Home  |  Weather  |  Advertising  |  Classifieds  |  Subscription  |  Contact Us  |  About Us  |  Archives
Home|Weather|Advertising|Classifieds|Subscription|Contact Us|About Us|Archives

link exchange; in-house ad

Saturday, April 19, 2014

A CLOSER LOOK AT PROCUREMENT PRACTICES
Gray area in procurement rules seeks clear answers
Can off-island contractors do business in the CNMI without a CNMI business license?

Endeavour Inspection Services LLC has bagged three contracts from the Commonwealth Utilities Corp. totaling over $300,000 since 2011 but the Guam-based firm has never been required to obtain a CNMI business license and therefore has not been subjected to local taxation. Because the government does not have readily available data as to the total number of current and past off-island based contractors without valid business licenses, government officials and businesses say the CNMI government may have been losing out on much needed taxes for years and decades.

Procurement and Supply director Herman Sablan said yesterday that “a business license is required only after a contract is executed—signed by all parties including the contractor.”

But Sablan pointed out that CUC handles its own procurement regulations.

A CNMI general business license fee is $50. That has not changed in at least 31 years while the costs associated with processing business licenses have increased.

In the case of Endeavour Inspection Services, it has bagged three contracts from CUC without being required to obtain a business license.

CUC is a government entity tasked with the operation and maintenance of the islands’ power, water and wastewater facilities.

Pam Halstead of the CNMI Business License Office in Dandan confirmed that no business under that name has applied for or obtained a business license since at least 2011.

CUC executive director Alan Fletcher said CUC believes it “may do business with entities that are not required to have business licenses.”

However, in order to be sure of its position, CUC submitted a request for a declaratory ruling from the Department of Finance’s Division of Revenue and Taxation on this very question in May 2013.

Fletcher, as petitioner, requests a declaratory ruling from Revenue and Taxation that off-island unlicensed vendors that sell materials to residents of the CNMI are not subject to the CNMI’s business gross revenue tax.

The petitioner also requests further declaratory rulings on this issue when the sale involves only services and when the sale involves both services and materials.

“Because the outcome of this petition impacts several impending contracts, petitioner requests a declaratory ruling within 30 days of the date of this submission,” Fletcher said in his May 20, 2013, request. He has yet to hear from Revenue and Taxation.

Several pending government contracts could be impacted by the outcome of this request for declaratory ruling from Revenue and Taxation.

Finance Secretary Larrisa Larson separately said yesterday she has referred media questions on the matter to an attorney and would need more time to respond.

Central questions

CUC’s Fletcher posed three questions to Revenue and Taxation for declaratory ruling.

First, whether an off-island vendor who sells only materials to an entity (or person) in the Commonwealth can lawfully be assessed a business gross revenue tax on the sale of such materials.

Second, whether an off-island vendor who sells only services to an entity (or person) in the Commonwealth can lawfully be assessed a business gross revenue tax on the sale of such services.

Third, whether an off-island vendor who sells both materials and services to an entity (or person) in the Commonwealth can be lawfully assessed a business gross revenue tax on the sale of such materials and services.

In response to Saipan Tribune questions, Fletcher said that CUC is in the business of providing reliable power, water, and wastewater services for the CNMI.

He said CUC does not have the means to ensure business licensing, tax collection, or compliance with all CNMI laws for the hundreds of contractors and vendors CUC does business with each year.

“This is the job of the Division of Taxation and Revenue, and this is why we submitted our petition for a ruling concerning the application of CNMI business license laws and regulations. As our request shows, CUC continues to be committed to staying in compliance with CNMI law,” he said.

‘Unlawful’

Fletcher as the petitioner asserts that assessment of CNMI business gross revenue tax on off-island unlicensed vendors is “unlawful.”

The CNMI Code states in part, “There is imposed on every person a [monthly] tax on the person’s gross revenue.” This is based on 4 CMC 1301 as amended by Public Law 17-30 signed in 2011.

“Gross revenue” is defined as the “gross receipts of a business derived from trade, business, commerce, or sales or similar income derived from a ‘person’ in the Commonwealth and received by a ‘resident’ in the course of carrying on a ‘business.’”

