Waiving use tax will mean diving into city’s receipts

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Retired manufacturer Barry Baum could find himself up to his eyeballs in tax receipts this summer.

This month, he plans to ask city officials if he can pore over a year’s worth of equipment tax bills from businesses across the city. There could be thousands.

Baum is on a mission to find out just how much local manufacturers pay each year in use tax on manufacturing equipment — that is, the equipment that transforms a raw material or facilitates the assembly of a product.

For years, local manufacturers have suggested the city scrap the 2.5 percent use tax they pay on manufacturing equipment, the tools and machines that cost them hundreds of thousands of dollars.

They say if the city waived the use tax on these big-ticket items, it would be an incentive to attract and retain businesses, especially manufacturers that spend millions each year on heavy equipment.

But the problem is, no one, not even the city’s finance experts, can say how much of the collected use tax comes from a small business buying a new computer and how much comes from a manufacturing plant buying high-tech equipment. When the use taxes are paid to the city, the money goes into the same pot without distinction.

It’s not really fair to ask city officials to waive the tax when they don’t know what kind of a hit it would be to the city coffers, Baum says. It would be like saying to your kid, “sure, take 10 percent out of my wallet” without knowing whether you had a $10 bill or a $100 bill in there.

Last year, the city collected about $7 million in use taxes. These are taxes levied on the purchase, lease or rental of tangible personal property — furniture, fixtures, equipment and operating supplies — and they are paid directly to the city. When a business buys equipment from an out-of-state company and pays no city sales tax, but is using the equipment in Colorado Springs, it must pay the city use tax.

Manufacturers say it’s a tax that quickly adds up because high-tech tooling machines are not cheap. Over at Springs Fabrication, CEO Tom Neppl recently spent $2.5 million on a vertical lathe and a tube laser, equipment that will help process product more efficiently. His tax bill to the city on that one item was about $60,000 — money he could have used to hire another employee, he said.

The tax burden was enough that one small company, RP Machining, high-tailed out of the city last year and into El Paso County where there is no use tax on equipment.

The city tax code allows for exemptions, meaning a tax on equipment for manufacturing could be waived. City Council has the authority to make such an exemption.

But before manufacturers can ask the city to cut the use tax, they have to know how much it is.

That’s where Baum comes in. He is the retired president of tool-making company Western Forge. He is on the Greater Colorado Springs Chamber & EDC Local Industry Council. He is a member of The City Committee, a 10-member goup of city leaders.

He could review the equipment use tax receipts to figure out if manufacturers pay $1 million or $3 million a year in use taxes. Then, City Council could decide whether the city could or couldn’t live without those taxes to the general fund. And if Baum exams the thousands of receipts, city personnel wouldn’t be tied up with the request, he said. But, he would hope they would agree to monitor and authenticate his work.

“This is not going to be easy by any means,” Baum said. “It will be a huge challenge to go invoice by invoice.”

But it’s an important issue — this 2.5 percent use tax on equipment comes up time and again when local manufacturers get together. It’s been raised at the three most recent manufacturing forums hosted by the Chamber and EDC. In May, about 40 Colorado Springs manufacturers signed a letter asking the city to reduce, rebate or eliminate the sales-and-use tax for manufacturing equipment.

It’s a tough issue, Baum says. On one side are the manufacturers who could use a break. In the past decade, El Paso County lost more than 50 percent of its manufacturing jobs. On the other side is a city that may not want to give up a revenue stream in this economy.

“We realize the city needs every dime it can get right now,” Baum said. “The real issue is, can this be a win-win?”