The cash-pinched District of Columbia government has decided to eliminate a long-standing policy that automatically allows about 400 businesses a 10-day, penalty-free grace period to pay sales taxes to the city.
The policy costs the city about $2 million a month in money that could be invested overnight and earn interest income.
Carolyn L. Smith, director of the city's department of finance and revenue, said that the money could earn more than $75,000 a year in interest if it were deposited in short-term investments of up to 10 days.
The money ordinarily would come into the city at a time each month when it faces some of its steepest bills.
"Every month, the city is financing that money for them. They're able to use it and we're giving it to them free of charge," Smith said yesterday. "I don't mind granting the (10-day) extension if there's some quid pro quo for the city. But they just invest the money. The city is not getting the benefit of that."
Changing the policy to eliminate automatic 10-day extensions is one of several efforts under way by the District of Columbia government to avoid cash-flow problems that have caused delays in the payment of some city bills and contributed to a potential budget gap of $172.4 million.
Earlier this month, D.C. officials asked the U.S. Treasury to send a $17.1 million installment on the federal payment two weeks early. Without the speeded-up payment, city officials said, there could be a $15 million budget deficit at the end of this month.
Among the larger firms usually paying later in the month is the Washington Gas Light Co., which charges 5 percent sales tax on bills sent to customers in the District of Columbia. In February, WGL paid about $650,000 in sales taxes to the city, according to a company spokesman.
The spokesman said the company has complied with the city's request for the past few months and will do so in the future. "It is not that complicated a procedure," the spokesman said. "If it will help them out, it's not much of a problem."
Earlier this week, Smith told the City Council of plans to hire more workers, employ a private collection agency, and work longer hours in a stepped-up campaign to crack down on thousands of businesses and individuals who owe the city a total of about $23 million in taxes.
Smith said she hopes to collect at least $6 million of that money by Sept. 30, the end of the current fiscal year. If those collections should fall short of if not enough of the money regularly due during the year is collected, Barry's plans to fill the budget gap could fail.
Smith said yesterday that the $2 million usually paid during the grace period is part of $15.5 million in sales taxes collected each month. The businesses that make the late payments are not among the delinquents, she said.
Instead of paying taxes from the previous month on the 20th of the next month, these businesses pay on the 30th, Smith said. Many have followed that practice for years, she said, with the city's concurrence.
The city's new policy, to be outlined next week in a letter to about 19,000 firms that collect sales tax, will be to cancel all previous automatic extensions and consider each request individually, Smith said.
Smith said about 400 firms -- both large and small -- currently have automatic 10-day extensions.
Among the bills the city must pay on either the 30th or the first day of each month are about $12 million in welfare benefits, $10 million to pensioners and $3 million for teachers' salaries. The city also pays out about $14 million every two weeks in salaries for other city employes, according to City Controller Al Hill.
Managing money to avoid cash flow problems has become more important for the city in the last two years, city officials contend, because District of Columbia government checks are now drawn on private banks rather than the U.S. Treasury, which, they say, had a more liberal policy on overdrafts.