differences could be noted on i n t e r n a l records. Data recording and
reporting a l t e r n a t i v e s i n c l u d e c a p t u r e on magnetic tape, used by the City
of S c o t t s d a l e , and summary r e p o r t s of t o t a l numbers and d o l l a r v a l u e o f
payments processed, used by t h e C i t y of Phoenix.
Security
DORIS s e c u r i t y over tax payments is d e f i c i e n t i n comparison t o other
e n t i t i e s ' s e c u r i t y . Our a n a l y s i s revealed t h a t adequate p r o t e c t i o n has
not been afforded unprocessed documents and r e m i t t a n c e s , t h e r e b y c r e a t i n g
a p o t e n t i a l f o r s i g n i f i c a n t l o s s through d e f a l c a t i o n or accident.
DOR c o l l e c t s approximately $ 68 million i n s a l e s tax each month. The
payments a r e stored on open shelves i n DOR's mailroom f o r up t o eleven
days and are not a d d i t i o n a l l y secured a t night or on weekends. During
working hours, the mailroom and document- processing area doors a r e not
only unlocked but, on occasion, a r e l e f t open a s well. Although s p e c i f i c
instances of malfeasance or t h e f t were not detected during our a u d i t ,
allowing unlimited access t o tax payments by DOR employees and
unauthorized i n d i v i d u a l s i n c r e a s e s the p o s s i b i l i t y of such occurrences.
Additionally, storage f a c i l i t i e s f o r s a l e s t a x r e t u r n s and payments a r e
not afforded adequate p r o t e c t i o n a g a i n s t f i r e , water damage from s p r i n k l e r
systems or other accident.
By way of c o n t r a s t , v i s i t o r s a r e required to sign i n , obtain badges and be
accompanied by authorized personnel t o e n t e r American ~ x p r e s s ' Western
Regional Operations Center and Valley National Bank's c e n t r a l payments
processing area. Doors a r e locked a t both f a c i l i t i e s a t a l l times, with
access limited t o authorized employees and persons accompanied by
authorized employees. A t American Express, payments not i n process a r e
stored i n a locked area.
F i n a l l y , according t o a L e g i s l a t i v e Council memorandum dated October 7,
1980,* a l o s s of t a x r e t u r n s and checks from the DOR mailroom, p r i o r to
deposit with the S t a t e ' s servicing bank, would r e s u l t i n a d d i t i o n a l delays
and c o s t s i n t h a t DOR would have t o exert a d d i t i o n a l e f f o r t to c o l l e c t the
taxes due. The opinion s t a t e s , i n p a r t :
" The tax is paid ... i f by negotiable instrument
such a s a check, when the drawee ( bank) charges
the amount of the instrument to the account of the
drawer ( taxpayer) ... I f the l o s s occurs before the
tax is paid, the t a x p a y e r ' s debt is not discharged
and the department has the duty t o pursue the
c o l l e c t i o n of the taxes..." ( ~ m n h a s i s added)
Recent DOR Imnrovements In
the Processing of Sales Tax Payments
During and subsequent to our review DOR made a number of s i g n i f i c a n t
improvements i n processing s a l e s tax payments. The following is a
chronology of those improvements:
* Appendix V contains the f u l l t e x t of t h i s memorandum.
2 2
In September 1980 DOR r e i n s t i t u t e d s p e c i a l handling procedures whereby
checks i n excess of $ 50,000 were batched s e p a r a t e l y and expedited through
the documents processing system. According to the Administrator of D O R ' s
Management Services, such a procedure had been used previously but was
" ( i ) n a d v e r t a n t l y discontinued i n the s h i f t t o the new procedures
( i n s t i t u t e d i n July 1980). . . "
According to a DOR management a n a l y s t study, by reimplementing the above
special- handling procedures DOR has reduced the delay i n depositing
payments. Our a n a l y s i s of the DOR management study revealed t h a t , since
reimplementation of special- handling procedures, DOR now takes an average
of f i v e calendar days t o deposit checks with the Treasurer, with delays of
up to ten calendar days.
November 1980
In November 1980, DOR revised its special- handling procedures t o include
a l l checks i n excess of $ 10,000. This change was prompted by a November
1980 DOR management a n a l y s t study which indicated t h a t , while only two
percent of the s a l e s t a x r e t u r n s f i l e d with DOR indicated a tax due i n
excess of $ 10,000, these r e t u r n s accounted f o r 64 percent of t o t a l s a l e s
t a x d o l l a r s .
In addition to p r i o r i t i z i n g checks based upon d o l l a r value, DOR has a l s o :
1) completed s t a f f i n g , 2) begun t r a c k i n g work t o i d e n t i f y backlogs,
a s s i s t i n f o r e c a s t i n g workloads and a n t i c i p a t e temporary s t a f f i n g needs
and 7) i n i t i a t e d s t u d i e s of various processing a l t e r n a t i v e s such a s
lockbox s e r v i c e s and automated in- house processing.
A l t e r n a t i v e Processing Procedures
Arizona s t a t u t e s allow f o r the use of lockbox s e r v i c e s by providing f o r
the appointment of agents. A. R. S. $ 42- 1303 s t a t e s , i n p a r t :
" C. The department s h a l l appoint, as necessary, such
agents, c l e r k s and stenographers authorized by law, who
s h a l l perform such d u t i e s a s may be required ... and who
s h a l l be authorized to a c t f o r the department a s it
prescribes. . . "
Further, a Legislative Council memorandum dated October 17, 1980"
concludes:
" The department of revenue may appoint a bank as
its agent and contract with it for its lockbox
services for processing sales tax payments. The
bank would be subject to the confidentiality
provisions of A. R. S. 542- 1307.''
It should be noted, however, that if DOR used a lockbox for sales tax
payments, personnel still would be required for processing quarterly
withholding tax payments and annual income tax payments, for which
processing with lockbox services is not feasible because of timing and
volume of receipts. DOR has requested $ 62,100 in the 1981- 82 budget for
the first year of a seven- year lease- purchase agreement to acquire an
electronic payments- processing system similiar to that used by American
Express. A December 1980 memorandum** from the Administrator of DOR's
Management Services concludes that automated in- house processing, when
compared with other alternatives, has among its advantages:
" a) Lower costs.
" b) Document balancing.
" c) Improved audit trail on documents and checks.
" d) Front end locator capabilities before data entry.
" e) Check encoding which could improve correspondent
bank bids for service.
" f) Microfilming of checks.
" g) Internal versus external operations."
* Appendix VI contains the full text of this memorandum.
** Appendix I contains the full text of the memo.
While it appears t h a t implementation of the system proposed by DOR would
increase processing c o s t s , e l e c t r o n i c processing would provide f o r same- day
deposit of payments. Thus the S t a t e would r e a l i z e a d d i t i o n a l revenues
because of the elimination of delays i n depositing remittances. Table 5
shows the a d d i t i o n a l i n t e r e s t revenues, net of the a d d i t i o n a l c o s t of the
e l e c t r o n i c equipment requested by DOR, which would be earned i f the current
average processing delay of f i v e calendar days f o r s a l e s tax payments were
eliminated.
TABLE 5
ADDITIONAL NET REVENUE PER YEAR WHICH COULD
BE EARNED IF THE ELECTRONIC PROCESSING
EQUIPMENT REQUESTED BY DOR WERE ACQUIRED
Year during which Additional
Net Revenue Would Be Earned
F i r s t year of Acquisition
Second to 7th year a f t e r a c q u i s i t i o n
A f t e r 7 t h y e a r of a c q u i s i t i o n
Additional
Net Revenue
Per Year
Based on the information i n Table 5, it appears t h a t t h e a c q u i s i t i o n of
the equipment requested by DOR would be c o s t e f f e c t i v e . P a r t i c u l a r l y i n
view of the f a c t t h a t t h e a d d i t i o n a l revenue shown i n Table 5 does not
include the a d d i t i o n a l i n t e r e s t earnings t h a t would accrue from f a s t e r
processing of withholding and income tax payments.
CONCLUSION
DOR does not process s a l e s tax payments e f f i c i e n t l y . A s a r e s u l t : 1 ) DOR
is not i n compliance with s t a t u t o r y requirements concerning t h e timeliness
of depositing monies with the S t a t e Treasurer, and 2) the S t a t e may have
l o s t an estimated $ 1.1 m i l l i o n i n i n t e r e s t income annually. I n a d d i t i o n ,
DOR does not f u l f i l l its r e s p o n s i b i l i t y to safeguard s a l e s tax payments,
and a p o t e n t i a l e x i s t s f o r s i g n i f i c a n t l o s s e s through d e f a l c a t i o n o r
accident.
* The f i r s t - y e a r expenses include a ten percent down payment ($ 10,372) and
t h e c o s t of a p p l i c a t i o n programming ($ 20,124) i n a d d i t i o n t o the expenses
f o r years two through seven.
RECOmE~~ DATIONS
It is recommended t h a t :
1. The Legislature approve DOR's request f o r funds to purchase a
electronic payments processing equipment.
2. DOR implement additional s e c u r i t y precautions, including:
1) storage f a c i l i t i e s t h a t provide safeguards to prevent loss from ( I
t h e f t , f i r e , sprinkler- system damage and other accidents, and
2) r e s t r i c t access to areas i n which returns and payments are
processed.
a
5 . During the time required to implement electronic processing, it is
recommended t h a t DOR e i t h e r :
- Provide for the deposit of a l l checks with the S t a t e Treasurer
within 24 hours of receipt by separating checks from returns a t i( l
the time returns are opened and sorted, or
- Adopt the use of lockbox services.
FINDING I1
DOR HAS NOT DEVELOPED A SYSTEMATIC AUDIT SELECTION PROCEDURE SIMILAR TO
THOSE OF OTHER TAX ADMINISTRATION AUTHORITIES. AS A RESULT, DOR MAY NOT
BE MAXIMIZING REVENUES FROM ITS SALES AND USE TAX AUDIT FUNCTION. I N
ADDITION. DOR HAS OVERSTATED REVENUES GENERATED BY ITS AUDIT FUNCTION I N
BUDGET DOCUMENTS SUBMITTED TO THE LEGISLATURE.
Department of Revenue ( DOR) budget documents reported t h a t during f i s c a l
year 1979- 80 DOR's 41 s a l e s and use tax a u d i t o r s completed approximately
758 s a l e s and use t a x a u d i t s . According t o the documents, the d i r e c t cost
of these a u d i t s was $ 537,338, and t h e a u d i t s generated $ 13,107,482 i n
a d d i t i o n a l S t a t e revenues. In 1979, DOR's a u d i t function received a g r e a t
deal of public c r i t i c i s m and, since then, DOR has made a concerted e f f o r t
to improve t h a t function. However, based on our review a d d i t i o n a l
improvements s t i l l a r e needed i n the following areas:
- The s e l e c t i o n of taxpayers f o r s a l e s tax a u d i t s is not based on
demonstrated a u d i t assessment p o t e n t i a l . A s a r e s u l t , DOR may
not be maximizing the r e t u r n on expended a u d i t resources.