Fletcher said that because any income from an off-island unlicensed vendor’s sale to petitioner [CUC] was not derived from a regular and continuous business activity transaction conducted by a “person in the Commonwealth,” the “off-island” unlicensed vendor cannot be assessed the CNMI’s business gross revenue tax.

He said assessment of CNMI’s business gross revenue tax on an off-island vendor violates the U.S. Constitution, and cited McGoldrick v. Berwind-White Coal Mining Co., on holding state taxation that tends to place interstate commerce at a disadvantage as compared to intrastate commerce, its unconstitutional regulatory effect on commerce between states, and noting the same for commerce with foreign nations.

Department of Public Works Secretary Martin Sablan, in a separate interview, said he does not know of any current DPW contractor, whether from on island or off-island, that does not have a CNMI business license.

“I believe all of our contractors have a business license. That’s the only way they will be required to pay taxes in the CNMI,” he said.

‘Causing confusion’

CUC’s chief legal counsel, James S. Sirok, said in a May 20 letter to acting director of Revenue and Taxation Maria White that CUC feels that when an off-island vendor intermittently contracts to sell supplies to CUC, that vendor is not required under CNMI law to acquire a business license because the intermittent sales activity does not fall within the ambit of the term “regular and continuous activity.”

However, he said, should the Department of Finance determine that this certain class of off-island vendors engages in “business” in the CNMI, then such determination would require this class of off-island vendors to possess a CNMI business license prior to the award of a CUC contract for the purchase of products or services.

“For those vendor activities that are not regular and continuous, CUC feels that a BGR tax should not be imposed on the proceeds derived from such activities. However, whether or not the CNMI Department of Finance is of the same conclusion is unclear,” Sirok told White.

The fact that CUC has not been able to provide procurement registrants and proposers a clear answer to this question has caused confusion and delay in CUC’s procurement proposal and award process, Sirok added.

“It has also caused confusion on vendor invoices and payments made by CUC for those invoices,” he said.

Sirok’s letter accompanied Fletcher’s request for a declaratory ruling on the issue.

Endeavour contracts

Based on data obtained through an Open Government Act request, CUC awarded a $17,291.67 contract to Endeavour in 2011 to inspect and test the integrity of an aboveground storage tank and pipeline on Rota.

A few months later, CUC again awarded a $140,700 contract to Endeavour Inspection Services as construction manager for the replacement of an 8-inch petroleum pipeline for CUC’s power plants 1 and 2.

A change order on the contract changed the contract amount from $140,700 to $103,472.

In late 2012, CUC awarded a third contract to Endeavour Services. The contract says the minimum chargeable project cost is $245,000.

This contract, however, has not been completed.

Fletcher, in response to Saipan Tribune questions about its contract with Endeavour Services, said, “CUC does its best to ensure that contractors follow all requirements of CNMI law.”

“To do this, we specify particular responsibilities of our contractors in our contracts, including taxes, labor, immigration, and other local laws, rules, and regulations. We believe, however, that CUC may do business with entities that are not required to have business licenses,” Fletcher said.

The Office of the Public Auditor is also looking into CUC’s contracts with Endeavour Inspection Services, Saipan Tribune sources said.

‘Sour graping’

Mark Matthys, chief operating officer of Endeavour Inspection Services, said Endeavour has been reviewing the matter as well.

Matthys said that Endeavour Inspection Services is “considering” applying for a CNMI business license, although it believes it is not required to do so.

In a phone interview, Matthys said Endeavour Services has not been subjected to this criticism in the past and believes that the issue was fueled by another contractor in the CNMI.

“I see this as sour graping by another contractor in the CNMI. But that is being considered now—applying for a business license,” he added.

He believes there are a number of off-island contractors that also do not have a CNMI business license.

Rep. Lorenzo Deleon Guerrero (Ind-Saipan), chairman of the House Committee on Public Utilities, Transportation and Communications, separately said he is considering introducing a bill requiring all on-island and off-island companies that obtain a contract from any CNMI entity to apply for and obtain a business license here so they can pay their taxes.

But Deleon Guerrero said this needs consultation with relevant agencies such as Finance’s Revenue and Taxation.

Back to top Email This Story Print This Story

 

Home | Weather | Advertising | Classifieds | Subscription | Contact Us | About Us | Archives
©2006 Saipan Tribune. All Rights Reserved

MORE Local