By Gary Robson
Montana does not have a sales tax, but as anyone who shops in Red Lodge knows, certain towns do have a local tax known as a "resort tax." The 1985 law authorizing the resort tax is very specific about what towns qualify: among other things, the town must have a population under 5,500 and the residents must vote to approve the tax.
Last year, several bills were introduced in the Montana legislature that would have allowed any city in Montana, regardless of size or resort status, to implement a sales tax. Senator Kim Gillan (D-Billings) got closest with SB320, but it was killed on a 31-17 vote. The bill by Sen. Sam Kitzenberg (D-Glasgow) was defeated by a wider margin, and the one by Rep. Dave McAlpin (D-Missoula) never made it out of committee.
There are four communities in Montana that collect resort tax (Red Lodge, Virginia City, West Yellowstone, and Whitefish), and two "resort areas" (Big Sky and St. Regis). Seeley Lake has also been granted resort area status, but has not yet implemented a resort tax. Over seven million dollars in resort taxes were collected last year, of which less than a tenth came from Red Lodge (see chart).
The intent of the Red Lodge resort tax is to collect on the sale of "luxuries," while not taxing the basic necessities of life, like food, clothing, and furniture. In some cases, the Red Lodge ordinances define what is not to be taxed very specifically. To quote from City Ordinance #833, 5th amended, ?1.C.7: "For purposes of this Ordinance, 'underwear' is defined as items worn next to the skin and under outer clothing, and includes only the following items: (a) Boxer shorts; (b) Briefs; (c) Bras; (d) Panties; (e) Girdles; (f) Slips; (g) Non-embroidered and non-imprinted white T-shirts without pockets; (h) All hosiery; (i) All socks; (j) Panty hose [sic]; (k) Tights; and (l) All long underwear including thermal underwear."
As an aside, we asked one elected public official (who asked not to be identified) whether the word "only" in that section means thong underwear must be taxed, he replied: "Yes. It's a travesty. It should be subsidized."
In some cases, these rules are very straightforward. You don't pay resort tax on a car, a bed, a pair of pants, a bag of flour, a screwdriver, or a refrigerator. You do pay on a t-shirt with "Red Lodge" imprinted on it, a meal in a restaurant, a drink in a bar, rental skis, or a fly rod.
In many other cases, the matter is open to interpretation. Resort tax is charged on books and newspapers, but not on iPods and handheld GPS units, even though none of those are mentioned in the City code. If I buy my Diet Pepsi in a 12-pack of 12-ounce cans (144 oz total), it is not taxed, but in a 6-pack of 24-ounce bottles (also 144 oz total) it is taxed. T-shirts with a "Local Rag" logo would not be taxed unless they had the words "Red Lodge" on them.
Since the City started collecting resort tax in 1998, no business has been audited. Everyone with a business license fills out a form once per quarter listing total taxable sales, and sends it in with a check. Some business owners have actually requested audits, according to Councilmember Glory Mahan, because that would make it clearer to them what's taxable and what isn't. "It's high time the city put together a list," she said.
The City reports resort tax collected in five different categories: Motel, Food, Liquor, Retail, and Miscellaneous. For the summer quarter (July, August, September) last year, it broke down like this:
The resort tax regulations make no allowances for nonprofit organizations. If you're selling a taxable item, you must collect resort tax whether you're doing it for charity or not. The Beartooth Elks Club fought with the City over this issue for several years: the Elks felt that as a nonprofit, they shouldn't have to charge resort tax in the bar. The City said that they're selling drinks and drinks are taxable: pay resort tax or we'll close you down (they paid the tax).
Much has been made in the press about resort taxes and the Beartooth Rally motorcycle event. Another local newspaper reported that Rally vendors paid an average of $2.00. Checking numbers with City Clerk Debbie Tomicich told a slightly different story. Her data shows $744.78 collected from Rally vendors in 2007. With 25 vendors on the list, that's an average of just under $30 per vendor, which would indicate taxable sales of about $1,000 each.
In actuality, according to the City codes, much of the merchandise sold at the Beartooth Rally isn't taxable. For example, jackets are classified as a necessity, and therefore aren't taxed. Having a "Red Lodge" logo would make them taxable, but not having a Harley-Davidson logo. So the clothing vendor will have to charge resort tax on patches and shades, but not on leather jackets, no matter how expensive.
The actual mechanics of collecting from out-of-area vendors varies slightly. Anyone who wishes to do business in Red Lodge must purchase a business license. A standard license is $50, while a "transient" license is $35. This does not count as resort tax income. When the vendors set up, they must post a $500 bond with the City. Upon providing proof that they've collected and paid their resort taxes, they get the bond back. Again, as mentioned above, no vendor has ever been audited.