- Because of the c u r r e n t wording of the Arizona s t a t u t e of
l i m i t a t i o n s on s a l e s and use tax a u d i t assessments, DOR is not
able to a u d i t taxpayers f o r a f u l l 36- month period. A s a r e s u l t ,
the S t a t e may have l o s t approximately $ 3.2 m i l l i o n i n a d d i t i o n a l
a u d i t assessments during the t h r e e f i s c a l years from 1977- 78
through 1979- 80.
- The Department h a s n o t coordinated e f f e c t i v e l y its a u d i t program
w i t h t h o s e of the f i v e l a r g e s t Arizona c i t i e s , which a l s o conduct
s a l e s and use t a x a u d i t s . A s a r e s u l t , s u b s t a n t i a l revenues may
be l o s t , and an apparently s i g n i f i c a n t amount of a u d i t e f f o r t has
been d u p l i c a t i v e .
- DOR has overstated substantially the return on its sales and use
t a x a u d i t function i n budget information submitted to the
Legislature. Consequently, analysis based on the data is
unreliable.
AUDIT SELECTION
During f i s c a l year 1979- 80, DOR assigned 41 auditors to conduct
approximately 646 sales and 102 use tax audits.* Unlike other e n t i t i e s
that conduct such audits, DOR has not developed a system of audit
selection that is designed to p r i o ~ i t i z e sales taxpayers based on
h i s t o r i c a l probability of a large audit assessment relative t o t h e audit •
resources expended. Instead of using such a system, DOR r e l i e s almost
exclusively on auditor recommendations for s e l e c t i n g f u t u r e auditees. A s
a r e s u l t , DOR may not be maximizing its rate of return on audit resources
expended.
Audit selection procedures was a primary topic discussed a t an August 16,
1979, hearing of a special S t a t e l e g i s l a t i v e committee established to
study DOR. A t the hearing, a DOR o f f i c i a l l i s t e d the primary goals of
sales tax audits as:
- Maximizing revenue generated, and
- Promoting taxpayer compliance and education.
Based on our analysis of DOR's audit selection procedures and the
resultant taxpayers selected for audit, it appears that the goal of
maximizing revenue generated from audits is not realized.
Our analysis of DOR records revealed that during f i s c a l year 1977- 78
through 1979- 80, DOR completed more than 2,700 sales and use tax audits.
The 2,700 audits resulted in additional tax assessments of approximately
$ 32 million. Table 6 presents a summary of the audits.
* Our analysis of DOR records revealed that during f i s c a l year 1979- 80
DOR completed 748 sales and use tax audits ( see page 37).
TABLE 6
A SUMMARY OF SALES AND USE TAX AUDITS COMPLETED BY
DOR DURING FISCAL YEARS 1977- 78 THROUGH 1979- 80
Fiscal Year Use Tax Sales Tax Total
Number Additional Number Additional Number Additional
of Audits Assessments of Audits Assessments of Audits Assessments
Total
The procedure DOR used t o s e l e c t the taxpayers who were subjected t o the
2,728 a u d i t s shown i n Table 6 primarily was a u d i t o r recommendation. Such
a procedure is i n sharp c o n t r a s t t o the much more s o p h i s t i c a t e d a u d i t
s e l e c t i o n procedures used by o t h e r tax administration a u t h o r i t i e s .
For example, the C a l i f o r n i a S t a t e Board of Equalization* has developed a
system f o r s e l e c t i n g s a l e s tax accounts f o r a u d i t t h a t is designed to
produce a d d i t i o n a l tax assessments equal to or g r e a t e r than the cost of
the a u d i t . I n the C a l i f o r n i a system, s a l e s t a x accounts f i r s t are
gathered i n t o 740 industry- tax i n t e r v a l groupings. H i s t o r i c a l a u d i t
r e s u l t s f o r each of these groupings a r e accumulated, and c r i t e r i a f o r •
a u d i t s e l e c t i o n s a r e developed. Based on t h e p r o b a b i l i t y of a productive
a u d i t and the time required t o conduct i t , each of the 740 industry- tax
i n t e r v a l groupings a r e placed i n t o one of 16 a u d i t s e l e c t i o n c e l l s . This
system allows C a l i f o r n i a o f f i c a l s t o i d e n t i f y p o t e n t i a l l y productive
a u d i t s r e a d i l y , based on p r i o r a u d i t s of s i m i l a r firms.
Other examples a r e the Texas Comptroller of Public Accounts*" and the City
of S c o t t s d a l e , which have developed a u d i t s e l e c t i o n systems s i m i l a r to the a
C a l i f o r n i a system. Further, it took Scottsdale approximately 200 s t a f f
hours to implement the system because C a l i f o r n i a provided Scottsdale with
its h i s t o r i c a l p r o b a b i l i t y data.
One consequence of DOR's not s e l e c t i n g its s a l e s t a x a u d i t assignments
based on demonstrated a u d i t r e s u l t s is t h a t revenues r e s u l t i n g from audits
may not be maximized. Such a conclusion is based on our a n a l y s i s of the
taxpayer accounts t h a t DOR audited during f i s c a l years 1977- 78 through
1979- 80, summarized i n Table 7.
* The C a l i f o r n i a S t a t e Board of Equalization is responsible f o r
administering C a l i f o r n i a ' s s a l e s tax program.
** The Texas Comptroller o f P u b l i c Accounts is responsible f o r
administering the Texas s a l e s tax program.
TABLE 7
ANALYSIS OF DOR SALES TAX AUDITS CONPLETED
DURING FISCAL YEARS 1977- 78 THROUGH 1979- 80
Tax Paymentss Made during
the Year for which DOR
Performed an Audit
Less than $ 1,000
$ 1,001 to $ 5,000
$ 25,000
25,001 to $ 50,000
50,001 to $ 100,000
1100, 001 to ~ 200,000
200,001 to 300,000
300,001 to 400,000
$ 400,001 to $ 500,000
$ 500,001 to $ 1,000,000
$ 1,000,001 to $ 1,500,000
More than $ 1,500,000
Total
1977- 78
- No. %
1978- 79
- No. %
1979- 80
- No. %
A s shown i n Table 7, DOR a u d i t s s u b s t a n t i a l l y more small firms than large
f i r m s . For example, from f i s c a l years 1977- 78 through 1979- 80, 74 percent
of the DOR audits completed were of firms who paid $ 25,000 or l e s s during
the year of the audit. This suggests a l e s s than optimal usage of s a l e s
t a x a u d i t resources, i n view of the f a c t t h a t i n f i s c a l year 1979- 80 the
15 audits of taxpayers who paid more than $ 1.5 million generated more than
40 percent of the audit assessments that resulted from the 371 audits of
taxpayers who paid l e s s than $ 25,000. It should be noted t h a t the audit
hours expended f o r each category on Table 7 are not shown. DOR records
regarding audit hours are recorded and maintained i n such a manner as t o
preclude such a presentation for a l l p r a c t i c a l purposes.
* Tax payments were obtained from the s a l e s tax year- to- date payments
f i l e . Since use tax payments are not maintained i n t h i s f i l e , use tax
auditees were excluded from t h e a n a l y s i s . In addition, a few s a l e s
tax auditees did not have corresponding records i n the f i l e and were
similarly excluded. ( see Finding V I regarding problems associated
with the year- to- date payments f i l e . )
Improvements Made During 1980
D O R ' s s a l e s and use t a x a u d i t function received a considerable amount of
public c r i t i c i s m during 1979. Since t h a t time, DOR has made a concerted
e f f o r t t o improve the function. According t o a December 1980 memorandum
from the Director of DOR,* major improvements accomplished during 1980
included :
- A comprehensive t r a i n i n g program f o r new a u d i t o r s was i n i t i a t e d
covering such subjects as law, a u d i t techniques and policy and
procedures.
- A management information system was implemented t o measure,
c l a s s i f y and monitor a u d i t s .
- An a u d i t s e l e c t i o n u n i t was created t o develop methods f o r random
and cost e f f e c t i v e a u d i t s e l e c t i o n .
- A separate a u d i t review u n i t was created t o provide independent
q u a l i t y c o n t r o l on a u d i t s .
- A procedure w a s i n i t i a t e d t o i s s u e " tax rulings" on t o p i c s which
need c l a r i f i c a t i o n and t o e s t a b l i s h and/ or d e l i n e a t e the
Department's o f f i c i a l p o s i t i o n on various i s s u e s .
It should be noted, however, t h a t some of the improvements s t i l l a r e i n
the formative stage and, i n the case of the management information system,
it appears t h a t a thorough review of the data i n the system is i n order.
According t o the Chief Auditor f o r the s a l e s tax a u d i t s e c t i o n , as of
September 1380 DOR a u d i t s e l e c t i o n procedures had not changed m a t e r i a l l y .
AUDIT PERIOD
Once a taxpayer is s e l e c t e d , DOR normally a u d i t s only a 33- month period.
This is d e s p i t e t h e f a c t t h a t the s t a t u t e of l i m i t a t i o n s on s a l e s and use
tax a u d i t s provides f o r a 36- month period. However, because of the
wording of the s t a t u t e , DOR is e f f e c t i v e l y l i m i t e d t o 33- month a u d i t s . A s
a r e s u l t , the S t a t e may have l o s t an estimated $ 3.2 millions* i n s a l e s and
use t a x a u d i t assessments during f i s c a l years 1977- 78 through 1979- 80.
* Appendix V I I c o n t a i n s t h e f u l l t e x t of t h i s memorandum.
** This amount is based on the assumption t h a t the a u d i t s could have been
expanded t o f u l l 36- month a u d i t s using e x i s t i n g a u d i t s t a f f .
Arizona S t a t u t e s
Arizona s t a t u t e s impose a three- year s t a t u t e of l i m i t a t i o n s on s a l e s and
use tax a u d i t s . Arizona Revised S t a t u t e s ( A. R. s.) $ 42- 1327.~ provides the
l i m i t a t i o n f o r s a l e s taxes:
" Except i n the case of a fraudulent r e t u r n , f a i l u r e or
r e f u s a l t o make a r e t u r n , every notice of a
determination of a n a d d i t i o n a l amount due ' s h a l l be
mailed within t h r e e y e a r s a f t e r the f i f t e e n t h day of
the calendar month following the period f o r which the
amount is proposed t o be determined o r within t h r e e
years a f t e r the r e t u r n is f i l e d , whichever period
expires l a t e r . "
S i m i l a r l y , A. R. S. $ 42- 1414. F contains the l i m i t a t i o n f o r use tax a u d i t s :
" Except i n the case of a fraudulent r e t u r n o r the case
of a f a i l u r e o r r e f u s a l t o make a r e t u r n , every n o t i c e
of a determination of a n a d d i t i o n a l amount due s h a l l be
mailed within t h r e e years a f t e r the f i f t e e n t h day of
the calendar month following the period f o r which the
amount is proposed t o be determined o r within t h r e e
years a f t e r t h e r e t u r n is f i l e d , whichever period
expires l a t e r . "
According t o a L e g i s l a t i v e Council memorandum dated December 5, 1980", the
purpose of the l i m i t a t i o n s is t o p r o t e c t the taxpayers. The memorandum
s t a t e s :
" The purpose of a s t a t u t e of l i m i t a t i o n s is primarily
t o p r o t e c t t h e defendant and the court from the
l i t i g a t i o n of s t a l e claims where evidence may have been
l o s t or w i t n e s s e s s ' memories may have faded. Brooks v.
