As of September 30, 2017, we consider the KanLicense IT project within the Kansas Department of Revenue (KDOR) to be in caution status. The purpose of the KanLicense project is to replace KDORís old mainframe driverís license system. The KanLicense project started as another project in 2007, as the DMV project. Phase one of the DMV project, which included the new motor vehicle titling and registration system, was deployed in May 2012. However, the department stopped the project in November 2015, before completing the driverís license system in phase two. The KanLicense project was created to complete that project phase at an estimated $6 million and with a scheduled completion date of December 2017. We selected the KanLicense project for continuous monitoring due to its prior problems, criticality, and cost.
During this quarter, we found the project scope to be in satisfactory status, an improvement from the previous quarter, during which the project scope changed several times. During this quarter, KITO approved the revised project plan which included the several scope elements from the enhancement project. We considered the project schedule to be in unsatisfactory status because KDOR has missed deadlines and experienced delays on several project components, and also experienced delays with web services that will interface with the completed KanLicense System. The cumulative effect of delays in completing these work segments could delay the final project deployment (currently scheduled for January 3, 2018) or negatively affect the quality of the project. Within the schedule category, we also found KDOR's milestone tracking does not accurately represent the project's status for the steering committee. We determined the project cost, which was recast at an estimated $8.6 million, to be in satisfactory status. Finally, we considered project quality in unsatisfactory status. That's because staff missed a critical deadline to complete the project security plan, and because the project has several security deliverables yet to complete with only three months before it is to go live. Lastly, project management staff planned to address only "high" vulnerabilities identified as part of an independent code review.
Kansas Tax Revenues: Reviewing How Other States Inventory and Evaluate Tax Credits and Exemptions
Although Kansas does maintain a comprehensive inventory of its tax credits and exemptions, it trails what many other states are doing to regularly evaluate their tax incentives and use the results to inform policy. According to The Pew Charitable Trusts, Kansas trails other states in following best practices for evaluating tax incentives. This is because Kansas does not have formal policies requiring regular, systematic evaluations of major tax incentives. Further, the limited evaluations that are conducted do not necessarily address the cost or economic impact of tax incentives. Finally, Kansas does not have formal processes to ensure lawmakers consider the results of tax incentive evaluations. Several other states, including Kansasí neighbors, meet many of Pewís best practices.
Agricultural Land Valuation: Evaluating the Potential Impact of Changing How Agricultural Land is Valued in the State
State law requires the value of agricultural land be based on its use valueóa measure of the landís net incomeórather than its fair market value. The Division of Property Valuation within the Department of Revenue uses a complex formula and a large amount of data to calculate agricultural land values. In determining agricultural property values, state law also requires an eight-year average of net income to help ensure land values and the property taxes they produce remain stable. We tested the impact increasing the number of years in the calculation would have on agricultural property values for a single land type in a sample county and found it would produce more stable values. However, increasing the number of years also results in values that increasingly lag current crop prices, yields, and mixes. Moreover, increasing the number of years would likely result in reduced property values because crop prices are not adjusted for inflation. In addition, the assessed values produced by the formula do not necessarily reflect actual income for individual landowners because they are based on county
Kansas Department of Revenue: KanLicense IT Project (Quarter Ending June 30, 2017)
As of June 30, 2017, we consider the KanLicense IT project within the Kansas Department of Revenue (KDOR) to be in caution status. The purpose of the KanLicense project is to replace KDORís old mainframe driverís license system. The KanLicense project started as another project in 2007, as the DMV project. Phase one of the DMV project, which included the new motor vehicle titling and registration system, was deployed in May 2012. However, the department stopped the project in November 2015, before completing the driverís license system in phase two. The KanLicense project was created to complete that project phase at an estimated $6 million and with a scheduled completion date of December 2017. We selected the KanLicense project for continuous monitoring due to its prior problems, criticality, and cost.
During the previous quarter, KDOR initiated significant scope changes to the project due to several serious issues which jeopardized the projectís health. During this quarter, we continued to find the project scope to be in caution status because the scope changed several times. The revised KanLicense project plan submitted to KITO at the end of this quarter does not yet reflect all the changes that were made. We again considered the project schedule in caution status because KDOR has experienced delays on some of its newly established milestones. Additionally, a key contractor, MorphoTrust, did not meet its contract deadlines for several deliverables which threatens KDORís timeline for completing the project on time. Lastly, KDOR has agreed to allow MorphoTrust to delay certain upgrades until after KanLicense is scheduled to ďgo liveĒ by early January 2018, which could result in functionality issues after the system is in use. We determined the project cost to be in satisfactory status. With the recast scope, the current project cost estimate is $8.6 million, from the previous estimate of $6.4 million. KDOR revised its contract with Allied Global Services to guard against further cost uncertainties. Finally, we considered project quality in satisfactory status because project staff continued to make progress completing a security plan during this quarter.
Kansas Department of Revenue: KanDrive IT Project - Quarter Ending March 31, 2017
As of March 31, 2017, we consider the KanDrive IT project within the Kansas Department of Revenue (KDOR) to be in caution status. The purpose of the KanDrive project is to replace KDORís old mainframe driverís license system. The KanDrive project started as another project in 2007, as the DMV project. Phase one of the DMV project, which included the new motor vehicle titling and registration system, was deployed in May 2012. However, the department stopped the project in November 2015, before completing the driverís license system in phase two. The KanDrive project was created to complete that project phase at an estimated $6 million and with a scheduled completion date of December 2017. We selected the KanDrive project for continuous monitoring due to its prior problems, criticality, and cost.
During this quarter, KDOR decided to close and recast both the project and its separate enhancement project. This decision was made in response to significant concerns that were raised in a separate technical report the department received from its contractor. As a result, we found the project scope to be in caution status because the project scope for KanDrive has changed and was not yet formalized as of the end of the quarter. We also considered the project schedule in caution status because a key contractor, MorphoTrust, has missed a second major deadline by delivering equipment that does not work properly. Additionally, we could not evaluate whether the new major milestones KDOR established for the recast project were realistic. Lastly, the new milestones have the project ďgo liveĒ by the end of December with a change in how the project will be deployed across the state, but we could not determine whether the timeline for this new approach is realistic. In addition, we considered project cost in caution status because combining the KanDrive and its enhancement project made it impossible for us to evaluate whether changes in cost estimates are appropriate. Finally, we considered project quality in caution status because the project has suffered from several quality issues which were identified by a technical review released during this period. However, project staff have made progress completing a security plan and mitigated additional security issues during this quarter which is an improvement from our previous findings in this area.
Kansas Department of Revenue KanDrive IT Project Quarter Ending December 31, 2016
As of December 31, 2016, we consider the KanDrive IT project within the Kansas Department of Revenue (KDOR) to be in caution status. The purpose of the KanDrive project is to replace KDORís old mainframe driverís license system. The KanDrive project started as another project in 2007, as the DMV project. Phase one of the DMV project, which included the new motor vehicle titling and registration system, was deployed in May 2012. However, the department stopped the project in November 2015, before completing the driverís license system in phase two. The KanDrive project was created to complete that project phase at an estimated $6 million and with a scheduled completion date of December 2017. We selected the KanDrive project for continuous monitoring due to its prior problems, criticality, and cost.
During this quarter, we found the project scope is satisfactory, based on a clearly defined scope and controls to handle additional major improvements ideas in a separate project. Similarly, we considered project cost satisfactory because the team re-baselines the project quarterly to approve any changes (increases and decreases) in the estimated cost of the project. However, we considered the project schedule to be in caution status because certain work segments are behind schedule and other work has been delayed. Additionally, the contractor MorphoTrust has delayed the deadline for a milestone by three weeks. We again considered project quality in caution status because the project continues to lack adequate security planning, despite being well into its execution phase. Many of the security plan items remain mostly incomplete.