In some cases (e.g., the Beartooth Rally), each vendor handles their license and sales tax separately with the City. Organizations like the Festival of Nations collect the money and forms from each vendor and deliver it all to the City. The Arts Guild runs all sales into one big pot and pays a single lump sum.
When resort taxes were implemented, Rock Creek Resort and Red Lodge Mountain were given the option of joining with the City to create a "resort tax district," and both declined. At one point, Red Lodge Mountain suggested that they could collect the tax if it could be used to improve the road leading to the ski area, but regulations don't allow tax revenues to be earmarked in that way.
From the inception of the resort tax in 1998 through the end of calendar year 2007, the City of Red Lodge has collected $5,299,539 in resort taxes. State laws are very specific on how that money can be spent. As you can see in the chart titled "Where Our Resort Taxes Go," the majority of the money has gone to water and sewer, with the rest spread through some rather broad categories of roads, parks, and general use.
What does this really mean? Let's take the largest category to start with. Since 2000, Red Lodge has spent $1,916,830 on "sewer." Obviously, not all of this was spent directly on digging holes in the ground and buying pipes and treatment chemicals. In that time period, $915,000 (19% of the total taxes collected) went to direct subsidies of residents' sewer bills. Over $100,000 was used in 2000 to purchase a piece of land. Other purchases include engineering services, equipment, and subcontracted labor.
In "water," the story is similar. About $807,000 went to direct subsidies of residents' water bills, and the majority of the rest went toward repair of our 100-year-old water system, much of which has been replaced in the last five years using resort tax money. This is an area greatly in need of work. Mayor Betsy Scanlin explained that 65% of our drinkable water in Red Lodge is lost due to leakage in the system. Glory Mahan agreed, saying that parts of our water system still have wooden water pipes.
Councilmember Jason Priest also agreed with that number, but said that the loss isn't actually the reason for the repair work right now. "Our incremental cost for a gallon of water is low," he explained. "It would be very costly to replace all of the pipes just to save the water we're losing. We're doing the repairs to fend off the possibility of a catastrophic breakdown." In other words, if the water main ruptured, the entire town could be without water, and the City is working on fixing or replacing the parts of the infrastructure where such a break is most likely.
Although the State of Montana does influence how much money can go into each of the major categories, the City has fairly wide latitude on the specific spending within each category. The money spent on "roads," for example, was mostly repair and paving, but also includes $17,000 for a road grader, $12,000 for a dump truck, and $155,114 for street lights. Similarly, the money in the "parks" category includes $35,000 to design trail plans, and $38,029 for the new playground.
One area where the City could improve would be communications. There are potholes that aren't being fixed because the street is scheduled to be torn up and repaved as a part of the new water project. Unfortunately, people living on those streets aren't aware of this, and don't know in advance which City Council meetings will discuss their streets. Councilmember Mahan also pointed out that people may not know that the resort tax money can't be spent on Broadway because it's a state highway.
A large portion of the money in all categories goes to debt service. If the City needs to spend $6 million on an infrastructure project, and it has $6 million sitting in the bank, then the cost of the project will be $6 million. If, however, the City needs to spend that money and doesn't have it, then it will do the same thing most of us do when we buy a house: borrow it. Since the $6 million project that's underway now is being financed with a 40-year amortization, the actual cost to the City will be in excess of three times that amount. The $6 million project will cost over $18 million by the time it's finally paid off.
The City has been approached several times by the Chamber of Commerce and other groups about using some of the resort tax money for marketing and promoting the town. The logic behind the proposal is that promotion brings more people to town, the people spend money, and (hopefully) enough new resort tax revenue is generated to pay back the marketing expense.
Mayor Scanlin said that using resort tax revenues for marketing "is an idea worth putting to the council and the electorate" even though the Council voted it down last time. Councilmember Mahan supports the idea.
"The year the Beartooth Highway closed was still our second-highest year in resort tax collection [at the time], mostly because of the strong marketing done by people like Kim from the Beartooth All-American Road," Mahan told me. Total resort tax collected in calendar year 2005 (when the highway closed) was $522,581, compared to $562,553 in 2004, $518,047 in 2003, and $503,528 in 2002. With the exception of that year, resort tax collection has increased every year since it began. The total for calendar year 2007 was $644,606, a 4.8% increase over 2006.
I asked the Mayor whether she felt that the resort tax is working the way it was supposed to work. "Yes, definitely," she replied. "We would not have been able to do a lot of our infrastructure projects without the resort tax revenues."
But does that mean the taxpayers are getting what they bargained for? Mayor Scanlin thinks so. She pointed out that over $1.5 million has gone directly into lowering water and sewer bills. "The bills may seem high," she pointed out, "but they'd be a lot higher without the resort tax."
Glory Mahan followed up by saying that water and sewer bills actually couldn't be any lower. "Government organizations told us they wouldn't provide grants because 'users aren't paying their fair share'," she explained. "In order to qualify for grants, we had to increase rates."
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