Southern P a c i f i c Company 466 P. 2d 736, 105 Ariz. 442
( 1970) ."
* Appendix V I I I contains the f u l l t e x t of t h i s memorandum.
Because the Department is required t o provide "... every n o t i c e of a
determination o f a n a d d i t i o n a l amount due" w i t h i n t h r e e years of the
o r i g i n a l due d a t e o f the t a x , it cannot a u d i t a f u l l 36 months because
some of those months a r e consumed i n processing the a u d i t . For example,
i f DOR begins an a u d i t on January 1, 1981, i t a u d i t s the following r e t u r n s :
Sales Months
Sales Tax Return
Due Date
March 1978
through
November 1980
A p r i l 15, 1978
January 1, 1980*
Thus, DOR a u d i t s only 33 months of s a l e s t a x r e t u r n s because it
a n t i c i p a t e s t h a t the a u d i t w i l l be completed and the taxpayer n o t i f i e d of
a d d i t i o n a l assessments by April 15, 1981, or 36- months a f t e r the due date
of the March 1978 r e t u r n .
The c i t i e s of Phoenix and Scottsdale have similar three- year s t a t u t e s of
l i m i t a t i o n s . However, they conduct f u l l 36 month a u d i t s because t h e i r
s t a t u t e s of l i m i t a t i o n s a r e based on the n o t i f i c a t i o n of i n t e n t t o conduct •
an a u d i t . not the n o t i f i c a t i o n of a d d i t i o n a l assessments. For example,
Scottsdale City Code $ 6- 219. A, s t a t e s i n p a r t :
" Collection of back p r i v i l e g e taxes by the c i t y s h a l l
be limited t o a period of t h r e e years p r i o r t o the date
when t h e t a x c o l l e c t o r gave n o t i c e t o the taxpayer of
the c i t y ' s i n t e n t i o n t o perform an a u d i t of t h e
t a x p a y e r ' s books, wrote t o the person through use of
o r d i n a r y m a i l concerning an apparent v i o l a t i o n of the
a r t i c l e , or took some other recorded a c t i o n to require
a p r i v i l e g e tax permit a p p l i c a t i o n or o t h e r compliance
with the a r t i c l e . ( ~ r n ~ h a saidsd ed)
* During the 1980 L e g i s l a t i v e s e s s i o n , A. R. S. 542- 1722 was amended t o
extend the f i l i n g date f o r s a l e s tax r e t u r n s from 15 days a f t e r the
s a l e s month t o the f i r s t day of the second month a f t e r the s a l e s month.
As previously noted, during the last three fiscal years the Department
assessed additional taxes amounting to $ 31,710,130.66 as the result of
sales and use tax audits based on the 33- month audit period. Had the
audit periods been 36 months, the State may have earned an estimated $ 3.2
million in additional assessments. Finally, it appears that if A. R. S.
$$ 42- 1327 and 42- 1414 were amended to use notification of intent to audit
as the operative date for the statute of limitations, taxpayers still
would be afforded the protections intended in present statutes.
COORDINATION OF AUDIT ACTIVITIES
In conjunction with its own audits, DOR also conducts audits for cities
that participate in the State's sales tax collection program. The five
largest cities in the State, however, have independent sales tax programs
and conduct their own audits. In 1977 DOR formed a Unified Audit
Committee including representatives from the cities not participating in
the State's sales tax collection program. A primary objective of this
group was the coordination of audit activities but, as of November 1980,
audit activities of the various entities have not been coordinated
effectively. As a result, the State has lost tax revenues that could be
generated by the city audits, and an apparently significant duplication of
audit work exists.
Cities' Audit Programs
The five largest cities in Arizona - Mesa, Phoenix, Scottsdale, Tempe and
Tucson - each conduct their own sales tax audits. During fiscal year
1979- 80, the five cities employed a combined total of 56 auditors. These
auditors completed in excess of 1,600 audits during the year.
To better assess the potential impact of the cities' audits, we reviewed
in detail the sales tax audit program of the City of Scottsdale.
According to a city official, Scottsdale has completed more than 1,000
sales tax audits during the three fiscal- year period from 1977- 78 through
1979- 80. The audits resulted in more than $ 1 million in additional tax
assessments, based on Scottsdale's one percent tax rate.
Also with a s s i s t a n c e from Scottsdale o f f i c i a l s , we compared the taxpayers
audited by the c i t y with the taxpayers audited by the S t a t e during the
same three- year period. We found t h a t 98 of the taxpayers were audited by
both DOR and the City of Scottsdale during the same period. The 98 a u d i t s
r e s u l t e d i n a d d i t i o n a l assessments of $ 258,646 f o r the City of
Scottsdale. The remaining 935 Scottsdale a u d i t s , which were not a l s o
audited by DOR, r e s u l t e d i n a u d i t assessments of $ 750,769.
A t the present time t h e r e is no mechanism by which DOR can use the r e s u l t s
of the c i t i e s ' a u d i t s automatically. I f such a mechanism had e x i s t e d , it
appears the S t a t e could have assessed up t o a n a d d i t i o n a l $ 3 million*
based on the 935 Scottsdale a u d i t s which the S t a t e did n o t d u p l i c a t e .
Unified Audit Committee
In an attempt t o e s t a b l i s h b e t t e r cooperation beteen the c i t i e s and DOR,
the Department formed a Unified Audit Committee i n November 1977. The
Department i n v i t e d a l l c i t i e s not p a r t i c i p a t i n g i n the S t a t e s a l e s tax
c o l l e c t i o n system t o send r e p r e s e n t a t i v e s t o the committee's monthly
meetings. I n a d d i t i o n t o DOR o f f i c i a l s , the primary p a r t i c i p a n t s have
been r e p r e s e n t a t i v e s from the c i t i e s of F l a g s t a f f , Mesa, Phoenix,
P r e s c o t t , S c o t t s d a l e , Tempe and Tucson. The main t o p i c s addressed by the
committee have been a u d i t i s s u e s and problems o r d i f f e r e n c e s encountered
between the c i t i e s and DOR i n the g e n e r a l a d m i n i s t r a t i o n of t h e i r ( I
r e s p e c t i v e s a l e s tax programs.
According t o a DOR o f f i c i a l the work of the committee has r e s u l t e d i n
improved cooperation between the c i t i e s and the S t a t e . During f i s c a l year
1979- 80, DOR and the c i t i e s coordinated t h e i r a u d i t a c t i v i t i e s f o r
s e l e c t e d a u d i t s - e s p e c i a l l y out- of- State a u d i t s . It was estimated t h a t
f o r a t l e a s t 15 out- of- State a u d i t s during the l a s t year, DOR and c i t y
a u d i t o r s worked together on t h e a u d i t s .
* The $ 3 m i l l i o n is based upon a four percent t a x r a t e f o r t h e S t a t e .
I n 1978- 79, 88 percent of a l l S t a t e s a l e s taxes were paid at the four
percent r a t e .
The DOR official added that a fully coordinated audit program, one which
would eliminate duplication of audit work and allow the cities and DOR to
use each other's work as a basis for additional assessments, would require
a concerted effort by all parties and is a long- term project. The DOR
official pointed out that differences between State and local sales tax
laws and their interpretation of these laws, audit techniques, audit
schedules and the length of audit periods complicate the development of a
fully coordinated system.
City officials support the concepts of coordinated system. They point
out, however, that only the State ( DOR) can institute such a coordinated
effort effectively. Further, concern was expressed over the slow rate at
which progress is being made.
REPORTED RESULTS HAVE BEEN OVERSTATED
DOR has overstated the return on its sales and use tax audit function
substantially in budget information submitted to the Legislature.
Consequently, the results of analysis based on such data is unreliable.
During the last three fiscal years, DOR has reported in budget documents a
total " return" on sales and use tax audits of $ 38,517,641. Our review of
DOR records revealed that the " returns" presented in the budget documents
have been overstated in that:
- DOR records do not support the reported returns on audits in any
of the three years, and
- The " return" amounts are based on audit assessments, many of
which are appealed and subsequently reduced or eliminated.
In its annual budget requests submitted to the Legislature, DOR presents
the number of audits conducted and the " average return per audit". Total
return on sales and use tax audits must be derived from these amounts.
Table 8 presents the results as presented in the budget requests and the
derived total results.
TABLE 8
DORIS REPORTED RESULTS OF SALES AND USE TAX AUDITS
AND DERIVED TOTAL RESULTS FOR FISCAL YEARS
1977- 78 THROUGH 1979- 80
Reported Results
Return Per Number Derived
Description Audit of Audits Results
1977- 78 a u d i t s :
In- State $ 6,308
Out- of- State 37,734
1978- 79 a u d i t s :
In- State 10,566
Out- of- State 42,701
1979- 80 a u d i t s :
In- State 13,494 6 48 8,744,112
Out- of- State 39,667 110 4,363,370
13,107,482
Total 2LE' 2! 2 $ 38,517,641
A s shown i n Table 8, DOR reported t h a t t h e s a l e s and use tax a u d i t s
yielded a " return" of $ 38,517,641 f o r the l a s t three f i s c a l years. Our
review of DOR records, however, revealed t h a t the a u d i t s completed i n
those three f i s c a l years yielded a " return" of only $ 31,710,131. Table 9
presents a comparison of the DOR reported r e s u l t s and the t o t a l assessment
as shown i n our review of DOR records.
TABLE 9
A COMPARISON OF DORIS REPORTED RESULTS OF SALES AND
USE TAX AUDITS FOR FISCAL YEARS 1977- 78 THROUGH 1979- 80
AND THE TOTAL ASSESSMENTS RECORDED I N DOR RECORDS
F i s c a l
Year
1977- 78
1978- 79
1979- 80
Total
DOR1s Reported Total Assessments
Results Per DOR Records
As shown in Table 9, the reported returns on DOR sales and use tax audits
are overstated in comparison to the Department's records of assessments
resulting from sales and use tax audits completed during the same periods.
A further analysis of the audit assessment amounts revealed that the
presentation of these amounts as returns on audits is a substantial
overstatement of actual returns. In fact, our analysis showed that a high
percentage of the dollar value of the assessments may never be realized.