Lastly, although outside of this assessment period, we learned that KDOR is making significant changes to the KanDrive project scope and overall management, which the Legislature and stakeholders should be aware of. We will continue to monitor and report how these changes affect the progress of the project.
Kansas Department of Revenue KanDrive IT Project Quarter Ending September 30, 2016
As of September 30, 2016, we consider the KanDrive IT project within the Kansas Department of Revenue (KDOR) to be in caution status. The purpose of the KanDrive project is to replace KDORís old mainframe driverís license system. The KanDrive project started as another project in 2007, as the DMV project. Phase one of the DMV project, which included the new motor vehicle titling and registration system, was deployed in May 2012. However, the department stopped the project in November 2015, before completing the driverís license system in phase two. The KanDrive project was created to complete that project phase at an estimated $6 million and with a scheduled completion date of December 2017. We selected the KanDrive project for continuous monitoring due to its prior problems, criticality, and cost. During this quarter, we found the project scope is satisfactory, based on a clearly defined scope and controls to handle additional major improvements ideas in a separate project. Similarly, we considered project cost to be satisfactory and an improvement from our last report. However, we considered the project schedule to be in caution status because certain work segments are behind schedule and other work has been delayed. KDOR staff hold weekly conference calls to discuss progress with its contractor MorphoTrust. However, the contract has insufficient penalty clauses to ensure MorphoTrust meets intermediate milestones. Lastly, the project quality received a caution status, an improvement from last quarterís rating of unsatisfactory. That is due to increased efforts on IT security during this quarter, but the first deliverable is not due to be completed until the end of November 2016.
Kansas Department of Revenue KanDrive IT Project Quarter Ending June 30, 2016
As of June 30, 2016, we consider the KanDrive IT project within the Kansas Department of Revenue (KDOR) to be in caution status. The purpose of the KanDrive project is to replace KDORís old mainframe driverís license system. The KanDrive project started as another project almost 10 years ago, as the DMV project. Phase one of the DMV project, which included the new motor vehicle titling and registration system, was deployed in May 2012. However, the department stopped the project in November 2016, before completing the driverís license system in phase two. The KanDrive project was created to complete that project phase at an estimate $6 million and with a scheduled completion date of December 2017. We selected the KanDrive project for continuous monitoring due to its prior problems, criticality, and cost. During this quarter, we found the project scope is satisfactory, based on a clearly defined scope and controls to handle additional major improvements ideas in a separate project. However, we considered the project schedule to be in caution status because certain work segments are behind schedule and other work has been delayed. The KanDrive project has a designated project manager to oversee successful integration with the existing driverís license information and issuance system which we considered satisfactory. We found the project cost to be in caution status. Thatís because internal project management has approved a cumulative cost increase of $1 million thus far, but those revised cost baselines were not properly disclosed outside the agency. Lastly, the project quality received a caution status because it does not include sufficient consideration for IT security, and because the periodic independent verification and validation assessments, which were part of the projectís quality plan, were eliminated.
State Agency Information Systems: Reviewing Security Controls in Selected State Agencies Ė Department of Revenue (CY 2015)
In July 2009, Kansas Department of Revenue (KDOR) officials signed a contract with the 3M Company to develop and implement a new motor vehicle information system referred to as the Division of Motor Vehicles (DMV) Modernization Project. As of October 2014, the DMV Modernization Project is not complete and has fallen significantly behind schedule. The project has two phases. Phase One, the new motor vehicle system was deployed in May 2012; about 10 months late. Phase Two, the new driverís license system has not been deployed and is nearly three years behind schedule. In May 2014, KDOR terminated its contract with 3M, and plans to complete Phase Two internally. Because the project is not complete, the total cost of the project is unknown. Several factors, including poor project management contributed to the projectís delay. Also, we found problems with the stateís oversight of the project including that external, independent risk assessments were discontinued before Phase One was implemented. Finally, project monitoring reports used by the stateís top IT officials and the Legislature did not always provide an accurate picture of the projectís status.
On behalf of KDOR, county treasurers and their staff register and title motor vehicles in Kansas. We estimate that county treasurers incurred about $2.0 million to $2.5 million in additional costs to implement Phase One. However, KDOR paid a total of about $560,000 to counties to help offset some overtime costs and also provided temporary staffing assistance to two counties. KDOR officials do not expect any stakeholders to incur additional costs to implement Phase Two. In addition, we estimate that counties incurred about $1 million in additional costs related to taking on new title-approval duties that were previously completed by KDOR. However, state law dictating how the title fee is split between the state and counties has not changed.
County treasurers reported a number of current problems with the new motor vehicle system (Phase One). In response to our May 2014 survey, nearly three-quarters of county treasurers told us the new system is often or always slow at processing transactions. They also expressed concerns about data problems in the new system, including inaccurate, duplicate or missing data. County treasurers also continue to experience problems with the new systemís equipment. Finally, county treasurers expressed concerns about KDORís ability to communicate and provide assistance.
State Agency Information Systems: Sensitive Datasets and IT Security Resources
Overall, we identified most state agencies maintain computer systems which hold a variety of sensitive data or process payments that must be protected. Although the state is responsible for these sensitive data or payment systems, it lacks an enterprise-level approach to IT security. We also found that 17 of 45 agencies (38%) that process payments or maintain large amounts of highly sensitive data have not had an independent evaluation of their security measures in the past three years. In addition, we learned the state lacks a complete set of three-year IT Plans as required by law, and that agenciesí submitted plans have been made public despite containing sensitive security information.
We also reviewed IT security resources at 10 selected agencies. As part of that review, we found the reporting structures at seven agencies created a risk that important security issues may not be communicated to top management. Additionally, three agenciesí lead IT security positions were not filled with sufficiently qualified staff, and two agencies lacked enough staff to perform necessary IT security tasks. Lastly, IT security software products agencies reported using in five security categories appeared to be adequate except for one agency, which lacked software to back up its system databases and electronic files stored on its network since November 2013.
Department of Revenue: Evaluating the Revenue Impact of Machinery and Equipment Classification and Valuation
County appraisers are responsible for classifying assets as real or personal property and appraising and maintaining records of those properties. The Division of Property Valuation within the Kansas Department of Revenue is responsible for providing oversight and guidance to county appraisers. Complex manufacturing plants represent a small portion of appraised property in Kansas and were the focus of our audit work because of a recent lawsuit. A targeted review of three ethanol manufacturing plants identified problems with county appraisersí inconsistent classifications and valuation errors. We found Kansasí computer assisted mass appraisal system does not work well for appraising these complex manufacturing plants. Further, we noted the division does not provide sufficient oversight and guidance for appraising these plants. These problems likely are limited to a small number of complex manufacturing properties. Lastly, we found some neighboring states also struggle with appraising complex properties, but the tax ramifications are different.
In 2012, the Legislature considered two bills to amend property tax laws. Senate Bill 317 would have changed how some commercial property was classified. Specifically, certain commercial fixtures (formerly real property) would be classified as personal property. We estimate this change would reduce statewide property tax revenues between $170 million and $500 million annually, over the long term. SB 317 would have had several other consequences in addition to its financial effects. The 2012 Legislature also introduced Senate Bill 59 which would have prevented appraisers from reclassifying certain personal property. We could not analyze the fiscal impact of the bill due to a lack of available data.
