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State hits ShoWare Center in Kent with unexpected B&O tax
The city-owned ShoWare Center took a deeper loss than expected in the second quarter of this year because of an additional $100,000 business and occupation tax payable to the state Department of Revenue.
"We were better than budget for the quarter and year to date we were $6,000 behind before the B&O tax," said Patrick McCluskey, ShoWare finance director, at a Public Facilities District board meeting on July 26. "It was not in the budget so it is an unexpected expense."
The payment of $100,000 left the ShoWare Center with financial losses of $290,741 through June of this year, about $106,000 more than the SMG projected loss of $184,430, according to the ShoWare income statement. The arena had expenses of $1.2 million through June and income of $963,000.
The ShoWare Center is on the way to losing hundreds of thousands of dollars for the fourth consecutive year. The arena lost $451,723 in 2009, $398,013 in 2010 and $457,480 in 2011 for a total of more than $1.3 million.
The city sets aside money in its annual capital budget to cover the losses. That money could be used for capital projects such as improvements to city streets and other facilities.
ShoWare and city officials initially believed that salaries paid to SMG, the Philadelphia-based operator hired by the city to run the 6,000-seat arena, were exempt from the B&O tax because it is a city-owned facility.
"We had always assumed that the ShoWare Center was the city and that no B&O tax is payable," City Finance Director Bob Nachlinger told the Public Facilities District board. "We had a Department of Revenue auditor come in and he had a different opinion. We did get them to only assess the tax on the actual salaries paid out by the ShoWare Center and not including all of the ancillary costs. The number initially was about twice as much and we managed to get them to agree to move it down."
The $100,000 assessed by the state in April covers the tax on salaries since the arena opened in 2009. The actual tax per year will be about $30,000, McCluskey said.
Board member Mike Miller said arenas operated directly by cities do not pay the B&O tax on salaries. But because the city hired SMG to run the facility, it is considered a third party and therefore subject to the tax.
That comment led board member Greg Haffner to ask Nachlinger if there is any potential legal challenge to the ruling by the city.
"We had one of our attorneys who is very familiar with the B&O tax look over everything and we could challenge it but we would lose," Nachlinger said.
The state ruling surprised Haffner, a business and real estate lawyer.
"I'm frankly shocked it's applicable," Haffner said. "I'm not a tax expert so I don't want to sit here and say the Department of Revenue is wrong. But they're not always right."
McCluskey also explained that the state considers SMG a third party rather than part of the city staff.
"The city is giving money to SMG for salaries so they're saying that's revenue to SMG so the tax is on the salaries," McCluskey said. "They initially went after all expenses."