October 15, 2009

Making an Assessment

by Jim Newsom

Doug Knack and Sharon McDonald are friends of mine. I’ve known Doug for about 35 years, went to elementary and high school with his wife Kathy, and first met Sharon nearly 20 years ago when we both worked for Crestar Bank. The Knacks and McDonalds have also known each other for a long time, their children being classmates and close friends who played together in public school orchestra programs.

When Doug, a realtor with William E. Wood, announced earlier this year that he would run against Sharon to replace her as Norfolk’s Commissioner of the Revenue, many people asked me why he was doing it. She has held the job for twelve years and seems to be highly regarded for the job she’s done. She has the announced support of most city council members and other local elected leaders.

But the seeds of Doug’s challenge were sown over the last six years, as he and his wife have had an ongoing dispute with the commissioner’s office over the business tax classification given to Kathy Knack Interior Designs, the Ghent-based business they own. For purposes of the Business, Professional and Occupational License tax (BPOL), Kathy’s business is classified as a provider of business services. She has argued that she is in fact a retailer, that most of her income is derived from the sale of goods, not from charging her clients consulting fees.

Non-business owners are probably asking “who cares?” The reason the classification matters to those affected is that there are different BPOL tax rates—retailers are taxed at 20 cents per $100 of gross revenue, service providers are taxed at 36 cents per $100 of gross revenue. The General Assembly’s justification for the discrepancy has to do with the costs retailers must absorb in carrying inventory to generate their income.

Businesses that get their income from both sales and services can have a dual classification. McDonald has offered Kathy Knack the opportunity to receive a dual classification if she will keep her books in a manner that breaks out her business revenue between retail and service. A Virginia Tax Commissioner ruling in April, 2008, issued in response to a Knack appeal, supported McDonald’s position.

Knowing the backstory, I asked Doug Knack and Sharon McDonald to have a conversation with me about the issues in their race in order to illuminate them for readers of Veer. We talked for nearly an hour and a half on September 22nd. Pertinent excerpts from our discussion follow:

JN: What is the difference between the City Treasurer and the Commissioner of the Revenue; what is the job description?

DK: Effectively the job is that of chief tax assessor for the city of Norfolk, assessing everything except for the real estate taxes. You assess the personal property tax—most folks are touched by that only through their car tax; business property taxes, which are tables and chairs and cars and machinery if you have a manufacturing concern; and then the business licensing tax. There are other parts of the job—the office can receive tax returns and help fill those out. It’s an administrative position that applies the tax law against evaluations of the properties that are being taxed.

SM: You also asked the question of what the city treasurer does. It’s confusing to a lot of people. All of your tax bills come from the treasurer. The treasurer’s chief job is to take whatever value is produced out of the commissioner’s office and translate that into a tax bill—apply the tax rate against the value that’s determined by the commissioner’s office, and then send a bill.

JN: How many people do you manage; what kind of staff does the commissioner of the revenue have?

SM: There are about 50 people in the office. My office is broken up into different teams with responsibility for the various taxes. So there’s a personal property team, and all of the various taxes that fall under that area. Then there’s a business revenue team, and all of the business related taxes. We also have a tax assistance team, which includes state income tax and real estate tax assistance programs. And an audit team, and also tax compliance: I’m tasked with business license revenue, and we have the tax compliance folks that go after folks who have not filed their business license filings.

JN: Do you think of your job as being primarily a managerial position?

SM: I am not a policy maker, I am a policy enforcer. So the law is the law, and we have guidelines that we follow as well. We have standards of accountability that we have to meet in how we do our assessments to provide for uniformity within our office and from office to office.

JN (to DK): Do you have experience managing a lot of people? It seems to me that’s a big part of the job.

DK: I don’t have experience managing 50 people. I have worked in situations where I have directly managed five to seven in a business situation; I’ve been kind of the manager for the state department of social services when I was an administrative specialist and actually had to work with about 25 different social work organizations.

There are differences in the scale but the philosophy is the same. You want to learn who does the job well, let them do their job and be a resource for them if they have questions. And I think the job is a management job; it’s not the commissioner’s job to be out there plugging and chugging the numbers. It’s to make sure that the folks who work in the office on the different teams have the resources they need in order to do the job.

SM: It’s not quite that simple. As commissioner, you really do have to have a very thorough understanding of Virginia tax code and Norfolk city code relating to our taxes. You have to have an understanding of the BPOL guidelines, which are the guidelines that we follow in assessment of business licenses.

JN (to SM): Having been in the job for twelve years, what accomplishments can you point to that you are proud of?

SM: I started out by saying I was going to improve operational efficiency and enhance customer service. And those have been the two bottom-line issues in everything I have done in the office. If it’s restructuring my teams, or providing another service, or eliminating a way we do a process, everything points to making us better operationally, spending the taxpayers’ money more wisely in how we are running this office. And then doing it with a high level of customer service.

JN: Are there any particular things that we as taxpayers would feel?

SM: The DMV Select is a perfect example. It allows us to provide all the DMV services except for driver’s licenses or ID cards—we don’t do anything with a camera. But anything else we can provide in my office. I would say that has been the number one thing I have done that has been the wow factor for my office; out of all the things, when you list them, that would be at the top. People are thrilled because they don’t have to wait in line at a regular DMV—they can be in and out in a very short period of time.

If somebody is buying or selling a car…if they come to my office, I can handle the state transaction and the local transaction at the same time. And they walk out a happy, satisfied customer; the city is making money because I get a percentage of the fees that are generated on those transactions that DMV would charge. And it’s much more efficient. It’s a win-win for everybody.

JN (to DK): My question to you as the challenger is, why are you running?