State Agency Information Systems: Reviewing Selected Controls in Selected State Agencies (CY 2012)
We evaluated six important IT security controls and the comprehensive IT security management process at nine state agencies. We found that most agenciesí IT security controls we reviewed were not strong enough to help ensure that confidential information was adequately protected. Moreover, most agencies had weak controls to help ensure strong and secure staff passwords, and almost all agencies did a poor job of patching software vulnerabilities for both workstations and servers. Most agencies did not adequately train staff on IT security issues, and none of the agencies had fully developed and tested a continuity of operations plan. While most agencies adequately controlled their IT inventory, four agencies were missing or had lost track of computers. On the other hand, we found only a few problems with network access points, which were largely controlled by the Office of Information Technology Services. None of the agencies had a fully developed security management process, but all nine had at least some process components. Finally, security controls were far stronger at agencies where management made IT security a priority.
Accounts Receivable: Reviewing Agencies' Efforts To Collect Amounts Owed to the State (A K-GOAL Audit)
For the State, accounts receivable represent moneys expected to be collected for unpaid taxes, overpayments, fines, or goods and services provided. Our survey of 53 State agencies with significant accounts receivable found that many State agencies could improve their debt collection efforts if they strengthened their collection policies and adopted other collection best practices. Four of the six programs we reviewed in detail failed to meet many of the collection best practices applicable to their operations; three of those four also had inadequate collection policies. Overall, the four poor-performing programs had deficiencies in some or all of the following areas: monitoring receivables, aggressively pursuing debts, using enforcement tools, and using outside collection options, including the Stateís Setoff Program. If those four programs improve their collection efforts, they might be able to collect a significant amount of additional revenue: collecting just 5% more of those programsí delinquent receivables would generate almost $3 million in one-time revenues. We also noted that not all of the $2 billion accounts receivable shown in the Stateís financial report is collectible because it includes aged, and therefore doubtful, receivables for a number of agencies.
Agency Data Centers: A K-GOAL Audit Assessing the Potential Savings of Consolidation
As of 2007, at least 27 states were pursuing data center consolidation, and 22 states had completed or were partially done with consolidation. Kansas and four other states were proposing data center consolidation in 2007, and Kansas currently is still in the planning stage. The 2010 Legislature directed the Division of Information Systems and Communications (DISC) to complete an information technology consolidation study by the 2011 legislative session. Data center consolidation is an expensive and difficult process, but server virtualizationóreplacing several physical servers with a single host server that simulates severalóis a relatively new step agencies can take to save money and prepare for future data center consolidation. We selected five large agencies that have about half the physical servers in the State, and found those agencies already had virtualized many servers, saving an estimated $600,000 to date. We estimate these five agencies could save an additional $400,000 to $1 million over three years by virtualizing their remaining servers. Additionally, we estimate the State potentially could save about $1.3 million over three years if smaller and mid-sized agencies leased virtualized servers from DISC, rather than maintaining their own physical servers. However, these savings depend on agenciesí willingness to participate, and agency officials have expressed concerns with DISCís costs and customer service.
Kansas Tax Revenues, Part III: Reviewing Property Tax Exemptions
A significant amount of real and personal property currently is exempted from taxation--including all property used for governmental and educational purposes, and certain business machinery and equipment -- but there is almost no data on how much the State and local governments are losing in tax revenues from these exemptions. We identified a number of exemptions the Legislature may want to re-evaluate, including six exemptions that have been broadened beyond what the Constitution requires regarding household goods, church parsonages, non-profit housing organizations, and certain buildings owned by private non-profit universities or colleges. In addition, four exemptions relating to farm structures, certain aircraft, and low-production oil wells could result in unequal treatment for similar types of taxpayers. Finally, local governments have lost a significant amount of property tax revenues from four machinery and equipment exemptions.
Kansas Tax Revenues, Part I: Reviewing Tax Credits
Kansas currently has 47 tax credits and 2 refund programs. Only 34 of the tax credits had been in existence long enough for us to evaluate. After applying tax policy considerations and reviewing available data, we identified 8 tax credits the Legislature may want to consider repealing, primarily because minimal or declining use over time suggests they arenít fulfilling their purposes. One refund program and 6 other credits could be considered for modification because they are more generous than similar credits or programs in some neighboring states. Finally, we identified 12 tax credits the Legislature may want to reconsider to ensure they provide the right balance between the Legislatureís public policy goals and State funding needs. Three of Kansasí four transferable tax credits--Angel Investor, Community Service Contribution, and Deferred Maintenance--are a cost-effective way of generating money from the Stateís perspective because all the money the State gives up in forgone tax revenue goes to the project or activity the State is subsidizing. The Historic Preservation Tax Credit isnít a cost-effective way to generate money from the Stateís perspective because, on average for the credits that have been sold to raise money for projects, only 85 cents went to the project for every dollar the State gave up. Since its inception, $312 million worth of projects have been approved for Historic Preservation Tax Credits. About $44.2 million of resulting tax credits actually had been claimed so far through 2008. If all the credits related to the approved projects are issued and claimed, the amount of forgone tax revenue could be as high as $78 million. This credit is costing much more than the initial estimate of $1 million a year.
Kansas Tax Revenues, Part II: Reviewing Sales Tax Exemptions
Kansas currently has 99 sales tax exemptions that cost the State an estimated $4.2 billion in fiscal year 2009. Sales tax exemptions in several areas provide unequal treatment for similar types of taxpayers, including $2.2 million in exemptions granted to 39 specifically named organizations. Kansas also exempts some non-profit organizations from paying sales taxes, but not their for-profit counterparts. Such exemptions are not in line with good tax policy principles. The Legislature hasnít formally adopted a public policy goal regarding the types of organizations, services, or activities it wants to exempt from sales tax.In all, 13 sales tax exemptions accounted for $4.1 billion (96%) of the total estimate of revenues forgone in 2009. Six of those exemptions accounting for $3.4 billion, relate primarily to taxing goods at the final point of sale, and not taxing government entities. Seven exemptions totaling almost $700 million were for machinery and equipment, education/youth activities, labor services utilities, and prescription drugs. Although they significantly erode the State and local tax base, there are other significant considerations for having them. Finally, in recent years, the Legislature has broadened many sales tax exemptions to allow purchases on behalf of or sales by certain entities. We noted several issues with these exemptions.
Economic Development: Determining the Amounts the State Has Spent on Economic Development Programs and the Economic Impacts on Kansas Counties
The estimated cost of economic development in Kansas for the preceding five years has been at least $1.3 billion, which includes both spending by State agencies, and State and local forgone tax revenues. Of the $453 million State agencies reported spending, most related to the Department of Commerce. Of the estimated $860 million in forgone tax revenues, most has been local property tax revenues related to industrial revenue bond exemptions. Assessing the effectiveness of economic development programs can be hampered because of the lack of data, and when data are available, most traditional economic development programs or incentives show negative or inconclusive results. Nonetheless, there are some success stories, both traditional and technology-based. The literature suggests that states now must offer economic development assistance to remain competitive, regardless of its cost-effectiveness.We took several approaches to try to assess the results of spending for economic development--from the global to the specific. First, we asked State agencies to report their accomplishment data to us, which showed that more than 130,000 jobs had been created or retained over five years. However, thereís likely to be double-counting in those figures between some programs and tax credits. Second, using historical county-level data, we found there has been a small but measurable statistical relationship between economic development spending in a county and the growth in jobs and businesses in that county between 2003 and 2007. However, all other things being equal, factors like population and employment levels that existed before the assistance was provided had a much greater impact on job and business growth in a county. Third, we analyzed the impact Nebraska Furniture Mart has had Statewide and on individual counties. Statewide, furniture sales increased by 88% from 2002 to 2007, but since 2002 the number of furniture stores and the amount of furniture store sales in nearby counties have declined--sometimes significantly. Finally, we followed up on the findings of an earlier audit, which showed that about one-third of the companies or individuals assisted by several State economic development programs in 1998 were operating a business in Kansas in 2008.
