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Home / Washington Business - November/December 2003 / Municipal Tax Fairness Finally Comes to Washington |
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Municipal Tax Fairness Finally Comes to Washington |
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Written On: November/December 2003 |
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Written By: By Shawn Sullivan |
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After a six year struggle, AWB and Washington’s business community have won a great victory. Thanks to HB 2030, municipal tax fairness is now the law in Washington.
Sponsored by Rep. Lynn Kessler (D-Hoquaim) and Rep. Jean Berkey (D-Everett), HB 2030 ends multiple business and occupation (B&O) taxation and requires cities to report the amount of taxes they receive annually. The bill was signed by Gov. Gary Locke in April.
“Businesses were being charged on one-hundred percent of their sales, even when they were located primarily in a city that didn’t charge a B&O tax,” Kessler recalled. “This didn’t strike me as being fair. The cities who charged B&O taxes needed uniformity in the language, and working with the Governor and the Senate this year, we passed HB 2030 and now businesses will be able to understand what is going on by 2008.”
“Small businesses are dealing with the same problems as big businesses,” Berkey stated. “It was time for us to change the old law. Businesses need to spend more time on productivity and growth, and less time trying to figure out the tax laws.”
AWB’s Vice President of Governmental Affairs Gary Chandler and lobbyist Tom Dooley also spoke of the importance of HB 2030.
“We looked at it as a fairness bill to stop our members from being double taxed,” Chandler said. “AWB almost passed this bill last year, but it had to undergo several changes to satisfy the cities.”
Chandler said AWB worked diligently with the cities and the state in order to come up with a bill to satisfy both businesses and municipalities.
Dooley is concerned about cities’ interpretation of the new law, especially in view of their failure to work with AWB and the Department of Revenue on this issue.
“Cities are taking a ‘we don’t have to change anything until 2004’ stance on municipal tax fairness,” Dooley stated.
In 1982, Washington allowed cities to impose a B&O tax on all companies conducting business within their city limits. Thirty-seven cities currently implement B&O taxes without any deduction for the cost of doing business. The Legislature attempted to limit city B&O taxes to a maximum rate of 0.2 percent, but higher rates were allowed if approved by voters. Two cities were allowed to tax a business on 100 percent of a transaction concurrently.
Under this law, municipalities that established a B&O tax would have to determine if a nexus existed before a business could be taxed. A nexus was interpreted to mean a business only had some physical presence, or that some of the business’ activity occurred within the city. Cities argued that physical presence was established by the rental of office space, signing of a contract or loading of items from a warehouse within the city limits, even if the sale originated or was consummated outside the city.
Businesses challenged the cities’ arguments in court with little success. Washington’s courts consistently upheld cities’ broad interpretations of nexus with the rationale for imposing taxes.
Snohomish’s Shinoda Floral Company was one of many businesses hit hard by Washington’s multiple municipal taxes.
A small firm, Shinoda Floral does most of its business in Snohomish County, but occasionally makes deliveries to other locations. A simple delivery to Tacoma, in December 2002, set the company on a collision course with the city’s tax laws.
“Tacoma had an agent who used binoculars to read the signs on trucks to see if they were conducting business in the city,” according to Kessler.
Within days after the tax officer spotted a Shinoda Floral truck parked on a street in Tacoma, Paul Shinoda, the firm’s owner, received a letter from the City of Tacoma. The letter insisted Shinoda was responsible for Tacoma’s B&O taxes, even though his company is exempt from state B&O taxes.
“They wanted ten years of back sales information, and told me I was supposed to pay a B&O tax on all of my gross sales,” Shinoda recalled. “We are an ornamental agricultural company and exempt from paying the state B&O taxes. The taxes we are exempt from at the state level should be the same at the city level.”
Although Shinoda completes less than $2,000 in sales in Tacoma annually, the city wanted to charge him for every item sold in the state, not just in the city.
“I don’t mind paying my taxes, but I want to be taxed fairly,” Shinoda stated.
Ironically, the cities that are charging B&O taxes have made themselves less competitive in attracting businesses. Kessler noted that many businesses have located outside the 37 cities that charge B&O taxes.
Generally, cities with B&O taxes have not permitted businesses to apportion their income for taxation purposes. With apportionment, a business is allowed to divide its taxable income among the municipalities in which it does business. As a result, it has not been uncommon for companies to be taxed in cities where they had not conducted business. Thanks to the new law, cities can now only tax the percentage of business actually performed within the city.
The new law greatly simplifies municipal taxation. In contrast to the cumbersome old system, the new rules are clear and sensible. For example, if a company does 30 percent of its business in Seattle, 20 percent in Renton and 50 percent in Tacoma, that company will pay 30 percent to Seattle, 20 percent to Renton and 50 percent to Tacoma.
The new law also prohibits cities from taxing businesses that do less that $20,000 in business in the related city. Companies who perform a limited amount of sales in a given city will be allowed to continue operating without severe penalties.
Overall, Washington’s cities stand to lose approximately $26 million each year as a result of the new law. In the long run, however, gains from attracting new businesses are likely to offset any losses from the new law.
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