As part of our review of DOR's audit function, we reviewed all audits that
had substantial audit assessments for the last three fiscal years.
According to DOR records, 30 audits were completed during the last three
years that resulted in audit assessments greater than $ 200,000. In the
aggregate these audit assessments totaled $ 14,334,796, or 45 percent of
the $ 31,710,131 in total audit assessments for the period. As of June 30,
1980, the status of these 30 audits was as follows:
Status of
Assessment
Paid or due
Original Amount
Number of Audit Paid or
Audits Assessment Collectible
Appealed assessments
for which a decision
has been rendered 8 3,148,547022 1,003,753.80*
Assessments still in
appeals process
Total
It should be noted that the DOR has implemented an Audit Management
Information System which will automate the record- keeping function for the
sales and use tax audits. Hopefully, the system will improve the accuracy
of DOR's budget information regarding audit activities.
* These amounts may be subject to future appeals to the State Board of
Tax Appeals or Superior Court. ** These amounts will be determined when the appeals are resolved.
CONCLUSION
Since August 1979, DOR has made a concerted e f f o r t t o improve the s a l e s
and use tax a u d i t function. However, as of November 1980, a d d i t i o n a l
improvements s t i l l a r e needed i n the following areas:
1) Audit s e l e c t i o n procedures,
2) Expansion of the s t a t u t e of l i m i t a t i o n s f o r a u d i t s ,
3) Coordination of DOR's and Arizona c i t i e s ' s a l e s tax audit
a c t i v i t i e s ,
4) Recording and reporting of s a l e s and use tax a u d i t r e s u l t s .
Therefore, DOR may not be maximizing revenues generated by the s a l e s and
use tax a u d i t function. In a d d i t i o n , DOR h a s o v e r s t a t e d revenues earned
from a u d i t f u n c t i o n s r e p o r t e d i n budget documents submitted t o the
L e g i s l a t u r e .
RECOMMENDATIONS
It is recommended that,:
1. DOR expedite the implementation o f a n a u d i t s e l e c t i o n system
s i m i l a r to those c u r r e n t l y used i n Texas and C a l i f o r n i a .
2. The L e g i s l a t u r e consider amending A. R. S. $$ 41- 1727.~ and
42- 1414. F t o allow f o r f u l l %- month a u d i t s a s conducted by the
c i t i e s of Scottsdale and Phoenix.
3. DOR increase i t s e f f o r t s to coordinate its a u d i t a c t i v i t i e s with
those of the f i v e l a r g e s t c i t i e s i n Arizona.
4. DOR maintain more accurate records of a u d i t assessments and
report such information t o the L e g i s l a t u r e i n a manner which w i l l
more accurately r e f l e c t a c t u a l revenues generated by its audit
a c t i v i t i e s .
FINDING I11
THE DOR SALES AND USE TAX APPEALS PROCESS IS FRAGMENTED AND
UNCOORDINATED. AS A RESULT. THE PROCESS IS EXCESSIVELY LONG. AND NOT
PROPERLY DOCUMENTED OR MONITORED.
The Department of Revenue ( DOR) conducts approximately 800 s a l e s and use
t a x a u d i t s each y e a r , g e n e r a t i n g approximately $ 10 m i l l i o n i n a d d i t i o n a l
tax assessments. Under Arizona law those taxpayers who a r e assessed
a d d i t i o n a l taxes may p e t i t i o n f o r a hearing, c o r r e c t i o n or
redetermination. During the three- year period which ended June 30, 1980,
an indeterminate number of appeals r e s u l t e d i n 277 hearings involving
$ 18.2 m i l l i o n i n s a l e s and use tax assessments. Our review o f t h e 277
hearings revealed t h a t the s a l e s and use tax a p p e a l s p r o c e s s is fragmented
among s e v e r a l d i v i s i o n s within DOR, without s u f f i c i e n t formalized
procedure. A s a r e s u l t , DOR is:
1. Not processing appeals i n a timely manner,
2. Not documenting the appeals process properly, and
7. Not properly monitoring the appeals process.
APPEALS PROCEDURES
The formal appeals procedure begins when the s a l e s and use t a x a u d i t
s e c t i o n of the Taxation Division sends a taxpayer an assessment l e t t e r
s t a t i n g the amount of a d d i t i o n a l t a x or refund due from DOR and asking the
taxpayer t o inform DOR i n w r i t i n g within 30 days i f the a u d i t assessment
is accepted or protested.
When a p r o t e s t l e t t e r is received by t h e a u d i t s e c t i o n , it is given t o the
Chief Auditor t o review. The p r o t e s t l e t t e r , a u d i t assessment and a u d i t
f i l e are:
- Returned t o t h e a u d i t o r s f o r c o r r e c t i o n of mathematical or
t e c h n i c a l e r r o r s , and/ or
- Sent to a t a x a n a l y s t , who prepares a b r i e f f o r the Taxation
Division f o r an a d m i n i s t r a t i v e hearing.
Occasionally the a u d i t s e c t i o n schedules an informal conference with the
taxpayer to resolve t h e i s s u e s .
Receipt of a brief is the f i r s t o f f i c i a l n o t i c e t h e Administrative Hearing
Office receives of a request f o r a hearing. The secretary a t the Hearing
Office schedules a hearing and n o t i f i e s the taxpayer.
Since July 1980, the Administrative Hearing O f f i c e r w r i t e s and signs the
administrative decision and sends it to the taxpayer and copies to the
Taxation Division and the Director of DOR. The taxpayer and the Division
have 30 days i n which to appeal to the Director, or t h e Director may opt
to review the decision of the Hearing Officer. A t the end of the 30- day
period, the Hearing Officer n o t i f i e s the taxpayer t h a t the administrative
decision has become the f i n a l order of the Department. The taxpayer then
has 30 days from receipt of t h i s l e t t e r to appeal to the State Board of
Tax Appeals, Division Two* or the decision becomes f i n a l and any
additional assessments become due.
TIMELINESS OF APPEALS PROCESS
According to available records a t DOR for the three- year period ended
June 30, 1980, an indeterminate number of protested audit assessments
resulted i n 277 hearings. An analysis of these hearings revealed that the
time from i n i t i a l taxpayer protest to a hearing decision is excessive, i n
that:
1. The average time to reach a hearing decision is 14.4 months,
2. Time delays may place cases i n violation of l e g i s l a t i v e i n t e n t ,
and
3. DOR takes much longer than the State Board of Tax Appeals to
conduct and conclude hearings.
* Division Two of the S t a t e Board of Tax Appeals is separate from DOR
and conducts hearings on appeals from DOR dealing with income, sales,
use, e s t a t e and luxury taxes.
Processing Delays
Our a n a l y s i s of t h e h e a r i n g s conducted during the period from J u l y 1,
1977, through June 30, 1980, revealed t h a t the Department took an average
of 14.4 months t o render a decision on a protested a u d i t assessment.
Cases i n which a decision was rendered were completed i n an average of
17.9 months, while pending cases have been outstanding f o r an average of
15.2 months. Table 10 presents a summary of our a n a l y s i s of the delays
experienced i n processing contested a u d i t assessments over a three- year
period.
Decision Rendered
Numker of Months
from Assessment to N~ ur. ber of Tax
Hearing Decision Ifearings Assessment
Total & $ 6,635,519
Average 13.9
DELAYS EXPERIENCED I N PROCESSING CONTESTED
AUDIT ASSESSMENTS FROM JULY 1, 1977 TO JUNE 30, 1980*
Cases Pending
Number of Number of Tax
Months Outstanding Hearings Assessment
* From information a t Hearing O f f i c e , s a l e s and use tax a u d i t s e c t i o n
and S t a t e Board of Tax Appeals.
** The t o t a l does n o t e q u a l 277 cases because assessment d a t e s o r
d e c i s i o n d a t e s were u n a v a i l a b l e o r missing f o r 33 cases.
T o t a l Decisions Rendered and Cases Pendillel'*
Number of Months
t o Hearing Decision Number of Tax
o r Outstanding Hearings Assessment
A s shown i n Table 10, of the 142 hearings held i n the three- year period
ended June 30, 1980, for which a decision was rendered, 38 decisions took
longer than 15 months and one case took 113 months or more than nine years
to decide. Of the 102 cases pending on June 30, 1980, 38 cases had been
pending for longer than 15 months and one case had been pending for 87
months. The cases taking 16 months or longer represent $ 5.6 million or 53
percent of the audit assessments pending administrative review on June 30,
1980.
Our analysis revealed that a primary cause for the lengthy hearing process
is the time DOR takes to get ready f o r a hearing. For example, of the
hearings for which the date of assessment and date of the hearing were
available, more time was spent on getting the protest ready for hearing
than was spent i n rendering the decision. The average time between
assessment date and hearing date was 8.5 months, whereas the t o t a l average
elapsed time was 14.4 months. Thus 59 percent of the hearing process time
was spent preparing a protested audit case f o r hearing.
Several of the hearing f i l e s a t DOR document time delays encountered i n
the hearing process. The following is a synopsis of three noteworthy
cases.
Exam~ les of Excessive Delav a t Audit Division
CASE I
The taxpayer was assessed $ 315,286 f o r the period October 1967 through
September 1970. The taxpayer was allowed eight years, instead of 30 days,
to p r o t e s t . On March 8, 1979, the protest was made formally and
hand- delivered to the audit section. A hearing was held and the case was
s t i l l pending on June 30, 1980.
CASE I1
The taxpayer was assessed $ 2,150 on August 15, 1975. In t h i s case the
taxpayer did respond within 70 days. It took the a u d i t s e c t i o n 47 months
to get the b r i e f t o the Hearing Office. I n October 1979, 50 months a f t e r
the assessment, the hearing was held. The case was s t i l l pending on
June 30, 1980.
CASE I11
The taxpayer was assessed $ 244,731 on November 15, 1977. A hearing was
held nine months l a t e r on August 25, 1978. The case was still pending a t
June 30, 1980, 22 months a f t e r the hearing. ( A decision was mailed
September 9, 1980, and has been appealed t o t h e Director.)
Arizona P u b l i c S e r v i c e - Palo Verde Guidelines Cases
There have been a number of appealed a u d i t assessments pending since
Arizona P u b l i c S e r v i c e Palo Verde guidelines were worked out among various
taxpayers, DOR and the Attorney General. The guidelines i n d i c a t e items
used i n the c o n s t r u c t i o n of Palo Verde Nuclear Generating S t a t i o n t h a t
w i l l be p a r t i a l l y o r t o t a l l y exempt from s a l e s o r u s e t a x . These
guidelines were s e n t to the Director on August 15, 1979, and were accepted
by t h e D i r e c t o r August 16, 1979. The guidelines became e f f e c t i v e on
October 15, 1979."