Insurance Auto Salvage Auctions in Kansas: Reviewing the System for Regulating the Sale of Vehicles Acquired Through These Auctions (limited-scope audit)
Kansas has very limited oversight of salvage vehicle pools compared with four other states we contacted. In Kansas, salvage vehicle pools arenít licensed or regulatedĖthe only requirements are that they register with the Division of Vehicles, pay a one-time registration fee of $50, and have available a certificate of title (or facsimile or photocopy of the complete title) for salvage vehicles they sell. The Division has no authority to review those titles. In contrast, the four states we reviewed generally require salvage pools or their operators to be licensed, require background checks for salvage pool operators, allow state officials to request and review sales records of the pools, and limit who can purchase vehicles from the salvage auctions. Kansas could implement any of these requirements. A federal database created more than 20 years ago to help decrease title fraud, including fraud associated with salvage vehicles, still is not fully functional, and Kansas is not a participant in that system.
VIPS and CAMA: Reviewing Availability and Use of Funding Earmarked To Improve These Computer Systems (limited scope audit)
The Legislature created the VIPS/CAMA Hardware Fund and the Electronic Databases Fee Fund to provide funding for computer systems in the Department of Revenue. Originally, moneys from both funds could be spent only for specific purposes. Since 2003, the Legislature has allowed money in the funds to be used for the operation and administration of the Department of Revenue. During the past five years, more than $36 million has been deposited into these funds and $40.8 million has been spent or transferred out of the funds. Most of the money has been spent for Department salaries, telecommunications charges, consulting fees, and equipment, which are allowed by law. About $57,000 was spent during fiscal years 2001 and 2002 for travel and advertising Ė items that werenít allowable at the time. Concerns have been expressed that VIPS doesnít compute the tax due on salvage vehicles based on true market value. Changing VIPS to do that would cost about $30,000, and would reduce tax collections to counties by as much as $7 million. However, State law doesnít currently allow an adjustment for salvage vehicles.
Property Valuation in Kansas: Reviewing the Valuation of Agricultural and Commercial Properties
State law requires all real property subject to taxation to be appraised uniformly and equally as to class, and at its fair market value, except agricultural land, which is valued at ďuseĒ value. All the differences in value in our within-county comparisons of 18 pairs of commercial buildings and eight pairs of agricultural structures seemed justified. Differences in property values across counties reflect appraisersí decisions about market conditions; some seemed justified, but others were questionable. Land classified as agricultural receives a significant tax break, and getting land reclassified to agricultural is relatively easy because of Kansasí broad definition of agriculture. Tax receipts in Johnson and Butler Counties were reduced by at least $204,000 for 2004 after 64 plots of vacant land were reclassified as agricultural. Kansas may want to consider implementing a tax roll-back policy to recoup property taxes when agricultural land is reclassified. Concerns about agricultural land being purchased for recreation, yet continuing to be classified as agricultural, is an issue in southeast Kansas. But because the uses arenít mutually exclusive (that is, land purchased for hunting can be used during most of the year for growing hay or grazing cattle) itís unlikely this situation will change unless the Legislature chooses to significantly narrow the Stateís definition of agriculture.
Tax Enforcement: A K-GOAL Audit Determining Whether the Department of Revenue Is Collecting Delinquent Trust Taxes Owed The State
The Department of Revenue has a number of good practices for identifying businesses that aren't registered for trust taxes, filing timely returns, or remitting all the taxes owed. Its efforts could be strengthened by getting more cities and counties to help identify unregistered or under-remitting businesses, performing more automated cross-checking both internally and with other State agencies to find unregistered businesses, by consistently using information it collects from motor vehicle dealers to identify dealers that may not be paying all the sales tax they owe. Although most businesses voluntarily remit the trust taxes they collect on behalf of the State ($4.2 billion in fiscal year 2004), about $191 million in delinquent trust taxes was referred for collection activity that year. Collections from delinquent accounts have increased significantly in recent years, but we identified several problems with the Department's collection efforts in 40 sample cases, including delays in referring delinquent accounts into collections, lack of prompt actions to collect moneys, and lack of aggressive enforcement actions. Increasing the resources devoted to delinquent tax collection efforts would appear to be cost-effective.
Information Technology Projects: Determining Whether the Chief Information Technology Officer Has Followed All Applicable Approval and Notification Requirements (100-hour audit)
Out of frustration about computer projects taking longer and costing more than estimated, the Legislature required agencies to develop project plans and go through a formal approval and notification process before such projects can be implemented. These processes werenít followed for the Department of Revenueís streamlined sales tax project. Initially, the Department informed the CITO that the project would cost less than $250,000, which was below the threshold for the approval process. When project bids came in at more than $1 million, neither the CITO nor the Department followed the applicable procedures. The CITOís chief staff person told Department and Division of Purchases officials that the contract could be awarded without CITO approval, which would be given later. That approval was never provided. The CITO didnít report information about the project to the Joint Committee on Information Technology as soon as the projectís true size was known. In addition, several other computer projects have begun before receiving the needed approvals.
Taxation of Contractor Equipment: Determining Whether Kansasí System of Taxes and Fees Is Similar to Surrounding States
Local governments in all the states we contacted assess personal property taxes against construction equipment, but Kansas, Colorado, New Mexico, and Texas will collect property tax even if a contractor already has paid in another state. With few exceptions, Kansas and its neighboring states don't impose motor vehicle registration fees on construction equipment, primarily because such equipment isn't regularly driven on state roads or highways or the interstate highway system. All contractors have to pay oversize/overweight permit fees in Kansas and all 4 of the surrounding states we contacted, but those fees are much lower in Kansas. Kansas could generate about $1 million or more of new revenues each year by imposing some fees that other states already collect, and by increasing existing fees to bring them in line with what other states charge.
Electronic Certificates of Title: Reviewing the Effects of New Legislation (limited-scope audit)
Electronic titles have reduced the risk of title fraud, theft, and loss. However, they won't significantly reduce the number of reprinted titles as intended for several years, because there are still many paper titles with liens in circulation. The impact of electronic liens on the efficiency of title processing has been limited, but is likely to grow if more lenders enroll and use the system. Some groups reported problems with the implementation of electronic titles, but these don't represent fundamental flaws with the new systems. The problems were related to the increased complexity of some transactions, a perceived lack of information regarding these changes, and frustration with the Department's customer service.
Motor Fuel Tax Refunds: Determining Whether Adjustments Made to Refund Claims Were Handled Correctly (100-hour audit)
Of the sample of motor fuel refund claims we reviewed, 37% of the claims (21 of 57) were paid incorrectly. The amounts paid incorrectly ranged from a few cents to several hundred dollars; some taxpayers were overpaid, and others underpaid. Most errors were caused by Department staff making mistakes while trying to correct refund claims using cards with outdated tax rates. Other errors were caused by staff simply not updating the outdated rates on those cards. For 2 claims involving substantial refunds the documentation submitted by taxpayers didn't support their claim, but the Department paid the full refund anyway. This included one claim submitted by a large corporation requesting a refund of nearly $59,000 without providing any original invoices to support its claim, as required by law. We noted numerous problems with this claim and the Department's handling of it.
