When the Arizona Auditor general’s Office conducted a special audit of the GPLET to address whether it “provides a viable revenue stream to counties, cities and towns, community college districts, and school districts, it found that the most recent changes to the GPLET (government property lease excise tax) laws may not increase revenues because most lessees do not pay the increased GPLET rates.”
The Auditor General also “found that improvements are needed to ensure GPLET is accurately calculated, collected,
distributed, and reported to ensure jurisdictions receive all GPLET revenues due to them.”
The Auditor General recommended that the Legislature should consider modifying GPLET processes “regarding the processes and time frames for calculating, collecting, distributing, and reporting GPLET revenues. For example, the government lessor should calculate the GPLET liability instead of the prime lessee because the government lessors have the information required to perform the calculation and are responsible for levying GPLET.”
In the Auditor General’s overview, it is noted:
In 1996, the Legislature passed laws to allow Arizona’s cities, towns, counties, and county stadium districts (government lessors) to lease property they own to private parties (lessees) for nongovernmental use. In addition, the government lessors can enter into agreements with lessees to develop unused or underutilized property to help revitalize a community. Because the property is owned by the government, it is exempt from paying property taxes, and instead GPLET is assessed and distributed to jurisdictions.
In 2010, the Legislature amended the GPLET laws to increase the GPLET rates for new leases entered into on or after June 1, 2010, limit lease terms, and eliminate the ability to reduce payments over time. Additionally, the changes in law required the Arizona Department of Revenue to annually adjust the GPLET rates based on inflation and establish new reporting requirements to improve accountability and transparency. However, those government property improvement leases and development agreements entered into or approved prior to June 1, 2010, are still subject to the GPLET rates established in 1996.
Although the Legislature changed the GPLET laws in 2010 to increase revenues distributed to jurisdictions, these statutory changes may not increase revenues as expected because most lessees do not pay the increased GPLET rates.
The Auditor General analyzed leases included on the County Treasurer Reporting Forms (Reporting Forms) during calendar year 2014 and determined that most leases are either exempt from paying GPLET or continue to pay GPLET under the old GPLET rates and laws, which include a provision that allows lessees to reduce GPLET payments over time. Because so few leases are subject to the new GPLET rates and laws, the changes to the GPLET laws may not increase revenues as expected unless government lessors enter into a substantial number of new government property improvement lease agreements that are subject to the new GPLET rates.
Based on our review of the Reporting Forms for calendar year 2014, almost half of the government property improvement leases we identified are exempt from paying GPLET.
Further, because statutes do not require county treasurers to report exempt leases, the number of exempt leases could be much higher. There are 15 different types of government property improvement leases that are exempt from paying GPLET. For example, leases with other government entities, nonprofit organizations, low-income housing, and various types of athletic and entertainment facilities, including some restaurants, movie theaters, and retail shops, are exempt under statute.
GPLET process is not well understood and lacks adequate procedures — Many city, town, and county officials (parties) who are responsible for GPLET administration indicated a general lack of understanding regarding GPLET laws and requirements. Additionally, the lessees did not always understand how to accurately calculate GPLET. Further, the parties lack adequate policies and procedures to ensure GPLET is properly calculated, collected, distributed, and reported. Specifically, the parties did not review GPLET returns for accuracy; reconcile payments to lease agreements; or communicate with other parties administering GPLET.
Incomplete GPLET reporting could affect equalization assistance payments to school districts — The Arizona Department of Education (ADE) is required to consider the valuation of properties subject to GPLET, as reported by the county assessors, in its calculation of equalization assistance payments made to school districts. However, we found that some county assessors did not notify ADE of the valuation of properties subject to GPLET. As a result, the State and counties may have paid more in equalization assistance payments than required.
Legislature should consider modifying GPLET processes — The Legislature should consider modifying statutes regarding the processes and time frames for calculating, collecting, distributing, and reporting GPLET revenues. For example, the government lessor should calculate the GPLET liability instead of the prime lessee because the government lessors have the information required to perform the calculation and are responsible for levying GPLET.
Additionally, the Reporting Forms should be completed by both the government lessors and county treasurers to help ensure all GPLET payments are received and distributed to the jurisdictions.
Further, to allow the parties sufficient time to complete these proposed recommendations and others outlined in the report, the tax due date and other time frames should be modified.
Parties administering GPLET should develop and implement policies and procedures — Even if the Legislature takes no action, policies and procedures would improve the administration and oversight of the GPLET calculation, collection, distribution, and reporting processes.