Senate Bill S7672

                                
 
BILL NUMBER: S7672

SPONSOR: GRIFFO
 
TITLE OF BILL:  An act to amend the general city law, the village law
and the tax law, in relation to prohibiting compensation for service of
auditing returns or reports relating to certain taxes on utilities on a
contingent basis

 
PURPOSE:

To prohibit localities from compensating private auditors on a contin-
gent fee basis.

 
SUMMARY OF PROVISIONS:

Section 1 of the bill amends section 20-b of the general city law by
adding a new paragraph that prohibits a city from compensating auditors
on a contingent fee basis or on any other basis related to the amount of
tax, interest, or penalty assessed against or collected.

Section 2 amends section 5-530 of the village law by adding a new para-
              

graph that prohibits a village from compensating auditors on a contin-
gent fee basis or on any other basis related to the amount of tax,
interest, or penalty assessed against or collected.

Section 3 amends section 1201 of the tax law by adding a new subdivision
that prohibits a city from compensating auditors on a contingent fee
basis when they file a return or report imposing an excise tax on the
gross income or gross operating income of utilities and vendors of util-
ity services.

Section 4 establishes an effective date.

 
EXISTING LAW:

General City Law Section 20-b and Village Law Section 5-530 authorize
cities and villages to tax utility companies. Cities and villages are
allowed to hire private auditors to examine utility tax returns and
propose additional taxes. The private auditors are usually paid a
contingent fee for their services.

 
JUSTIFICATION:

Currently, cities and villages are allowed to hire private auditors to
examine utility tax returns and propose additional taxes. The contingent
nature of the arrangements between localities and private auditors
creates a conflict of interest for the auditor who is compensated only
when audits result in additional tax. These arrangements jeopardize the
neutral and objective weighing of the public's interest and instead
create a direct economic interest in the outcome of the services
rendered.

The objective of a tax audit should be to verify whether the correct
amount of taxes was paid by a taxpayer. Contingent fee audits do the
opposite as they encourage auditors to aggressively assess additional
tax, rather than ensure that the proper tax was paid. The auditor has a
financial incentive to file reports and returns that favor the taxing
authority, and not the taxpayer.

These contingent fee arrangements hurt the business climate of New York
State. They are a contributing factor to high utility costs as these
taxes are ultimately paid by utility consumers. New York should follow
the lead of other states, most recently, Alabama, and prohibit these
contingent arrangements.

 
LEGISLATIVE HISTORY:

New Bill.

 
FISCAL IMPLICATIONS:

None to the state.

 
LOCAL FISCAL IMPLICATIONS:

To be determined.

 
EFFECTIVE DATE:
Immediately.