Taxes on Motor Vehicle Sales: Reviewing the Department of Revenueís Procedures For Ensuring That Correct Amounts of Sales and Compensating Use Taxes Are Paid
The Department of Revenue doesn't have adequate procedures in place to ensure that vehicle dealers remit all the vehicle sales taxes they collect from customers. The Department's Divisions of Taxation and Motor Vehicles aren't coordinating and using information the Department already has available. This could help identify dealers who collect but don't remit vehicle sales taxes. Although requiring dealers to submit additional information would further strengthen the Department's collections system, having county treasurersĖrather than vehicle dealersĖcollect the sales tax might be more effective and efficient. During testwork, 5 large vehicle dealers appeared to be remitting tax correctly, but 4 of 7 small dealers that Department staff suspected of problems weren't remitting all the taxes they'd collected from customers. In addition, 3 of these 4 dealers had long histories of not remitting, but the Department allowed them to continue to operate. In addition, nearly half the private sales of vehicles reviewed had reported sale prices that appeared to be significantly lower than fair market value, making it likely that the State could collect millions in additional sales taxes on these transactions. Finally, about 10% of the rebates reviewed on new vehicles purchased out-of-State weren't taxed as required. We estimate the annual tax loss on these rebates at slightly more than $200,000.
Valuing Commercial Buildings for Property Tax Purposes: Determining Whether Current Procedures Ensure Accurate Appraisals at Fair Market Value
More than one-fourth of the 32 commercial office buildings we reviewed in Johnson, Sedgwick, Shawnee, and Wyandotte Counties didn't appear to be accurately valuedĖ7 appeared to be undervalued, and 2 appeared to be overvalued. Of these 9 buildings, 6 were in Shawnee County, while each of the remaining counties had 1. When buildings appeared to be undervalued, it was generally because counties hadn't considered all the income each building produced, such as revenue from parking garages, or in considering a building's value they had used different rates for rent, expenses, vacancy, or rate of return than their own market studies suggested were appropriate. The lack of documentation in Sedgwick, Shawnee, and Wyandotte Counties' files prevents anyone from being able to know how accurate their commercial appraised values are. At the State level, the Property Valuation Division's current oversight system provides a broad, high-level review of counties' compliance with State law requiring uniform and equal appraisal of property at fair market value. Although the Division provides guidance and training, conducts annual reviews, and follows-up to see whether problems are corrected, it could strengthen its oversight by periodically reviewing a sample of individual property files and assessing whether and how well counties are applying appraisal procedures.
Corporate Income Taxes: Reviewing Factors Affecting the Recent Steep Drop in Those Tax Receipts
For fiscal year 2002, net corporate income tax receipts were $100 million below November 2001 estimates, and about $118 million below 2001 receipts. The downturn in the economy appears to have been the primary factor affecting the steep drop in corporate income tax net receipts. Other contributing factors were: a Supreme Court decision ordering the Department to refund $25 million in taxes paid, multi-state corporations apportioning less of their income to Kansas, and an increase in the number and amount of income tax credits taken. These and other factors will continue to affect net receipts in the future. Overall, there's been less scrutiny of corporate tax returns since the implementation of a new computer system in 2001. Before converting to that system, the Department elected to ease up on the review of corporate tax credits claimed on returns. Under the new system, returns receive less overall scrutiny than in the past. Recently, the Department has one fewer auditor and has averaged about 7 fewer audits than in previous years. However, the additional dollars the State has received as a result of audits has stayed fairly constant. Although Kansas does fewer field audits than comparison states, those audits generally have found a larger amount of additional taxes due.
Bingo Tax Laws: Reviewing the Department of Revenueís Implementation and Enforcement of Those Laws
Since the Bingo Act was amended in 2000, the Department of Revenue has focused its efforts on setting up new automated systems for handling bingo tax payments and information. However, no audits of distributors or cross-matching of reported bingo face purchases and sales have been done to determine whether all bingo taxes have been paid. Bingo tax revenues in Kansas continue to decline, primarily because of competition from other gaming activities and fewer people playing bingo. The steeper-than-usual drop in bingo tax receipts during fiscal year 2001 also may have been caused by the tax on call bingo being set too low when the Bingo Act was amended.
Retailer Sales Taxes: Assessing Whether the Amounts Distributed to Localities Have Been Computed Correctly
Most of the localities we looked at eventually received the correct amount of sales taxes collected while the Department was converting to its new computer system, but there were some problems. The Department initially sent out incorrect amounts to localities. It later corrected its calculations, but didn't explain its adjustments very well to local officials. Even after all the adjustments were made, at least one city appeared to have gotten about $31,000 too much. Our tests of returns the Department received in October 2000 showed that when a payment was received with a fully completed sales tax return, it was generally distributed to localities without error. However, payments that come in without a sales tax return or other needed documentation may experience long delays in getting to localities because the Department didnít systematically identify and resolve them. The $19.5 million transfer from State General and Highway Funds to several local tax funds in October 2000 was needed primarily because a glitch in the Department of Revenue's sales tax computer system caused money from utility sales tax payments to be credited to the State funds when it should have gone to the local funds. Although this glitch didn't result in any localities being underpaid, it caused a temporary shortage of money in the fund the locals are paid from. This error was scheduled to be fixed in April 2001. In the meantime, Department staff were making manual monthly adjustments to avoid the need for similar large transfers in the future.
Reviewing Various Issues Related to the Department of Revenueís Handling and Processing of Tax Returns
Many of the problems with incorrect or delayed income tax refunds in 1999 occurred because inaccurate information was entered into the Department's computer through equipment "misreads," data conversion problems, staff or taxpayer errors, etc. Other problems were caused by bugs or a lack of edits in the computer software. Also, the system lacked some important controls to prevent inappropriate refunds or adjustments. New software installed in November 1999 contains fixes for many of the problems we saw, and will bring the sales tax process on line. That process also could experience problems in 2000 because of a lack of time to adequately test the computer programs before they had to be installed to meet Y2K deadlines. On average, income tax refunds took almost five weeks to generate in 1999, about twice as long as in 1998. Contributing factors: the need to reprogram the computer to handle changes in the tax laws, and an increased amount of work to be done by fewer staff. Also, many refund checks were returned because staff didn't update taxpayers' addresses. These delays and other factors resulted in about $1.2 million in interest being paid on refunds as of September 1999, compared with an average of $560,000 for the three previous years. Further, the way the Department interprets the laws related to interest on refunds and the amounts to be paid under the food sales tax refund program may result in the State paying out millions more than it needs to. Delayed refunds, coupled with unnecessary or confusing correspondence sent to taxpayers, caused a huge volume of phone calls to the Department, most of which weren't answered. Although the telephone system has been improved, a repeat of 1999's tax-processing problems likely will cause phone problems to surface again in 2000. Finally, the Department's system of checks and controls to try to ensure that taxpayers' checks aren't accidentally shredded appears to be adequate.
Reviewing Revenues and Expenditures for the Vehicle Information Processing System and the Computer-Assisted Mass Appraisal System After Changes in State Law, Through Fiscal Year 1998
This audit was conducted by Berberich, Trahan & Co. under contract with Legislative Post Audit. It found that changes to State law in 1996 have resulted in about $7.9 million in additional revenues coming into the State during fiscal years 1997 and 1998 to help fund upgrades for the Kansas Vehicle Information Processing System and the Computer-Assisted Mass Appraisal System. This amount was about $4.2 million more than the Department of Revenue originally had estimated. About $2.9 million of these moneys was used to upgrade vehicle identification processing system computer hardware for counties with older equipment, almost exactly what the Department originally estimated would be spent on that project for fiscal years 1997 and 1998. In addition, although the Department had originally expected to spend about $1.1 million on the project for improving the computerized property appraisal system used by the counties, only about $40,000 actually has been spent. That money was used for a continuing assessment of the system's needs. Because acceptable software seems to be unavailable at this time, further expenditures on the project likely will be delayed.