According t o records a t the s a l e s t a x a u d i t s e c t i o n and the Hearing
Office, through June 30, 1979 t h e r e were 17 appealed a u d i t assessments
r e l a t e d to c o n s t r u c t i o n a t Palo Verde. One taxpayer waived o r a l hearing,
two cases never reached the Hearing Office and 14 taxpayers received a
hearing. Although the guidelines became o f f i c i a l on October 15, 1979, not
one decision had been rendered by June 30, 1980, eight- and- a- half months
l a t e r . By October 22, 1980, a year a f t e r the guidelines were adopted,
only two decisions had been rendered.
* See Finding V I I f o r a discussion of these g u i d e l i n e s .
46
L e g i s l a t u r e Did Not Contemplate Unreasonable
Delav i n Resolution of Tax Appeals
A. R. S. $$ 42- 1415 and 42- 1338 provide the means t o appeal a use or s a l e s
tax assessment. $ 42- 1415 s t a t e s :
" Appeal t o department; p e t i t i o n f o r redetermination;
f i n a l i t y of order
" A. Any person from whom an amount is determined to be
due under the provisions of t h i s a r t i c l e may apply t o
the department by a p e t i t i o n i n w r i t i n g within t h i r t y
days a f t e r the n o t i c e required by 542- 1414 is received
by him, or within such a d d i t i o n a l time as may ' be
allowed by the department, f o r a hearing, c o r r e c t i o n o r
redetermination of the a c t i o n taken by the department.
The p e t i t i o n s h a l l s e t f o r t h the reasons why such
hearing, c o r r e c t i o n or redetermination should be
g- ranted and the amount i n which any tax should be
reduced. The department s h a l l promdtly consider the
p e t i t i o n and - - s h a l l grant a hearing, i f requested."
( Emphasis added)
Arizona s t a t u t e s impose few deadlines f o r hearing tax appeals and do not
e s t a b l i s h what c o n s t i t u t e s reasonable delays on the p a r t of the taxpayer,
the Division or the Department. A L e g i s l a t i v e Council Memorandum of
August 15, 1980," s t a t e s :
" The only s t a t u t o r y provisions r e l a t i n g t o the time i n
which the department must r u l e on appeals a r e A. R. S.
$ 542- 1338, subsection A and 42- 1415, subsection A which
require t h a t , a f t e r the appeal is received, ' t h e
department s h a l l promptly consider the p e t i t i o n and
s h a l l grant a hearing, i f requested.' It may be argued
t h a t t h i s is a requirement f o r the department t o
promptly take up the matter but does not r e l a t e t o the
speed of disposing of the matter. The s t a t u t e s do not
s p e c i f i c a l l y prescribe any time l i m i t f o r making a
decision on appeals. " ( ~ m p h a s i s added)
* Appendix I X c o n t a i n s t h e f u l l t e x t of t h i s memorandum.
" Nevertheless, a requirement f o r reasonable promptness
i n resolving the appeal may be implied from the nature
of the appeal and h e a r i n g b e f o r e the department. - The
l e g i s l a t u r e i n w r i t i n g and adopting t h i s s t a t u t e
intended it t o f a c i l i t a t e t h e c o l l e c t i o n of taxes due
or t o determine t h a t taxes were not due. The
l e g i s l a t u r e did not contemplate unreasonable or
a r b i t r a r y delay i n r e s o l u t i o n . For such t o occur would
be an i n t e r f e r e n c e with personal and property r i g h t s
and would i n h i h i t the f u r t h e r a p p e l l a t e r e l i e f afforded
by other s t a t u t e s . To i n h i b i t - - o r delay these f u r t h e r
hearings is a d e n i a l of due process of l a w under the
United S t a t e s Constitution. Due Drocess r e a u i r e s both A
a prompt hearing and a prompt conclusion." ( ~ m p h a s i s
added)
The administrative r u l e s and r e g u l a t i o n s of DOR i n e f f e c t June 30, 1980,
a r e no more s p e c i f i c than the s t a t u t e s as t o what c o n s t i t u t e s prompt
consideration of a taxpayer p e t i t i o n .
According t o L e g i s l a t i v e Council, the a d m i n i s t r a t i v e procedure w a s
intended to f a c i l i t a t e t h e r e s o l u t i o n of disputed tax assessments. A
taxpayer may be deprived of due process by unnecessary delays i n the
appeals procedures and thus the whole proceeding may be void. The
August 15, 1980, L e g i s l a t i v e Council Memorandum s t a t e s :
" There is l i t t l e conceivable s t a t e i n t e r e s t i n delaying
the decision on an appeal of s a l e s or use taxes. On
the c o n t r a r y , it would be i n the i n t e r e s t of both the
s t a t e and the taxpayer t o provide f o r a timely and
reasonably prompt r e s o l u t i o n of the matter i n order t o
e i t h e r c o l l e c t the tax or move the a c t i o n on to the
next forum. Moreover, i f due process is not afforded
by the hearing and appeal, the whole proceeding may be
void." ( ~ m ~ h a s aidsd ed)
Time L i m i t a t i o n s w i t h i n which Other S t a t e
E n t i t i e s Conduct Administrative Hearings
Although the s t a t u t e s governing the S t a t e Board of Tax Appeals, Division
Two* do n o t p r e s c r i b e s p e c i f i c time l i m i t a t i o n s , t h e r u l e s and r e g u l a t i o n s
adopted by the Board s e t l i m i t a t i o n s f o r s p e c i f i c s t e p s i n the process,
s t a t i n g :
* Division Two of the S t a t e Board of Tax Appeals conducts hearings on
appeals of DOR a d m i n i s t r a t i v e hearing decisions regarding protested
s a l e s and use t a x a u d i t assessments.
" R16- 7- 107. Memoranda
" A. The appellant may f i l e a memorandum i n support of
the appeal within t h i r t y ( 30) days of f i l i n g the notice
of appeal. The Department w i l l be allowed t h i r t y ( 30)
days from the date of r e c e i p t of a p p e l l a n t ' s memorandum
to respond. In the event t h a t appellant does not f i l e
a memorandum, the Department w i l l be allowed t h i r t y
( 30) days t o f i l e its memorandum from the time
a p p e l l a n t ' s memorandum would have been due. The
appellant w i l l then be allowed t h i r t y ( 30) days from
r e c e i p t of the Departmentt s memorandum to respond.
A p p e l l a n t ' s r e p l y memorandum s h a l l be l i m i t e d to a
reply to the i s s u e s of law o r f a c t raised i n the
Department's memorandum. Reasonable extensions of time
f o r the f i l i n g of memoranda may be granted upon w r i t t e n
request from e i t h e r party. The Board w i l l transmit a
copy of any memorandum f i l e d to the opposing party.
Both o r e i t h e r party t o the appeal may waive the f i l i n g
of memorandum. "
Further, our review of Division Two records revealed t h a t its decisions
a r e rendered i n a more timely fashion. During the past t h r e e f i s c a l
years, Division Two has rendered decisions on an average of 1.5 months
from t h e i r hearing dates. I n f a c t , 35 percent of its decisions were
rendered on the same day as the hearing.
It should be noted t h a t s t a t u t o r y and a d m i n i s t r a t i v e time l i m i t a t i o n s have
been e s t a b l i s h e d f o r other S t a t e e n t i t i e s . For example,
- Rule 12( a) of the Rules of C i v i l Procedure* s t a t e s :
" A defendant s h a l l serve and f i l e h i s answer within
twenty days a f t e r t h e s e r v i c e of the summons and
complaint upon him, except when s e r v i c e of process is
made pursuant to Rule 4( e) ( 11, ( 21, ( 31, ( 4), 01- 5. A
~ a r t v served with a ~ l e a d i n t z s t a t i n g a cross- claim
against him s h a l l serve and f i l e an answer t h e r e t o
within twenty days a f t e r the s e r v i c e upon him. The
- --
p l a i n t i f f s h a l l serve and f i l e h i s reply t o a
counterclaim i n the answer within twenty days a f t e r
s e r v i c e of the answer or. i f a r e ~ l vi s ordered bv the
c o u r t , within twenty days a f t e r s e r v i c e of t h e order,
unless the order otherwise d i r e c t s . The s e r v i c e of a
motion permitted under t h i s Rule a l t e r s these periods
of time as follows, unless a d i f f e r e n t time is fixed by
order of the court: ( ~ m ~ h a s aidsd ed)
* The Rules of C i v i l Procedure govern the procedure i n t h e s u p e r i o r
c o u r t s of Arizona i n a l l s u i t s of a c i v i l nature.
" 1. I f the court denies the motion o r postpones its
d i s p o s i t i o n u n t i l the t r i a l on the m e r i t s , the
responsive pleading s h a l l be served within ten days
a f t e r n o t i c e o f the c o u r t ' s a c t i o n .
" 2. I f the court g r a n t s a motion f o r a more d e f i n i t e
statement the responsive pleading s h a l l be served
within ten days a f t e r the s e r v i c e of the more d e f i n i t e
statement."
- Under the provisions of A. R. S. 532- 2157, the Department
of Real E s t a t e conducts a d m i n i s t r a t i v e hearings
regarding w r i t t e n complaints. The s t a t u t e s require the
defendant to f i l e a v e r i f i e d response within ten days
a f t e r n o t i c e of charges is served. The s t a t u t e s
f u r t h e r require t h a t proceedings regarding the
complaint be "... promptly i n s t i t u t e d and determined."
I n carrying the s t a t u t o r y mandate f o r prompt
determination, the Department has adopted Rule A. C. R. R.
R4- 28- 41 which requires the Hearing Officer to i s s u e a
w r i t t e n opinion within 45 days a f t e r the conclusion of
a hearing.
- Arizona Revised S t a t u t e s 532- 1157 . B requires the
R e g i s t r a r of Contractors t o i s s u e a w r i t t e n decision
within 15 days of the conclusion of a d m i n i s t r a t i v e
hearings.
DOCUMENTATION OF APPEALS PROCESS
Our review of DOR a d m i n i s t r a t i v e hearing f i l e s revealed t h a t t h e s a l e s and
use t a x appeals process is not adequately documented i n t h a t :
1. The f i l e s do not c o n s i s t e n t l y contain s t a t u t o r i l y required
records,
2. Some f i l e s contain c o n f l i c t i n g v e r s i o n s o f the same d e c i s i o n , and
3. The f i l e s do not adequately document the r e c e i p t of w r i t t e n
p r o t e s t s from taxpayers.
A s a r e s u l t , the absence of required records may preclude the c o l l e c t i o n
of a d d i t i o n a l taxes due t o t h e S t a t e . Further, the b a s i s f o r a timely
appeal from the taxpayer cannot always be e s t a b l i s h e d .
