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Home / Washington Business - September/October 2003 / Tax & Fiscal Issues 2003 |
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Tax & Fiscal Issues 2003 |
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Written On: September/October |
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SUMMARY
Without a doubt, the biggest issue facing the business community during the 2003 session was the state’s $23 billion operating budget. AWB entered the 2003 session braced for the impact of a projected $2.4 billion shortfall in the state’s general fund.
The shortfall came, in large part, because of the reverberating economic impacts of the September 11 attacks and the resulting increased demands on government services. AWB and the rest of the business community joined together in solid unity to prevent a rerun of the 1993 legislative session which produced massive business tax increases to balance the books. AWB’s theme of "live within your means" and calls for prioritization resonated through the halls of the Legislature from the opening gavel to the last days of the second special session.
Gov. Locke set the tone early by sending a "nonew-taxes" budget to the Legislature that he developed using his "Priorities of Government" process. After waiting for the House Democrats to produce a budget during most of the session, Senate Ways and Means Committee Chairman Sen. Dino Rossi (R-Sammamish), could wait no longer and followed with his own "no-new-taxes" plan. In the end, the Democrat majority in the House of Representatives gave up on their plan to raise taxes and agreed to a "live within your
means" budget.
With steady pressure from AWB and other business groups, we weathered the worst budget shortfall in our state’s history without resorting to any major business tax increases. Thanks to the volunteer efforts of hundreds of AWB members who called or wrote their elected officials with our message, we fended off each and every attempt to live beyond our current revenue stream. This was a major victory for the business community and Washington’s ability to remain competitive for jobs and investment.
While the budget was a major win for AWB, we had a number of substantial victories in the tax and fiscal policy arena that added significant building blocks to the state’s competitiveness.
USE TAX ERROR REMEDIED!
Early in the legislative session, AWB learned that a bill passed by Senate Democrats during the 2002 session (SB 6835) contained a seriously costly technical flaw. While attempting to apply use tax to certain out-of-state repair services, SB 6835 failed to provide a corresponding exemption from use tax for some repair services currently exempt from retail sales tax. Consequently, these retail services (both in-state and out-of-state) were potentially subject to use tax by the plain meaning of the statutes. The cost of this mistake was over $60 million! Nearly 90 percent or $54 million of that cost was directly attributable to the machinery and equipment exempted under the Manufacturing M&E Sales and Use Tax Exemption.
AWB quickly mobilized and directed a major effort to either pursue legal avenues to defend against the mistake or pass legislation to fix it. In the end, the threat of legal repercussions and intense pressure by AWB convinced legislators to pass HB 1977 -- the "use tax fix" bill. The bill was signed by Gov. Locke in the first month of the regular session and became law retroactively to July 1, 2002.
MUNICIPAL TAX FAIRNESS FINALLY BECOMES REALITY
AWB’s tenacious six year effort to bring municipal tax fairness to Washington has finally paid off! EHB 2030 was signed into law by Gov. Gary Locke in early April. The signing of EHB 2030 marks the end of confusing local B&O tax codes, the elimination of the potential for double taxation and the preservation of the rules of fair tax treatment. Soon business taxpayers will be on the receiving end of a long-awaited, model B&O tax ordinance that creates uniformity, certainty, predictability and fairness in local taxation. Introduced by Rep. Lynn Kessler (D-Hoquiam), EHB 2030 ends differing interpretations of tax laws from the state to local level and from city to city. Thanks to this legislation, businesses that operate in multiple cities will no longer be forced to pay double or triple taxes on the same revenue. A long time priority of AWB, the Governor’s Competitiveness Council and the Gates Tax Study Commission is now a reality.
COUNTY TAXES: GOING UP IN 2004?
While AWB successfully held back numerous attempts by the Legislature to offer increased tax authority for local governments, in the end there was overwhelming pressure to grant local governments additional taxes to make up for the fiscal impacts of Initiative 695 and Initiative 747. The bills offered and defeated included an "unidentifiable" street utility tax, multiple sales tax increases, significant property tax increases and other revenue generating mechanisms. In all, there were more than 25 bills to offer additional revenue options to city and county governments.
Unfortunately, 2ESSB 5659, a bill sponsored by Sen. Shirley Winsley (R-Tacoma), passed the Legislature in the waning days of the session over the objections of AWB. The bill allows counties to raise their sales tax by up to 0.3 percent and may impose property tax levy lid lifts for up to six years. However, AWB was successful in requiring voter approval of any of these alternatives, so the voters will have the ultimate say over how much taxes go up and the purposes for which they will be used.
A NO NEW TAXES BUDGET, BUT...