Reviewing State and Federal Oversight of Sand Dredging on the Kansas River (100-hour audit)
Neither the Department of Revenue nor the Corps of Engineers takes any steps to ensure that sand-dredging companies are submitting accurate information or making correct sand royalty payments to the State. Both the Department and the Corps rely on self-reported information from sand-dredging companies, believing that companies have little incentive to under-report. Also, the Corps reviews survey data every two years to monitor what, if any, damage that dredging has done to the Kansas River. Although dredging companies' data are not verified by either agency, the companies in our sample appeared to be reporting as accurately as possible. One company was reporting and paying royalties on tons of sand sold, rather than dredged, and company officials indicated that it wasn't aware of the 1996 statute which instead requires companies to report and pay royalties for the number of tons of sand removed from the river. The fiscal impact of this misreporting, however, was minimal.
Examining the Use of Bingo Tax Revenues by State and Local Units of Government (100-hour audit)
This audit compared revenues from bingo taxes to the amount spent enforcing bingo regulations. State and local governments are required by law to spend bingo tax moneys on the enforcement of bingo regulations. We found that, although the Department of Revenue spends all the moneys it receives from bingo taxes, those moneys arenít spent specifically on bingo enforcement. Further, officials of 9 of the 10 local governments we contacted told us that even though they received bingo tax revenues, they didnít do any bingo regulation enforcement. Officials of the tenth locality we contacted told us that localityís police department did some bingo regulation enforcement as part of its regular duties, but they couldnít estimate the cost of that enforcement. For the most part, then, bingo revenues arenít being spent as required by law.
Reviewing the Regulatory Activities of the Division of Alcoholic Beverage Control
To accommodate other responsibilities Department officials have assigned to them, ABC agents are spending less than half the time they spent five years ago enforcing the Stateís liquor laws. With fewer resources available for liquor enforcement, Division officials have tried to focus on catching sales of liquor to minors, which means some administrative requirements of the Liquor Control Act arenít being as vigorously enforced. In addition, for safety and liability reasons the Division has told its agents to stop pursuing vehicles transporting open containers of alcohol. Because a high percentage of liquor establishments still appear to be selling to minors, additional enforcement efforts should be taken to catch violators. In addition, serious efforts need to be made to improve the system for imposing and tracking fines and penalties. Enforcement agents in Kansas come into the job with fewer qualifications than people doing similar work in other states. Even though the Department tries to make up for this by providing appropriate training, some agents told us they thought they needed more. The Division followed applicable personnel laws and regulations when it hired and promoted staff. However, we couldnít tell whether employee reallocations met all guidelines because these actions generally werenít well documented. Finally, no one can tell whether the State is receiving all the bingo tax revenue thatís due because the Department doesnít require bingo licensees to keep the necessary information to make that determination.
Reviewing the Vehicle Information Processing System and the Computer-Assisted Mass Appraisal System after Changes in State Law
This audit, conducted by Berberich, Trahan & Co. under contract with Legislative Post Audit, found that during fiscal year 1997 revenues of the VIPS/CAMA Technology Hardware Fund totaled about $1.3 million, and revenues of the Electronic Databases Fee Fund totaled about $2.7 million. Both amounts exceeded the original revenue estimates of the Department of Revenue. During that same fiscal year, expenditures of about $380,000 from the Technology Hardware Fund mainly funded computer hardware upgrades for counties with older equipment. Expenditures from the Databases Fee Fund totalled only about $15,000, mainly to assess needs and develop specifications, because the Department found that acceptable software doesnít seem to be available at this time.
Reviewing the Distribution of Sales and Transient Guest Taxes to Cities and Counties (100-hour audit)
The Department of Revenue is responsible for collecting and distributing local sales and transient guest taxes to cities and counties that have imposed those taxes. Legislative concerns had been raised that the Department might be distributing one local governmentís taxes to another local government. Our reviews showed that the Department is distributing those taxes accurately and on a timely basis. We saw one instance where taxes were distributed to the wrong local government because a retailer moved one of its retail stores from one jurisdiction to another without informing the Department of Revenue. However, the Department already had discovered that error and corrected it.
Reviewing the Progress of the Department of Revenueís Project 2000
The audit found that the Department of Revenue generally has established good management practices for carrying out Project 2000. We raised a concern about the lack of a full-time project director. We also found two areas where the Departmentís practices could work more effectively--testing of products and communication within the Project. Problems in both these areas contributed to the Departmentís long delays in getting out tax refund checks while implementing the first major computer system of the Project. American Management Systems will be paid up to $49.9 million for their work on the Project, and the Department expects to take in a total of $225 million by 2002 in additional revenues as a result of the Project. We found that the Department has established a reasonable method for determining the amount of additional tax revenue itís receiving because of Project 2000. To fund the Project, AMS and the Department developed several initiatives that do such things as improve the productivity of the Departmentís existing collections system, and identify people who shouldíve paid taxes but hadnít done so. Through May 1997, these initiatives had resulted in $17.6 million in increased collections. AMS has until 2002 to collect its full fee. We found that the Department was taking reasonable steps to ensure that the amount of additional taxes collected and credited to the Project were accurate.
Reviewing the Methodology Used in Conducting & Analyzing the Stateís Sales-Ratio Study
The methodology the Division uses in conducting the ratio study is reasonable. It generally is consistent with professional appraisal guidelines and standards, although the Division has adopted a more lenient standard for assessing the uniformity of residential sales. The Division is operating under a court order to ensure that real property appraisal in Kansas complies with the State Constitution. The court order requires a way of determining compliance thatís different from the Divisionís normal methodology. As a result, itís likely different counties will be found in compliance under each method. The Divisionís policies for including and excluding properties from the ratio study closely follow professional standards. Division staff did a good job of following those policies, and of responding in an equitable manner to informal appeals filed by county appraisers.
Reviewing the Vehicle Information Processing System and the Computer-Assisted Mass Appraisal System after Changes in State Law
The 1996 Legislature earmarked certain funds for improving the Stateís Vehicle Information Processing and Computer-Assisted Mass Appraisal Systems. In general, those funds arise from certificate of title fees and fees from the sale of public records. During the first three months of fiscal year 1997, the Department of Revenue collected $278,454 for upgrading the Systemsí hardware and $315,865 for operation, maintenance, and improvement of these and the Departmentís other electronic data base systems. These amounts are reasonably close to estimates provided to the 1996 Legislature. During the first three months of fiscal year 1997, the Department spent about $8,900 to begin hardware procurement for upgrading the Vehicle Information Processing System.
Reviewing Sales Tax Enforcement and Collection Efforts at the Department of Revenue: A K-GOAL Audit
Based on comparisons with other states, the Division of Collections doesnít appear to be very cost-efficient or effective. Further, the Division doesnít routinely produce and review the basic management information it needs to track its effectiveness and efficiency. Our review of a sample of delinquent sales tax accounts identified several problems with collection activities, including inconsistency and lack of timeliness. The Departmentís Audit Bureau appears to be a cost-efficient part of its collection efforts; during fiscal year 1996, the Bureauís auditors assessed additional taxes due of about $24, and collected $12, for every dollar the Bureau spent. The current approach for handling sales tax exemptions--which makes the seller responsible for determining whether a particular sale is exempt from sales tax--is the same approach used in most other states. Parts of the sales tax law are difficult to interpret, which can result in inconsistent treatment of taxpayers. The Department could adopt additional administrative regulations to interpret the law, but Department officials contend it would be better for the law to be changed.