Documentation Required f o r Contested Cases
According t o a L e g i s l a t i v e Council Memorandum dated August 15, 1980," the
record- keeping requirements f o r contested cases contained i n the
Administrative Procedure Act apply t o a d m i n i s t r a t i v e hearings conducted by
DOR. In the memorandum, L e g i s l a t i v e Council s t a t e d :
" A s a l e s or use tax p r o t e s t o r appeal would become a
contested case i f a hearing is requested under s e c t i o n
42- 1338, subsection A or s e c t i o n 42- 1415,
subsection A. Once the proceeding becomes a contested
case, the a d m i n i s t r a t i v e procedure a c t a p p l i e s t o
prescribe the r u l e s and procedures f o r the hearing,
t h e r e being no procedural s t a t u t e s s p e c i f i c a l l y
applicable t o s a l e s and use tax appeals. The r u l e s and
procedures a r e prescribed by A. R. S. sections 41- 1009,
41- 1010 and 41- 1011 ..."
A. R. S. $ 41- 1009.~ is s p e c i f i c i n mandating what the records of a contested
case s h a l l include:
" E. The record of a contested case s h a l l include:
" 1. A l l pleadings, motions, i n t e r l o c u t o r y r u l i n g s .
" 2. Evidence received o r considered.
" 3. A statement of matters o f f i c i a l l y noticed.
" 4. Objections and o f f e r s of proof and r u l i n g s thereon.
" 5. Proposed findings and exceptions.
" 6. Any d e c i s i o n , opinion o r report by the o f f i c e r
presiding a t the hearing.
" 7. A l l s t a f f memoranda, other than p r i v i l e g e d
communications, or data submitted t o the hearing
o f f i c e r or members of the agency i n connection
with t h e i r c o n s i d e r a t i o n of the case."
* Appendix I X contains the f u l l t e x t of t h i s memorandum.
DOR Administrative Hearing Records
When contrasted with Administrative Procedure Act requirements, DOR
h e a r i n g r e c o r d s a r e s e r i o u s l y lacking. For more than one- third of the
cases resolved during the l a s t t h r e e years, no record of t h e r e s o l u t i o n
could be found i n the Hearing Office.
Of 277 hearings held i n the three- year period ending June 30, 1980, the
Auditor General's s t a f f found t h a t 102 hearings were s t i l l pending.
Presumably there had been decisions rendered or some r e s o l u t i o n of the
remaining 173 hearings." A search of decisions- rendered binders and
hearing f i l e s a t the Hearing Office on August 7, 1980, l o c a t e d o n l y 111
decisions. Thus, from records a t the Hearing Office, 62 decisions could
r, ot be located. Further, i n many closed f i l e s t h e r e was no i n d i c a t i o n of
case d i s p o s i t i o n and many presumably closed cases had - no f i l e s a t the
Hearing Office. Several cases had as many a s t h r e e d i f f e r e n t decision
l e t t e r s i n the f i l e , so it was impossible t o determine which d e c i s i o n , if
any, had been mailed t o the taxpayer.
An April 1980 DOR i n t e r n a l management report regarding the a d m i n i s t r a t i v e
hearing process recommended t h a t " Complete decision reference f i l e s should
be e s t a b l i s h e d i n the Hearing Office.. ." By November 18, 1980, g r e a t
improvements were noted i n the d e c i s i o n s r e c o r d s a t the Hearing Office;
however, the April 1980 recommendation had not been f u l l y implemented.
Auditor General s t a f f s t i l l could not find documentation f o r 23 decisions.
* An a d d i t i o n a l two cases had been heard but were i n a c t i v e f i l e s t o be
reheard.
Documentation of Taxpayer P r o t e s t s
The a u d i t s e c t i o n ' s assessment l e t t e r of June 30, 1980, s t a t e s :
" The r e s u l t s a r e e f f e c t i v e upon r e c e i p t of t h i s
n o t i c e . However, i f you wish to apply f o r an
administrative review, c o r r e c t i o n or redetermination of
t h e a c t i o n taken, you a r e required under the law to
present a p e t i t i o n i n w r i t i n g within t h i r t y ( 30) days
of vour r e c e i p t of t h i s n o t i c e . Such p e t i t i o n mst s e t
f o r t h the reasons why such a d m i n i s t r a t i v e review,
c o r r e c t i o n or Sedetermination should be granted and the
amount by which t h i s tax should be reduced or
increased. I f not f i l e d within the required time, t h i s
a u d i t w i l l become f i n a l and you s h a l l be deemed and
t r e a t e d a s having waived and abandoned any r i g h t s to
question said amount. Upon f i n a l i z a t i o n , a d d i t i o n a l
tax assessments w i l l begin t o accrue i n t e r e s t a t the
r a t e of 1/ 2 of 1 percent per month." ( ~ m ~ h a saidsd ed)
The assessment l e t t e r c l e a r l y s t a t e s t h a t the taxpayer who wishes t o
appeal assessment must:
1. Present a p e t i t i o n i n w r i t i n g , and
2. Do s o w i t h i n 30 days of r e c e i p t of the assessment.
Thus, t o ensure t h a t t h e a u d i t d i v i s i o n allows timely p r o t e s t s only,
appeals should be properly documented. The documentation should include:
1. The d a t e t h e assessment was received by the taxpayer, evidenced
by a green r e t u r n - r e c e i p t card received by DOR from the post
o f f i c e ;
2. The t a x p a y e r ' s w r i t t e n p e t i t i o n , and
3. The d a t e t h e w r i t t e n appeal was received by DOR.
An a n a l y s i s of 88 a u d i t f i l e s a t the Hearing Office on June 30, 1980,
revealed t h a t only 59 f i l e s contained documentation t h a t the taxpayer
f i l e d an appeal within the 30- day s t a t u t o r y l i m i t a t i o n .
IMPROPER MONITORING OF THE APPEALS PROCESS
The s a l e s and use tax appeals process is fragmented among s e v e r a l DOR
d i v i s i o n s , and formalized procedures have not been e s t a b l i s h e d or s p e c i f i c
r e s p o n s i b i l i t i e s assigned t o ensure t h a t appeals a r e processed i n an
appropriate and timely manner. In a d d i t i o n , meaningful management reports
a r e not prepared f o r DOR o f f i c i a l s regarding tax appeals i n process. The
lack of monitoring f o s t e r s an uncoordinated, i n e f f i c i e n t and poorly
c o n t r o l l e d appeals process.
Fragmentation of Appeals Process
The Hearing Office h a s n o t been the r e c i p i e n t or processor of p e t i t i o n s
f o r review, redetermination or c o r r e c t i o n . The a u d i t s e c t i o n has
controlled: 1) acceptance of appeals, 2) documentation of t h e i r
t i n e l i n e s s , and 3) progress of p e t i t i o n s through the a u d i t s e c t i o n to the
point a t which they may reach the Hearing Office. No a u d i t s e c t i o n
deadlines e x i s t regarding the processing of appeals, amending a u d i t s or
preparing b r i e f s f o r hearings.
In a d d i t i o n , t h e Hearing Office accomplished l i t t l e i n the way of
monitoring the s t a t u s and progress of c a s e s d u r i n g most of the three- year
period ended June 30, 1980. A s i n the a u d i t s e c t i o n , there a r e no
guidelines or e s t a b l i s h e d deadlines to expedite the scheduling of a
hearing or t o render a decision. Until May 1980, cases were n e i t h e r
logged nor assigned a number t o aid i n tracking or i d e n t i f y i n g the age of
an appeal. Cases were l o s t i n a l p h a b e t i c a l f i l e s with no followup to
remind the Hearing Officer of an a p p e a l ' s existence or s t a t u s and thus to
ensure compliance with s t i p u l a t e d time requirements.
It should be noted t h a t DOR e s t a b l i s h e d new appeals procedures i n the
summer of 1980, and a memorandum from the Director on September 19, 1980,
called f o r control of the appeals process by c e n t r a l i z a t i o n i n the Hearing
Office. However, as of November 20, 1980, the new procedures had not been
implemented.
The absence of monitoring and the lack of e s t a b l i s h e d g u i d e l i n e s allow f o r
i n e f f i c i e n c y and i n e q u i t y i n the a p p e a l s p r o c e s s , a s demonstrated i n the
following cases:
CASE I
The taxpayer requested t h a t an o r a l hearing be rescheduled. He was
assured by DOR t h a t the hearing date would be changed. The taxpayer heard
nothing more from DOR u n t i l a year l a t e r , when he received a copy of the
Eearing O f f i c e r ' s decision l e t t e r . The case had been heard without the
taxpayer's presence. The taxpayer appealed the decision to the S t a t e
Board of Tax Appeals.
CASE I1
Incongruously, another taxpayer was n o t i f i e d i n advance of a h e a r i n g t o be
held September 12, 1979. He f a i l e d to appear. I n a l e t t e r dated
December 12, 1979, DOR n o t i f i e d t h e taxpayer t h a t he had f a i l e d to:
1) appear f o r the scheduled hearing, or 2) n o t i f y DOR of the reason for
h i s nonappearance. The l e t t e r from DOR s t a t e s :
" Please be advised t h a t unless you r e q u e s t w i t h i n 15
days t h a t a h e a r i n g be rescheduled, I w i l l be forced to
decide your p r o t e s t without having o r a l l y heard your
position."
Thus, the second taxpayer was given two o p p o r t u n i t i e s by DOR t o present
h i s p r o t e s t while the taxpayer i n Case I was given no opportunity to
present h i s p r o t e s t . A s of June 30, 1980, no decision had been reached
f o r Case 11.
CASE 111
The audit f i l e indicated t h a t the taxpayer had been extremely
uncooperative with DOR a u d i t o r s , had no s a l e s t a x l i c e n s e number and was
assessed $ 33,947 on November 5, 1979. The taxpayer had requested and had
been granted two hearing postponements. I n April 1980, DOR asked the
taxpayer t o l e t the Hearing Office know the date and time he conveniently
could appear f o r a d m i n i s t r a t i v e review. The taxpayer did not respond. In a
June 1980, DOR requested by c e r t i f i e d mail t h a t t h e taxpayer respond
within 15 days or the Hearing O f f i c e r would s e t a date f o r hearing.
Subsequently, the t a x p a y e r ' s r e p r e s e n t a t i v e n o t i f i e d DOR t h a t h i s c l i e n t
would be out of t h e S t a t e u n t i l a t l e a s t January 1981.
It should be noted t h a t the S t a t e Board of Tax Appeals does not permit
such delaying t a c t i c s by taxpayers. A five- day g r a c e p e r i o d may be given
for good cause, but if the taxpayer or DOR exceeds t h a t grace period, a
hearing is scheduled automatically.