Even though we escaped major increases in business taxes during the budget debate, we did not dodge all the bullets. In fact, the final budget negotiations contained various revenue generating mechanisms that were to produce nearly $183 million to balance the budget. Sponsored by Rep. Jeff Gombosky (D-Spokane), HB 2269 shortens tax payment dates, increases penalties, adds auditors, and other administrative changes to generate revenue. AWB will remain diligent in trying to rein these changes back in during future legislative sessions.
AN OFFER BOEING SHOULDN’T REFUSE
The Legislature has also agreed on a package that gives Boeing and its many manufacturers $3.2 billion in tax breaks over a 20-year period. HB 2294 was passed on the condition that the company chooses Washington state as the location for its 7E7 assembly.
Washington has benefited from the aerospace industry because it provides good wages and benefits for the thousands of engineers, mechanics and support staff working directly in the industry throughout the state. Suppliers and vendors that support the aerospace industry, in turn, provide a range of jobs. It is in the public interest to encourage the continued presence of this industry through tax incentives. The comprehensive tax incentives in HB 2294 address the cost of doing business in Washington, and compare it to other locations in different states. This law takes effect on the first day of the month in which the Governor and Boeing sign an agreement that the 7E7 will be manufactured in Washington state. If this agreement is not signed by June 30, 2005, the tax incentive is null and void.
GOV. LOCKE SIGNS SB 5725: BIG BOOST TO SEMICONDUCTOR INDUSTRY
Gov. Gary Locke signed SB 5725, a bill that provides tax incentives for semiconductor manufacturers in Washington that will last 12 years. Recommended by the Governor’s Competitiveness Council, this legislation will bolster the entire semiconductor industry particularly in southwest Washington. With an average wage of $60,000, Washington needs to provide necessary incentives to entice the high tech industry and put a great deal back into the economy. Introduced by Sen. Joseph Zarelli (R-Ridgefield), SB 5725 provides tax exemptions on sales, property, and business and occupations (B&O) taxes that apply to labor, machinery, equipment, construction materials, installation services, gasses and chemicals. If a semiconductor firm, like WaferTech, will make a billion dollar investment in Washington, the bill goes into effect July 1, 2005, and expires in 2017.
DETAILS
HB 1977 - Clarifying Use Tax Provisions
In the 2002 session, the Legislature enacted Senate Bill 6835, which imposed a use tax on the services of installing, repairing, cleaning, altering, imprinting or improving tangible personal property. The sales tax already applied to these services and was collected on in-state activity. The principal intended effect of the bill was to impose use tax on those services when performed out of state on an item subsequently used in Washington.
SB 6835 did not include any use tax exemptions. For example, a use tax exemption was not included in SB 6835 for the repair of manufacturing machinery and equipment. The repair of manufacturing machinery and equipment is exempt from sales tax but SB 6835 inadvertently made this repair service subject to use tax.
The bill creates use tax exemptions for installing, repairing, cleaning, altering, imprinting, or improving the following types of property:
• Interstate transportation equipment;
• Manufacturing machinery and equipment;
• Warehouse material-handling and racking equipment;
• Purchases by federal corporations providing aid and relief;
• Prosthetics, orthotics, ostomic items and hearing aids;
• Public ferry vessels;
• Movie production services;
• Tangible personal property donated to a nonprofit organization or governmental entity;
• Air pollution control facilities at the Centralia Steam Plant;
• Agricultural field burning machinery and equipment;
• Dairy nutrient management equipment;
• Anaerobic digesters;
• Public contracts for watershed protection or flood protection; and
• Tangible personal property brought into Washington temporarily.
These exemptions are retroactive to June 1, 2002. The Department of Revenue is directed to refund any use taxes paid on these services.
EHB 2030 - Municipal Tax Fairness
The Association of Washington Cities (AWC) is required to adopt a model ordinance that will provide a more uniform system of municipal business and occupation (B&O) taxes. The AWC may amend the model ordinance to comply with state law but is restricted from otherwise amending the definitions and classifications in the ordinance more frequently than every four years. After December 31, 2004, any city that imposes a B&O tax must comply with the provisions of this act.
The model ordinance must include a number of mandatory provisions: a system of credits that prevent multiple taxation of the same income; a gross receipts threshold of $20,000 for small businesses; uniform tax reporting frequency requirements; consistent provisions for penalties and interest; claim and refund provisions identical to the state; and certain terms with definitions from the state B&O statutes or based on comparable definitions within the state B&O statutes. Deviations from the state B&O definitions must be noted in the model ordinance.
In addition to the provisions concerning the model ordinance, a requirement is imposed on all cities with gross receipts B&O taxes that, in order to impose the B&O tax on a business activity, there must be nexus. Nexus is defined to mean business activities that are sufficient to subject the business to the taxing jurisdiction of the city under interstate commerce standards.