Reviewing the Department of Revenueís Mail-Opening and Cash-Depositing Procedures
In fiscal year 1995, the Department of Revenue collected $4.1 billion in taxes and fees. Some of those moneys were deposited electronically, but most arrived in the mail and were processed by hand. Although the Department generally deposits tax revenues in a timely manner, we found that during the 1995 income tax season, it lost nearly $200,000 in interest income because of delays of up to 22 days in depositing checks from taxpayers. Department officials told us that as part of the Kansas Tax 2000 project, they expect to purchase equipment to automate the mail-handling and check-depositing functions, which should significantly reduce the delays. They expect to have this equipment in place for the 1997 income tax season.
Use of Alcoholic Liquor Fund Moneys By Local Units of Government
In 1994, the 10 localities we visited spent about 85% of their Special Alcohol and Drug Program Fund moneys for programs that complied with the law. Another 11% of the moneys were used to pay for items that in our opinion did not comply with the law. Those expenses included prosecutorsí salaries, police vehicles, and administrative costs. For the remaining 4% of the moneys, the municipalities did not have sufficient documentation for us to determine whether the expenditures complied with the law. Although two counties made slight errors in distributing tax revenues from the State to their Special Alcohol and Drug Program Funds, localities generally have established reasonable procedures to ensure that the moneys awarded to outside agencies are spent according to the law.
Reviewing the Department of Revenueís Enforcement of Kansas Motor Fuels Tax
The Department of Revenueís procedures do not ensure that all motor fuels taxes due the State are paid. The Department also is not enforcing statutory reporting requirements for transporters of motor fuels, and cannot uncover fraud with the information and reports currently received from taxpayers and other involved parties. Staff resources committed to auditing and investigating compliance with motor fuels tax laws are not adequate to meet the statutory mandates placed on the department. The Highway Patrol and the Board of Agriculture provide periodic assistance in enforcing motor fuels tax laws, but these resources are not available to the Department on a consistent basis. The Department could improve its tax collection procedures by adopting some of the methods used by the federal government or other states.
Reviewing the Computer-Assisted Mass Appraisal System
The audit shows that the original CAMA software and hardware cost nearly $5 million. Since 1988, the State has spent about $850,000 on CAMA software enhancements. In addition, the State and counties have spent more than $600,000 on hardware improvements. The CAMA System is capable of generating the sophisticated mathematical analyses necessary to value properties annually. The vast majority of county appraisers think the CAMA System generally works well, but could be improved. The types of problems county appraisers identified with the CAMA software and hardware do not appear to prevent the computer from producing good values, but they do make the System harder for some county appraisers to use. However, a number of information-related problems appear to be hindering the effectiveness of the CAMA System. Those include problems related to the valuation of both commercial and residential properties, appraisersí education and training, and communication. The Department of Revenue has assembled a task force to evaluate the current Kansas CAMA System and make recommendations regarding its future.
Reviewing Selected Issues Regarding Uniform and Equal Appraisal of Property in Kansas
The plan the Division of Property Valuation submitted to the District Court to correct problems with property valuation in Kansas addressed many of the problems which led to unequal property valuation, but was not very specific about how the Division intended to implement the solutions. In addition, some of the Division's proposed actions appeared overly ambitious based on what its staff has been able to accomplish in the past. The Division's plan either did not address, or did not go far enough, to ensure that State and county staff receive needed training, that methods for measuring compliance with the law identify all counties that have non-uniform valuations, that appraisal directives do not allow non-uniform valuation, and that Division policies do not impose unnecessary burdens on the counties that cause them to use their staff inefficiently. In addition, the Legislature will need to consider amending several laws to close loopholes and to relieve some of the burdens placed on county officials.
Reviewing Staffing in the Division of Property Valuation (100-hour audit)
The Division currently employs 73 people, two-thirds of whom are classified as property appraisers. In both 1988 and 1992, nearly all employees met the minimum qualifications for their jobs. Because of a position reallocation, the one employee who did not meet minimum qualifications in 1992 was not required to do so. Most of the Division's staff provide technical assistance and support to counties, but some staff are responsible for determining values for motor carriers and utilities. In Cherokee County, as in other counties, the Division's staff provides supervision of the reappraisal effort, but is not responsible for determining countywide property values.
Reviewing Potential Overlap in State Agenciesí Responsibilities for Protecting Groundwater and Regulating Transportation
The Corporation Commission and the Department of Health and Environment do not duplicate each other's efforts on the same pollution problems, but inefficiencies and confusion result from having two agencies involved. Because each agency follows essentially the same steps to ensure that pollution is cleaned up, there is no benefit to the State from having both involved. Other oil- and gas-producing states have placed pollution clean up from oil and gas with one agency. Having several agencies involved with motor carrier regulation also has not resulted in significant overlap in agency responsibilities. However, motor carriers would be better served, and the State could potentially reduce some administrative inefficiencies, if there were a greater degree of coordination in the regulatory system. Although there are no easy solutions to the inherent conflict regulatory agencies face in balancing the interests of the public and the regulated industry, restrictions on staff involvement with a regulated industry could help improve staff independence. Other oil-producing states generally have not enacted such restriction on their staffs.
Pasture and rangeland were appraised based on the ability of the land to support livestock. This is a use-value method of appraisal. The appraisal processes used by the counties we visited were fairly uniform, but adverse land conditions that could limit the usefulness and value of the land were not always taken into account. In addition, Reno County had a large number of problems resulting from incorrectly classified soil. On average, for the parcels of land we reviewed, valuation of pasture and rangeland decreased as a result of reappraisal. In addition, for another sample of parcels of land reviewed, it appeared that valuations based on use-value were actually lower than if rental rates alone had been used.
Results of the Stateís Program for Reducing Interest Rates on Agricultural Loans
The interest reduction tax credit program has or will cost the State about $859,800. This includes $170, 500 in foregone tax revenues for 1988 and $689,300 in foregone tax revenues for 1989 and beyond. The credit was claimed by 68 banks in 1988 for at least 669 loans. Most farmers who received reduced-rate loans under the program were experiencing financial difficulties. While most of these farmers were able to make the required payments on their reduced-rate loans, the rate reduction was often only one of several steps taken to help restructure debt and increase cash flow. Many bank officials indicated that they would have reduced the interest rates on certain loans even without the tax credit program.
Department of Revenueís Delinquent Tax Collection Process
In the fall of 1988, taxpayers owed the State approximately $71 million in delinquent sales, withholding, and individual income taxes. At that time, the Department of Revenueís Division of Collections had established uniform collection procedures for those delinquent accounts; these procedures were more consistent and aggressive than actions used before the Division was created in November 1987. Because a proposed automated collection system will not be completed until fiscal year 1990, we could not determine how that system will further enhance the Divisionís collection procedures.
The revenues the Department of Revenue reported for the stations in its cost-revenue analysis were accurate. The reported salaries and other operating expenses were estimates that were generally overstated in fiscal years 1984-1986, and understated in fiscal years 1987-1988. The Stateís charges for permits do not vary, but the amount motor carriers pay for those permits when ordered from wire service companies or delivered to truck stops may differ greatly. However, there is no indication that those differing charges constitute unequal treatment.
Reviewing the Department of Revenueís New Computer Systems
The Department of Revenueís new computer systems for property reappraisal and vehicle processing appear to be achieving their projected benefits. The property reappraisal system was implemented on schedule, but the vehicle processing system took about a year longer to develop than anticipated. Both systems cost more than originally planned, largely because of subsequent changes or enhancements. The vehicle processing system has resulted in some operating efficiencies in the areas of staffing, paperwork backlogs, and equipment.
