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SD officials working to prevent bank tax mistakes

Chet Brokaw, Associated Press

PIERRE, S.D. (AP) -- South Dakota officials told state lawmakers Tuesday they are working to prevent further mistakes in handling state taxes paid by banks.

In an audit covering the fiscal year that ended June 30, 2012, the Department of Legislative Audit found the state Revenue Department sometimes made mistakes in determining whether tax payments were for credit card operations or general banking operations. Because taxes on credit cards and other bank operations are divided differently between the state and local governments, money was sometimes distributed improperly, the audit found.

Mike Houdyshell, director of special taxes for the Revenue Department, said the tax money was eventually distributed correctly.

"At the end of the day, the distributions were accurate. The state and the counties received the money they were due," Houdyshell told the Legislature's Government Operations and Audit Committee.

In the next year, the department will start running bank taxes through a computer program that handles some other taxes, Houdyshell said. That program not only will help the department collect information from banks on the purpose of each tax payment and what period it covers, but also will help distribute the money correctly, he said.

In addition, the department will improve communication with banks so payments are accurately designated as credit card tax or the general bank franchise tax on other income, Houdyshell said.

The state gets 95 percent of the credit card tax and 26.67 percent of the bank franchise tax. The rest is distributed to the county where a bank is located, and the money is then divided among local governments in the county.

The audit said the Revenue Department's internal controls were not adequate to make sure bank taxes were accurately recorded and distributed on the state's accounting system.

For example, a $1.3 million credit card tax payment was incorrectly accounted for as bank franchise tax, which resulted in the state general fund initially being shorted $888,000. In another case, a bank paid $1.2 million without designating whether the money was for credit card operations or general banking, but the state incorrectly designated the money as bank franchise tax and mistakenly put it all in the state general fund.

Officials said part of the problem is that banks pay quarterly estimates of taxes and then make adjustments after they file their federal income taxes for the year.

State budget director Jason Dilges said the state previously could count on relatively steady bank tax payments each year, but the economy and a change in federal banking law led to fluctuations in bank income and tax payments. The state also got hit with three requests for large tax refunds, he said.

"The uncertain times, I think, have just exacerbated some of the challenges we find ourselves in," Dilges told the lawmakers.

Dilges and Houdyshell told the committee they agree with the audit's recommendations for changes in handling bank tax payments.

Dilges said a working group of state officials, legislators and bankers is looking at ways to simplify and streamline the bank tax.