All cities that impose gross receipts B&O taxes must allow for the apportionment of business income by January 1, 2008. For activities other than services or income from royalties, income is allocated based on the location of the activity. In the case of a wholesale or retail sale, the location is based on the location of delivery to the buyer.
If the location of the activity occurs in more than one jurisdiction, credit must be allowed for taxes paid on the same activity, or, in the case where not all the affected cities impose gross receipts taxes, an allocation system must be allowed. For income from royalties, income is allocated to the commercial domicile of the taxpayer.
For income from services, income is apportioned to a city by multiplying total taxable income by the average of a payroll factor associated with a city and a serviceincome
factor associated with a city. The payroll factor is equal to the ratio of the compensation paid in a city to the total compensation paid everywhere. The service income factor is equal to the ratio of all service income of the taxpayer in a city to total service income of the taxpayer everywhere.
The taxpayer may petition the taxing jurisdictions to allow for an alternative method of apportionment if it is believed that the prescribed apportionment approach does not fairly represent the taxpayer’s business activity. Alternative approaches may be based on methods relating to separate accounting; to a single-factor; to the prescribed approach, with the addition of other factors; or to another approach as may be deemed to provide an equitable allocation and apportionment of the taxpayer’s income.
HB 2269 – Tax Reporting
Taxpayers with total tax liability greater than $4,800 in a calendar year are required to report and pay taxes by the 20th of the month rather than the 25th.
Penalties
Penalties for failure to pay excise taxes on time are increased. The penalty for being more than one month late on the payment of tax on a tax return or filing a late tax return is increased from 10 percent to 15 percent. The penalty for being more than two months late is increased from 20 to 25 percent.
The 10 percent penalty on failing to pay assessments by the due date is replaced. A new penalty of five percent applies to all tax billings. If the tax is not paid by the due date, the penalty increases to 15 percent. If the penalty is not paid within a month of the due date, the penalty increases to 25 percent.
The five percent penalty imposed if a warrant is issued for the payment of taxes is increased to 10 percent. A new penalty is imposed on unregistered taxpayers discovered by the DOR. The penalty is equal to five percent of the tax found to be due. Unregistered taxpayers who come forward on their own are not subject to this penalty.
These penalties apply beginning July 1, 2003, except the penalty on assessments applies to assessments originally made after July 1, 2003.
Vendor Verification
A promoter of a special event such as an auto show, garden show or flea market must verify that all vendors at the event are registered with the DOR. Special events that charge vendors less than $200 to participate, charitable events, and on-going athletic contests are exempted from the verification requirement.
A promoter who only provides a venue for an event, without organizing, operating, or sponsoring the event, is exempt from the verification requirement. A promoter who is not exempt must keep records about the date and location of the event and the vendors at the event, and provide this information to the DOR on request.
A promoter who fails to meet these requirements is subject to penalties of $100 for each failure to verify that a vendor has obtained a certificate of registration from the DOR, $100 for each vendor from whom the promoter fails to collect required information; and $250 if the information is not received by the DOR within 20 days of the request. Total penalties cannot exceed $2,500 per event, for first-time violations.
Successorship
A successor for excise tax purposes is a person who acquires 50 percent of the fair market value of either the tangible assets or intangible assets of a business.
The surviving corporation of a statutory merger is defined as a successor. Thus, a surviving corporation of a statutory merger is liable for the unpaid taxes of a purchased business, but not penalties and interest on the unpaid taxes.
If the fair market value of the assets acquired by a successor is less than $50,000, the successor’s liability for unpaid tax is limited to the fair market value of the assets acquired from the taxpayer. The burden of establishing the fair market value of the assets acquired is on the successor.
Unclaimed Property
The holding period for abandoned property under the Uniform Unclaimed Property Act is shortened from five to three years for the following types of property: bank accounts; certain uncashed checks such as payroll and cashier’s checks; gift certificates and credit memos; life insurance; intangible property held by a fiduciary; and stocks, bonds and mutual funds.
SB 5969 - Additional TaxingAuthority for Local Governments Retail Sales and Use Taxes
Any county may impose an increase in local sales or use tax of up to 0.3 percent. Motor vehicle sales and some motor vehicle leases are exempt from this sales tax. The increase is subject to approval of a majority of voters in the county. The county must distribute 40 percent of the revenues received to cities within the county on a per capita basis. One-third of this tax money must be used only for criminal justice purposes.
Regular Property Taxes
Voters in counties, cities and towns may by majority vote approve, in a primary or general election, a resolution for a levy lid lift that lasts up to six years. The resolution must specify the target dollar amount only for the levy’s first year’s collection amount. The resolution must specify some type of annual increase scale (e.g., the consumer price index) for setting the levy’s succeeding years’ amounts.
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