Accountabilitv f o r Monitoring
Appeals Process Does Not Exist
In the summer of 1980, DOR e s t a b l i s h e d a formalized appeals process
including assignment of s p e c i f i c r e s p o n s i b i l i t y f o r the e n t i r e process.*
In a memorandum dated September 19, 1980, t h e D i r e c t o r recognized " . . . t h a t
taxpayer p r o t e s t s a r e not immediately being forwarded to the hearing
o f f i c e r . " Furthermore, the memorandum s t a t e d :
11 ,1n 0 properly handle taxpayer appeals, the hearing
o f f i c e r should be the only i n d i v i d u a l i n the department
to determine whether a p r o t e s t is proper and s h a l l
decide whether to accept or dismiss a p r o t e s t . To
a s s i s t the hearing o f f i c e r i n handling t h i s f u n c t i o n ,
a l l p r o t e s t s should be forwarded t o the hearing o f f i c e r
upon r e c e i p t . ( ~ m p h a s i s added)
* Appendix X contains a December 15, 1980, memorandum from DOR o f f i c i a l s
which o u t l i n e s improvements made i n the a d m i n i s t r a t i v e hearing
function.
A s of November 20, 1980, the memorandum had not been implemented i n t h a t :
1) according to the Chief Auditor, the DOR a u d i t s e c t i o n s t i l l receives
and screens p r o t e s t l e t t e r s from taxpayers, 2) the assessment l e t t e r had
not been revised to advise taxpayers t o send t h e i r p r o t e s t s t o the Hearing
Office, 3) the Hearing Office had received no s a l e s and use tax p r o t e s t
l e t t e r d i r e c t l y from the taxpayer or from the a u d i t s e c t i o n , and 4) the
Hearing Office had received eight b r i e f s on taxpayer p r o t e s t s , but a l l
eight p r o t e s t s had been received by the a u d i t s e c t i o n before June 30,
1980. Thus, procedures t h a t have been e s t a b l i s h e d by the Director of DOR
to monitor the appeals process have not been implemented and the appeals
process s t i l l is fragmented.
I n a d d i t i o n , DOR does not produce management r e p o r t s on a l l appealed a u d i t
assessments. A s a r e s u l t , DOR management is unsure and cannot v e r i f y :
1. How many and which a u d i t s have been p r o t e s t e d ,
2. Whether assessments were amended b e f o r e h e a r i n g ,
3. HOW many assessments were corrected f o r mathematical or t e c h n i c a l
e r r o r s ,
4. The time required t o process assessments through c u r r e n t
procedures,
5. The i d e n t i t y of each outstanding a u d i t , "
6. The age of each outstanding a u d i t , and
7. The causes f o r long- outstanding cases.
When Auditor General s t a f f requested the DOR a u d i t s e c t i o n t o provide a
l i s t of a u d i t s protested i n the l a s t t h r e e f i s c a l years, and t h e i r
r e s o l u t i o n , DOR furnished a list f o r the nine- month period from October
1979 t o June 1980 only.
* An outstanding a u d i t is one which has been a s s e s s e d b u t not paid i n
f u l l .
It should be noted t h a t i n accordance with an April 1980 DOR management
study recommendation, the Hearing O f f i c e h a s been preparing a monthly
Administrative Review S t a t u s Report, which lists caseloads, hearings h e l d ,
decisions rendered and cases appealed. However, t h e r e p o r t does not
include monthly appeals volume or the number of cases more than 30 days
old, a l s o recommended i n the study. Without such information, the
D i r e c t o r h a s no knowledge of the numbers of cases, on a month- to- month
b a s i s , more than 30, 60 or 90 days or two or t h r e e y e a r s o l d .
CONCLUSION
Our review of 277 hearings revealed t h a t t h e s a l e s and use tax appeals
process is fragmented among s e v e r a l sections i n DOR without s u f f i c i e n t
formalized procedures. A s a r e s u l t , DOR: 1) does not process appeals i n
a timely manner, 2) does not document the a p p e a l s p r o c e s s adequately,
and 3) does not monitor the appeals p r o c e s s p r o p e r l y .
Although improvements were made i n D O R ' s a d m i n i s t r a t i v e hearing process
during the summer of 1980, many problems s t i l l e x i s t . Procedures
developed to consolidate the appeals process have not been f u l l y adopted.
RECOMMENDATIONS
It is recommended t h a t DOR:
1. E s t a b l i s h a time l i m i t a t i o n f o r each s p e c i f i c step i n the appeals
process by adopting r u l e s and r e g u l a t i o n s s i m i l a r t o A. C. R. R.
R16- 7- 107 of the S t a t e Board of Tax Appeals or Rule 12( a) of the
Rules of C i v i l Procedure.
2. Adopt r u l e s and r e g u l a t i o n s d i r e c t i n g the Hearing O f f i c e r t o
schedule hearings f o r taxpayers who have postponed, without good
cause, a hearing beyond the e s t a b l i s h e d time.
7. Document appeals according to A. R. S. SS42- 1338, 42- 1415 and
41- 1009 ( ~ d m i n i s t r a t i v eP rocedure ~ c t ) .
4. Fully implement c e n t r a l i z a t i o n of the a p p e a l s p r o c e s s i n the
Hearing Office, a s outlined i n the D i r e c t o r ' s September 19, 1980,
memorandum.
5. Prepare monthly management r e p o r t s on the s t a t u s of protested
a u d i t assessments including explanations f o r excessive delays.
FINDING I V
DOE IS HOT CONSISTENTLY IMPOSING PENALTIES ON LATE PAYMENTS OF SALES TAXES
AS REQUIRED BY STATUTE. AS A RESULT. DOR IS NOT COMPLYING WITH STATE LAW
OF. TREATING TAXPAYERS EQUALLY, AND A SUBSTANTIAL AMOUNT OF STATE REVENUE
IS LOST.
Arizona law provides t h a t taxpayers who do not pay the proper amount of
s a l e s taxes when due must pay a penalty and i n t e r e s t . However, our review
revealed t h a t DOR 1) c u r r e n t l y does not always a s s e s s p e n a l t i e s on l a t e
payments and previously did not always assess i n t e r e s t , 2) does not
always assess the proper penalty when it does a s s e s s a penalty, and 3) i n
conjunction with the Office of the Attorney General, abates p e n a l t i e s even
though DOR i t s e l f has no s t a t u t o r y a u t h o r i t y to do so. A s a r e s u l t , DOR
is not complying with S t a t e law o r t r e a t i n g taxpayers equally, and a
s u b s t a n t i a l amount of S t a t e revenue is l o s t .
P e n a l t i e s and I n t e r e s t Not Always Assessed
Arizona Revised S t a t u t e s ( A. R. s.) $ § 42- 1722.~, 42- 1327. B and 42- 1327. C
provide t h a t taxpayers who do not pay the proper amount of s a l e s tax when
due a r e t o be assessed a penalty of 10 percent o r , i n cases of fraud or
i n t e n t t o evade the s t a t u t e s , 25 percent of the t o t a l tax due and i n t e r e s t
a t the r a t e of one percent per month," or f r a c t i o n t h e r e o f , on unpaid
amounts .
A s p a r t of our DOR a u d i t we reviewed the 30 l a r g e s t s a l e s and u s e t a x
a u d i t assessments between July 1977 and June 1980 t o determine if
p e n a l t i e s and i n t e r e s t were properly assessed. We found t h a t DOR did not
impose p e n a l t i e s and i n t e r e s t on 14 of the 30 a u d i t assessments and t h a t
approximately $ 1.5 m i l l i o n i n p e n a l t i e s and i n t e r e s t t h a t should have been
assessed were not. Table 11 summarizes the 14 s a l e s and use t a x a u d i t
assessments.
" P r i o r t o August 1, 1980, i n t e r e s t was assessed at the r a t e of one- half
of one percent per month, o r f r a c t i o n t h e r e o f , on unpaid amounts.
LC ffl
IWI
r0 *
+= h COaNOrlt- cnlnulOd~ t-- ln
dC-' *+ MdQdOMWlndML'ln
;( A . . . . . . . . . . . . . .
O c d delnP- mdM~ fd- lnNOMN
E G LnOOMMNMMdNa3QCOO
da, ema~ n~ 0ul+ rla303mm~ n
For a u d i t s i n i t i a t e d a f t e r June 1, 1979, DOR adopted a new policy
regarding penalty and i n t e r e s t assessment. Since t h a t time, the policy
has required the assessment of i n t e r e s t f o r a l l a d d i t i o n a l taxes owed.
The Chief Auditor of the s a l e s and use t a x a u d i t s e c t i o n s t a t e d t h a t a ten
percent penalty is levied automatically i f it is discovered through an
a u d i t t h a t a taxpayer did not f i l e a r e t u r n . I f it is determined t h a t a
taxpayer did f i l e a r e t u r n but the reported tax was i n s u f f i c i e n t , a
penalty is imposed only i f the Chief Auditor f e e l s t h e r e was an i n t e n t to
deceive the Department. Such a policy i s not only t o t a l l y d i s c r e t i o n a r y
but is not i n compliance with A. R. S. $ 42- 1322. D, which s t a t e s :
" Any taxpayer who f a i l s t o pay such tax ( t r a n s a c t i o n
p r i v i l e g e t a x ) w i t h i n f i v e days from the date upon
which the payment becomes due s h a l l be s u b j e c t t o and
s h a l l pay a penalty of ten percent of the amount of the
tax.. ."
1, egislative Council C r i t i c i z e s DOR's Penalty Assessment Policy
A L e g i s l a t i v e Council memorandum dated November 28, 1980*, c r i t i c i z e s
DOR's penalty assessment as being contrary to s t a t u t e s . It s t a t e s , i n
p a r t :
" The instances s t a t e d a s the department's c r i t e r i a do
not meet the s t a t u t o r y requirements ...
" According to t h e s t a t e d f a c t s , the department c o l l e c t s
the 10% penalty i f ( a ) the taxpayer did not f i l e a
r e t u r n o r ( b ) t h e chief of the a u d i t d i v i s i o n f e e l s t h e
imposition of a penalty is appropriate. The former
instance is so broad t h a t it could include cases which
should properly be subject t o a 25% penalty. I n order
to comply with the s t a t u t e , the department's f i r s t
c r i t e r i o n f o r a 10% penalty should exclude those
circumstances. The department's second c r i t e r i o n is
likewise i n a p p r o p r i a t e as seemingly permitting an abuse
of a d m i n i s t r a t i v e a u t h o r i t y through a r b i t r a r y and
capricious r u l i n g s which should instead be determined
on the b a s i s of promulgated r u l e s .
* Appendix X I contains the f u l l t e x t of t h i s memorandum.
" The department's c r i t e r i o n for no penalty again is a
s u b s t i t u t i o n of the department's standards f o r the
s t a t u t o r y standards. The department's practice is
invalid on a t l e a s t three points: ( a ) A s stated i n the
f a c t s , too much discretion is given to the chief of the
audit division. There should a t l e a s t be a requirement
of evidence upon which to make an objective finding.
( b) The practice does not recognize the s t a t u t o r y
requirements t h a t , i f the deficiency was fraudulent or
due to an i n t e n t to evade, a 25% penalty must be
imposed or, i f the deficiency was due to negligence or
i n t e n t i o n a l disregard, a 10% penalty must be imposed.