Kansans may be registering their vehicles out of State because property taxes are higher in Kansas than in the surrounding states. Officials from most of the 20 counties surveyed did not think out-of-State registration was a significant problem. However, Wyandotte Countyís enforcement program collects about $1 million annually, and Johnson and Sedgwick Counties are considering enforcement programs. The auditors could not determine the extent of out-of-State registrations because county officials generally could not estimate how many Kansans are registering vehicles in other states.
Problems Implementing the Kansas Business Integrated Tax System (K-BITS)
Because of numerous problems that have plagued the systemís development, the Department of Revenue cannot estimate when it will be complete or which taxes will eventually be covered. Adequate resources, continuity in personnel, and long-range planning that includes accurate cost and time estimates and provisions for a full-time project manager are needed if the system is to be completed.
Tax Incentives or Reductions Available to Kansas Businesses
The audit provides an inventory of major taxes levied on businesses in Kansas and summarizes statutory exemptions, exclusions, deductions, and other provisions that can allow businesses to reduce their taxes. When available, an estimate of the fiscal impact of each of the statutory provisions is provided.
Licensing Kansas Drivers with Medical Disabilities
The Division of Vehicles is generally following its established policies and procedures for licensing drivers with medical impairments. These procedures are more stringent than those of other states contacted. Some license applicants expressed dissatisfaction with Division procedures. The Division could minimize such complaints by explaining it policies and procedures more clearly.
Most of the audited localitiesí expenditures for alcohol and drug abuse programs complied with State law. A few used liquor tax funds to pay administrative costs, which is not specifically allowed by law. Others funded such activities as teenage hotlines and domestic violence programs, which did not have substance abuse as their primary concern. Statutory changes made in 1986 may prohibit such expenditures in the future.
Only one company has qualified to bid on the sheeting specified by the Department of Revenue to reflectorize license plates, but Kansas officials were unaware of a firm that successfully competed in another state. In 1986 Kansas also began packaging all bids for license plate sheeting, stickers, and decal, which effectively eliminated competition for the stickers and decals. For highway signs, the Department of Transportation has adopted a policy of using a more expensive high-intensity sheeting on certain signs and in construction work zones for visibility, durability, and safety reasons. However, that policy was based on a limited evaluation of the cost and useful life of the materials.
Improving Collections on Closed Sales Tax Accounts
Retailers who have gone out of business without remitting all the sales taxes they collected may owe the State up to $11.5 million. The Department of Revenueís procedures for collecting these delinquent sales taxes are generally ineffective. In many instances, the Department could increase the amounts collected by more strictly enforcing current laws and regulations. To maximize collections, the audit recommends more aggresive enforcement of current State law, as well as changes in law and administrative practices.
Inventory of Computer Equipment: Department of Revenue
Nearly all of the Departmentís computer equipment is leased, much of it directly from the Division of Information Systems and Communications. Major ongoing costs are for salaries and wages and data processing services. The Department submits an annual inventory of computer equipment to the Division. That inventory was quite accurate.
Although the asessment /sales ratio study prepared by the Division of Property Valuation is generally accurate, improvements can be made in several areas. A review of 1,500 parcels of property in three counties disclosed only one parcel that was incorrectly listed on the tax rolls. Unreported improvements to real property may be a more significant problem; on-site visits to 225 properties showed a number of discrepancies with county records.
Vehicle Rental Agencies: Reviewing Compliance with Vehicle Registration and Insurance Laws
Not all vehicle rental companies operating on an interstate basis are registering the required number of vehicles in Kansas or paying the appropriate amount of property taxes. In addition, uninsured rental vehicles registered in other states could be operating on Kansas highways. Ensuring that all rental companies register some of their vehicles in Kansas, which subjects them to Kansasí insurance verfication, procedures at registration time, appears to be the best control over this system.
Misuse of Dealer License Plates By Kansas Vehicle Dealers
Clear cases of dealer plate abuse were found by auditors in a review of about 100 car dealerships. Changes that might help curb such abuse include tighter guidelines for issuing plates and more frequent inspections and follow-ups.
Department of Revenue: Driver Control Regulatory Program
The audit shows that a number of administrative practices and procedures prevent the Bureau from identifying and disciplining many ďrepeat offenders.Ē These are drivers who could have their licenses suspended under current law for committing three or more traffic violations within one year.When disciplinary actions are taken, their effectivenss is limited. Some problems are outside the Bureauís control. For example, many drivers simply ignore their license restrictions, and police officers who catch them driving and violating traffic laws during that time seldom charge these drivers with violating their license restrictions as well. The Bureau appears to have the statutory authority to administratively extend these driversí license suspensions or revocations, but it has never used this authority.The audit found that the Bureauís lax monitoring and enforcement efforts for drivers who are placed on probation or required to attend driving clinics has undermined the effectiveness of those remedial actions.
Department of Revenue: Dealer Licensing Regulatory Program
This report concludes there is no need for the Dealer Licensing Bureau to continue regulating the sale of vehicles in Kansas because its regulatory efforts do little to safeguard the public from harm. The Bureauís activities are primarily administrative. It handles only those complaints dealing with administrtion matters like misuse of dealer tags.The Bureauís regulation also cannot help ensure dealers are more competent or qualified because there are no training, education, or experience requirements for licensure. Other aspects of the regulatory program that either act to benefit the industry or donít serve to protect the public include licensing vehicle salesmen and regulating dealer-manufacturer relationships.
Department of Revenue: Division of Alcoholic Beverage Control
This sunset audit examined the Stateís regulatory program, which is administered by the Division of Alcoholic Beverage Control. The audit found that Kansasí program is one of the most restrictive in the country, primarily because of statutes and regulations that restrict business operations. These include strict residency requirements, prohibitions against advertising, restrictions on deliveries, sales, and credit practices, and minimum retail mark-ups of alcoholic beverage prices.The audit also examined the collection and enforcement of the liquor excise tax. Based on a review of the Divisionís method of estimating taxes owed, the auditors concluded recent estimates appear to have been overstated. Further, initial audits of private clubs conducted by Department of Revenue auditors show some taxable liquor sales are not being reported.
This audit focused on the administration and enforcement of sales and withholding taxes, which accounted for more than half of the approximately $1.35 billion in gross revenues administered by the Division in 1981. The Divisionís effectiveness in administering these taxes was examined in three areas: identifying and registering firms that are required to remit taxes, managing their accounts and periodically updating their filing cycles to ensure that returns are filed according to the schedules called for in the law, and following up and applying penalties on firms not remitting taxes or not filing timely and accurate returns.The audit concludes that improvements are needed in all three areas and makes a number of recommendations. Most call for using resources or laws already available to improve or strengthen management practices, to comply with current laws, and to carry out functions on a more timely basis.
Assessing the Effectiveness of the Kansas Motor Carrier Inspection System
The audit found that the number of permits issued to trucks using State highways had dropped sharply, cutting into anticipated revenues. If permit sales during the last six months of 1977 had been at the same level as sales during the same period a year earlier, receipts would have been about $1.9 million instead of the $1.6 million actually collected. However, the largest single reason for the decline may have been that motor carriers were purchasing partial (prorated) registrations instead of temporary operating permits. The partial registrations cost less, and sales are not counted as revenues from permits. Also, of the trucks sampled, 7.8 percent lacked one or more of the necessary permits. The State may be losing as much as $3.1 million a year in revenue because trucks are operating without permits in the State. The audit recommended several improvements in the inspection system.