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Telecommunications Excise Tax Reductions Reporting

July 3, 2014 | TARC updates
bhannah@vil.north-aurora.il.us

In late June, municipalities received a notice from the Illinois Department of Revenue (IDOR) regarding a federal class action lawsuit settlement involving improperly charged telecommunications excise taxes.  As a result of the settlement, IDOR must recover amounts previously distributed to local governments from the improperly taxed transactions.

IDOR intends to recover the balance due through a reduction of the normal monthly distribution for telecommunications taxes over a period of 9 months beginning with the August 2014 distribution. Municipalities may request a shorter recovery period if they choose by contacting IDOR.

TARC has concluded that this recovery warrants recognition as a liability, as defined by GASB Concepts Statement 4, for local governments until the obligation is satisfied.  For entities with April 30 year ends, the liability should be recognized at year end based on the GASB Statement No. 56 criteria for subsequent events, as described in paragraphs 8 through 11 because the improperly taxed transactions had already occurred, and the lawsuit was in existence prior to year end.  Entities with June 30 year ends or beyond would have received the IDOR notice prior to year end.  Therefore subsequent event treatment is not relevant.  However, recognition of a liability in the financial statements for any remaining obligation from the recovery is still warranted.

Although reporting the monthly distributions and tax recovery amounts at gross is recommended, the Committee recognizes that materiality may impact a government’s decision on how to record and disclose the recovery amounts.  Materiality will vary depending on the funds/opinion units that report telecommunications taxes.  If material, netting the recovery amounts against revenues and/or receivables would not be appropriate.  Instead, governments should record a liability to IDOR and a corresponding expenditure for the remaining recovery amount at the fund level since the full amount will be recouped in less than a year.  Depending on the significance of the recovery, additional footnote disclosure may be appropriate.  Governments are encouraged to discuss the recovery and the treatment they have elected with their auditors.

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