Stated another way, the department's practice is that
the taxpayer escapes a penalty unless the chief f e e l s
that the taxpayer i n t e n t i o n a l l y deceived the
department. This does not follow the statutory mandate
i n any respect. ( c) The c r i t e r i o n does not recognize
the ' r e s i d u a l ' provision of A. R. S. section 42- 1322,
subsection D t h a t any taxpayer who f a i l s to pay the tax
within f i v e days of becoming due is subject to and
s h a l l pay a 10% penalty." ( Emphasis Added)
A s s t a t e d i n the Legislative Council memorandum, DOR's penalty assessment
policy is improper i n that: 1) taxpayers who do not f i l e a return may not
be subject t o a 25 percent penalty a t the discretion of the Chief Auditor
of the sales and use t a x a u d i t section, and 2) taxpayers who owe
additional taxes should always be assessed a t l e a s t a ten percent
penalty. In addition, DOR should promulgate rules regarding penalty
assessments.
DOR May Collect Penalty And I n t e r e s t
It Failed to Assess E a r l i e r
The Department of Revenue may assess and c o l l e c t penalties and i n t e r e s t it
neglected to impose originally. The assessment and collection of
penalties and i n t e r e s t are, however, subject to a three- year s t a t u t e of
limitations.
A Legislative Council memorandum dated December 5, 1980*, s t a t e s " The
department may assess and c o l l e c t the i n t e r e s t and penalty it f a i l e d to
impose on taxpayers who owed a d d i t i o n a l t a x e s , subject to the three year
l i m i t a t i o n on tax assessments f o r s a l e s and use taxes."
* Appendix V I I I contains the f u l l t e x t .
I n a d d i t i o n , the L e g i s l a t i v e Council memorandum s t a t e s t h a t " i n t e r e s t
should be assessed on the amount of taxes due and owing from t h e o r i g i n a l
f i l i n g date to t h e d a t e when t h e t a x e s were paid." Thus taxpayers a g a i n s t
whom DOR o r i g i n a l l y f a i l e d t o a s s e s s i n t e r e s t should be assessed i n t e r e s t
between the time the tax was o r i g i n a l l y due and the time the tax was paid.
DOR Abates P e n a l t i e s
DOR abates p e n a l t i e s i n conjunction with the Office of the Attorney
General even though the Department has no s t a t u t o r y a u t h o r i t y t o do so.
DOR has developed a s e t of w r i t t e n guidelines t o determine when p e n a l t i e s
on l a t e payment of s a l e s and use taxes may be abated. Following are the
guidelines DOR uses f o r penalty abatements.
" 1. Honest mistakes or e r r o r s .
" a. A new company or firm makes a mathematical
e r r o r on the timely f i l e d tax form.
" b. A new company or f i r m is l a t e the f i r s t time
with its tax r e t u r n . However, the r e t u r n
should not be more than 10 days l a t e .
" c. An e s t a b l i s h e d f i r m h i r e s a new or
inexperienced employee who is d i r e c t l y
responsible f o r timely and accurate f i l i n g s
of t a x r e p o r t s . This should only be granted
f o r the f i r s t such incident. Further, the
Department should be n o t i f i e d promptly upon
discovering the deficiency.
" d. Implementation of a new accounting o r
computerized report system which has caused a
delay o r mathematical e r r o r i n f i l i n g . This
should be a one- time abatement.
" e. Breakdown of mechanized accounting system
( e. g., computer) j u s t p r i o r to the f i l i n g
deadline.
" 2. Unexpected i l l n e s s o r absence of responsible
a u t h o r i t y f o r timely f i l i n g of tax r e p o r t s .
" 3. Weather conditions or a c t s of God which a r e
causally r e l a t e d t o l a t e f i l i n g of the tax return.
" a. Blizzards, storms, e t c .
" b. Other d i s a s t e r s caused by weather o r a c t s of
God.
" 4. Forms sent to another agency, when a taxpayer can
provide proof ( copy of envelope with postmark)
t h a t tax forms were mailed t o another agency such
as DES or IRS. Original envelope must i n d i c a t e
timely postmark. h his should be a " one time
only" abatement.)
" 5. Postmark.
" a. When a taxpayer s t a t e s he has mailed the
r e t u r n timely, but the Post O f f i c e d i d not
mark the envelope on the same date ( maximum 3
day allowance), penalty may be abated i f :
F i r s t request - Taxpayer w i l l prepare an
a f f i d a v i t s t a t i n g t h a t s a i d r e t u r n was mailed
timely.
Second request - Taxpayer w i l l prepare an
a f f i d a v i t s t a t i n g t h a t r e t u r n had been timely
f i l e d along with a witness a f f i d a v i t s t a t i n g
taxpayer had f i l e d timely.
Third request - Taxpayer w i l l have to go to
court t o g e t penalty abated.
" 6. The l a t e f i l i n g was a t t r i b u t a b l e to fraud by a
person who is d i r e c t l y responsible f o r f i l i n g of
tax returns.
" 7. Department of Revenue erroneous mailings ( s a l e s
Tax only) :
" a. Where a taxpayer has advised the Department
of a n a d d r e s s change, but said change had not
been processed p r i o r t o the next form mailing
to taxpayer, such t h a t the r e t u r n is sent to
the wrong address.
" b. Where a taxpayer does not get a r e t u r n mailed
t o the business address."
The guidelines s t a t e t h a t requests t o abate penalty must be received
within a reasonable length of time and t h a t a t a x p a y e r ' s h i s t o r y of f i l i n g
promptly may be considered i n g r a n t i n g p e n a l t y abatement.
When DOR r e c e i v e s a n abatement request t h a t does not involve questions of
f i l i n g t i m e l i n e s s , it fowards the request t o an A s s i s t a n t Attorney
General, who recommends approval or disapproval. DOR then reviews the
Assistant Attorney General's recommendations.
According to a L e g i s l a t i v e Council memorandum dated August 15, 1980":
" The p e n a l t i e s and i n t e r e s t which a r e assessed f o r
delinquent s a l e s and use taxes a r e mandatory.. . I n o r d e r
to abrogate the mandatory imposition of a penalty or
i n t e r e s t t h e r e must be e i t h e r s p e c i f i c s t a t u t o ~ y
a u t h o r i t y f o r the abatement or a f i n d i n g t h a t the tax
was not, i n f a c t , due.
A search of the s t a t u t e s and annotations thereunder has
not disclosed any a u t h o r i t y f o r abrogating or abating
s a l e s or use tax p e n a l t i e s o r i n t e r e s t which a r e
assessed, other than through t h e p r o t e s t and appeal
procedures prescribed i n A. R. S. s e c t i o n s 42- 1338,
42- 1338.01, 4- 2- 1339, 42- 1340, 42- 1415, 42- 1415.01,
42- 1421 and 42- 1422. Refunds of excess taxes paid may
occur under A. R. S. s e c t i o n s 42- 1326 and 42- 14- 17.
Otherwise, the s t a t u t e s do not appear t o authorize
abatement i n the case of mistake or d i f f i c u l t y i n
payment of s a l e s and use taxes."
In other words, DOR does not have a u t h o r i t y t o abate p e n a l t i e s o t h e r than
through the p r o t e s t and appeal procedures. However, the O f f i c e o f the
Attorney General claims t h a t the Attorney General, i n conjunction with
DOR, can abate p e n a l t i e s . A l e t t e r from an Assistant Attorney General**
s t a t e s :
* Appendix XI1 contains the f u l l t e x t of t h i s memorandum.
** Appendix X I 1 1 contains f u l l t e x t of t h i s l e t t e r .
" The Attorney General has the obligation to safeguard
the legal i n t e r e s t s of the S t a t e i n the most economical
fashion possible. A s a consequence, the Attorney
General is authorized to compromise claims i n an
a ~ ~ r o ~ r i a ctaese . A. R. S. 641- 192(~() 4 ). In the * L 2 - . - . , . . ,
absence of l e g i s l a t i v e guidelines, it is clear the
Attorney General has the discretion to determine the
likelihood of prevailing on any claim.
The procedure, devised i n conjunction with the
Department of Revenue, is designed to compromise only
i n cases where the Attorney General and the Department
of Revenue believe no penalty would be upheld by the
courts. The procedure, to the extent it involves the
Attorney General, only applies to penalties applied
under A. R. S. . $ 42- 1322. Penalties determined under
other provisions of t h e t a x law may be redetermined by
the Department of Revenue prior to becoming f i n a l . We
do not attempt to compromise claims where legal
l i a b i l i t y is unclear. In these instances, we w i l l
s e t t l e only a f t e r the claimant f i l e s s u i t and then only
when appropriate. " (~ mphasis added)
Thus the Assistant Attorney General opines that he may abate penalties through
t h i s authority to compromise claims against the State.
However, i n a memo dated April 22, 1980, the Attorney General's Chief Counsel ( I
of the Tax Division said penalty abatement requests t h a t involve questions of
timeliness are DOR's responsibility. The memo s t a t e s t h a t abatement requests
that " f a l l within the category of items where the taxpayer has claimed that
they have f i l e d t h e r e t u r n timely, i. e . , the return was placed i n the mail on a
or before the due d a t e . . . i s an administrative decision f o r the Department of
Revenue. "
Between August 30, 1979 and August 18, 1980, there were 265 abatement
requests, of which 119 dealt with questions of timeliness. According to a
memorandum from the Office of the Attorney General, between March 5, 1980, and
September 10, 1980, 92 requests were sent to the Assistant Attorney General
for review. The remaining 146, according to a memorandum from the Office of 4
the Attorney General to the Auditor General, were sent to the Assistant
Attorney General f o r review.
Of these 92 requests for abatements, the Assistant Attorney General
recommended that 57 be approved and 35 denied. The 57 abatements that the
Assistant Attorney General recommended be approved totaled $ 17,811.68.
DOR could not provide us with a complete list of penalty abatements involving
questions of timeliness which were granted. However we identified two penalty
abatements concerning questions of timeliness for $ 11,041.14 and $ 43,837 - 74
respectively. Thus the dollars involved in penalty abatements that are the
sole responsibility of DOR could be significant.
It should be noted that in its 1978- 79 Annual Report, DOR requested the
following legislative changes:
" Overhaul A. R . S. $ 42- 1322 to provide clear statutory
guidelines on: 1) imposition and waiver of penalty; 2)
imposition of interest; 3) the validity of and causes
for extensions of time to file a return and pay the tax.
" PURPOSE :
" To provide clear direction as to exactly how the sales
tax should be administered. The present law is vague
and results in confusion and misinterpretation on the
part of both the public and the Department."
CONCLUSION
The Department of Revenue is not consistantly or properly imposing statutorily
mandated penalties against audited taxpayers who are found to owe additional
sales or use taxes. In addition, in conjunction with the Office of the
Attorney General, DOR abates penalties even though it is not authorized by
statute to do so.