DK: I admit Sharon has been pretty successful in her career there. But she hasn’t been totally successful from what I gather and from what I’ve seen. What I wish for the office is more consistency in how businesses are classified and how their taxes are assessed. You’re fully aware of the issue with designers and framers.

JN: Is that the motivating factor behind your desire for the job?

DK: It is the educating factor behind my motivation for the job. It’s where I saw that the inconsistencies in that arena existed and still exist today.

JN: Give me some examples. There is an inference in your campaign material that something is not being handled fairly.

DK: I think that consistency leads to fairness. So if it’s inconsistent, it’s inherently unfair. Looking at designers and framers, there are examples of similar businesses in the city who are classified differently. We still have designers in the city who are classified as just service; a couple that I think are still classified as solely retail, although they’ve been told that classification is going to be changed. We have design firms in the city that have multiple classifications.

The law allows for discrepancies and differences—it’s supposed to be classified based on how you do business. If you just provide service, you should have a service license. If you do service and retail, you should have those two licenses. The state allows for these classifications. The decision on how you are classified should be made on how you do business, not necessarily what the name of the business is.

SM: Let me give some clarification to this because the BPOL tax is a confusing issue to most people. The business license tax is a privilege tax. It’s not based on income or what your profitability is. It is for the privilege of doing business in a particular locality. Not all localities in the commonwealth have a business license tax. The Virginia General Assembly determines the maximum rate that a locality can charge, then the local governing body determines what rate they will charge for a particular class.

JN (to DK): You wouldn’t be here today if you all hadn’t had a dispute. You got into this through a disagreement for your wife’s business, which is an interior design business. Are there other fields that are being taxed inconsistently in your mind, or is it just interior designers?

DK: Interior designers and framers are the ones of which I am aware. I can’t imagine that there would be inconsistencies in only one class of business, but that’s possible. I don’t think that there is a design to be necessarily inconsistent; I think it has just happened.

JN (to DK): I have noticed in listening to you and reading your material, you emphasize that you will ensure that ‘businesses stay in Norfolk, not move to neighboring cities and counties.’ This implies that businesses are leaving Norfolk because of something that the incumbent is doing.

DK: They have the ability to leave.

JN: But are they? Have any left because they don’t like the way that Sharon assessed them?

DK: None, currently, of which I am specifically aware. But the point is: it doesn’t matter if they are leaving. It matters if their leaving affects us negatively. If they don’t feel valued, they have the ability to leave.

JN: Sure, but anybody has the ability to leave, no matter who is the Commissioner of the Revenue. My concern as a friend and as a voter is that there is the implication that businesses are leaving because of Sharon. If that is going to be implied in your emails and in your literature, I want to know who is leaving.

DK: I tend to be very concise. I don’t say they are leaving. I say that they can leave if they feel unvalued.

JN: But you just said that none of them are leaving.

DK: None of them are leaving, of which I am aware. I’m not aware of every small business in town. I’m not aware of every inconsistency. I expect that if there is inconsistency in one class of business, there is probably inconsistency in other classes of business.

JN: I think that what we have is a red herring or a straw man, because it isn’t an issue unless it is really happening.

DK: I appreciate what you’re saying. I don’t necessarily agree that the issue is that businesses are leaving. The issue is the inconsistency. This is not the only area of inconsistency. If this were the only area of inconsistency, I wouldn’t be here.

The other issues that I have seen with the office…in a newspaper article in early August, Harry Minium said that the commissioner’s office had been ‘aggressive’ in trying to identify new sources of revenue. Well, the job of the commissioner is to use the laws that exist and apply them against the values of property, not necessarily look at new sources of revenue. I mean DMV is an example of a good thing, but that is not what was expressed in this article. The problem that I see is the types of other aggressive tactics that she has taken.

SM: My job is to enforce the tax code; my job is not to worry about whether somebody is going to be upset because I am taxing them or not taxing them.

JN (to DK): You also say, ‘Let’s bring accountability back to Norfolk’. I’m not sure what is meant by that.

DK: In my opinion, part of the accountability issue is how things like this are handled. The fact that the commissioner doesn’t look at what’s in the best interests of the citizens, necessarily, and those are the folks that hire her. You are not supposed to be the guarantor of revenue for the city, you are basically supposed to plug and chug numbers.

I think there have been instances where Sharon has lacked that accountability. She has seemed more accountable to council than to the folks.

SM: I am absolutely not accountable to council in any way. I am following the law and enforcing the law. The bottom line is that I am the tax assessor. We are the most critical job in the entire city because we generate revenue. If we don’t do our job well, there is not enough revenue to pay for anything else in the city, all of the city services that are demanded by our citizens and our business community.

My staff follows the letter of the law to the ‘T.’ I am not going to make apologies for how my office is being run. It is the most efficient commissioner’s office in the entire commonwealth and I am extremely proud of my staff.

JN (to SM): One of the top things on your flyer is ‘generated $35 million in additional revenue from taxpayers not paying their fair share of taxes.’ Doug says you are being ‘aggressive,’ so I’d like to see if I can bring that together.

SM: ‘New sources of revenue’—Basically what that means is that I’m looking under every rock and in every cranny I can find to make sure that we are assessing everybody who has responsibility for taxing. That’s what my job is. If I weren’t doing that, then the rest of us would have to pay more in taxes. So you want somebody who’s out there making sure that everybody’s paying their fair share.

We’ve got a number of cash related businesses and higher level gross receipts, and we audit them. The business license is self-reporting, so we’ve got to make sure that everybody is being honest. We generate three to five million dollars a year in the audit team. It’s not looking at the little mom-and-pop kind of places; these are the big ones with big dollars to make sure that they are reporting properly.

copyright © 2009 Jim Newsom. All Rights Reserved.