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HomeMy WebLinkAboutFIN 2026-04-13 Item 1C - Discussion - Business & Occupation Tax (B&O): Tax Rates & Licensing FeesCity of Tukwila Thomas McLeod, Mayor Marty Wine, City Administrator AGENDA BILL ITEM NO. 1.C. Agenda Item B&O Tax Rates and Business License Fees Sponsor Adam Schierenbeck, Senior Fiscal Coordinator Legislative History April 13, 2026 Finance & Governance Committee Recommended Motion ❑x Committee Decision ❑ Action Requested EXECUTIVE SUMMARY The Finance Department proposes replacing the current per -employee business license fee with a flat or tiered fee structure beginning January 1, 2027. To offset the associated revenue loss, the Department recommends increasing the City's business and occupation (B&O) tax rates beginning January 1, 2027, raising the minimum annual B&O tax threshold to $1 million (with an aligned quarterly threshold), and implementing a square -footage -based B&O tax for certain business facilities within the City. Together, these differences are intended to offset one another and produce a net -zero impact on City revenues, based on estimated collections. DISCUSSION The City of Tukwila has historically assessed business license fees based on the number of employees assigned to work at business locations within the City. Beginning in 2024, the City also adopted a municipal B&O tax to raise necessary revenues. However, those Washington cities that levy per -employee fees generally do not also impose B&O taxes. Because of this, the Finance Department is seeking to realign Tukwila's business license structure with that of neighboring jurisdictions. To offset revenue reductions from adjusting the City's business license fees, the Department recommends increasing B&O tax rates to more closely match surrounding cities. As part of this adjustment, the Department proposes raising the minimum annual B&O tax threshold to $1 million and adopting a corresponding quarterly threshold, which will provide administrative efficiencies. The proposed B&O tax changes also include implementing a square footage tax. This tax would apply to warehouse space exceeding 4,000 square feet and other business floor space exceeding 12,000 square feet. Gross receipts tax and square footage tax would be calculated independently, and a business's B&O tax liability would be based on the higher of the two amounts. This proposal realigns the City's revenue framework by reducing reliance on a regressive per -employee license fee structure in favor of the more proportional B&O tax. As the City pursues long-term financial sustainability, these changes position Tukwila to potentially further adjust B&O tax levels to meet future revenue needs. FINANCIAL IMPACT 27 Overall, the changes to business license fees and B&O taxes are designed to be revenue -neutral. However, because of the new requirement to submit all tax payments quarterly, one-time additional revenues are estimated in fiscal year (FY) 2027 as the result of fewer annual returns due in FY 2028. Complete for all items with fiscal implications Disclaimer: Final terms and scope of work subject to review by the City Attorney Expenditures: Fund Source: ■ Expenditure - Budgeted $0 Revenues: ■ Expenditure - Unbudgeted ■ Expenditure - Grant -Funded © Revenue — One -Time (e.g. $187,000 asset sale, surplus equipment) ■ Revenue - Ongoing Contractor (if applicable) n/a Scope of Work n/a Amount n/a Duration n/a Additional Comments: 2027 due to administrative changes involving tax filing frequencies. One-time additional revenue in FY ATTACHMENTS Exhibit 1 — Business License Fee Comparison and Proposal Exhibit 2 — Business License Revenue Detail Exhibit 3 — B&O Tax Rate Comparison Exhibit 4 — B&O Tax Revenue Estimate https://tukwilawa.sharepoint.com/sites/clerksintranet/Council Agenda Items/04-13 F&G Committee/B&O Tax Rates and Business License Fees/Agenda Bill - B&O Tax Rates and Business License Fees.docx 28 EXHIBIT 1- Business License Fee Comparison & Proposal 2026 Business License Fee Comparison Proposed Business License Fee City Non -Resident Home Occupation General Business License Non -Resident License* Home Occupation License General Business License License* License Auburn $112 $112 $112 Burien $180 $70 $180 for 0-39 employees $350 for 40 or more employees Kent $101 $51 $293 for 0-24 employees $393 for 25-49 employees $593 for 50-99 employees $793 for 100 or more employees Renton $150 $150 $150 Seatac $150 $50 $100 for 0-10 employees $250 for 11-50 employees $1,500 for 51-100 employees $4,750 for 101-500 employees $9,500 for 501 or more employees Tukwila $100** same as General Business License $112 per full-time employee $56 per part-time employee $150** $75 $150 for 0-9 employees $300 for 10-24 employees $500 for 25-49 employees $750 for 50-99 employees $1,000 for 100 or more employees Seattle Tiered fee structure based on the annual taxable revenue earned in Seattle: - Less than $20k: $73 - $20k to $500k: $147 - $500kto $2 million: $667 - $2million to $5 million: $1,604 - $5 million or more: $3,210 *A Non -Resident license means that the business does not own, rent, lease, occupy, or otherwise maintain a physical place of business within Tukwila City limits. **The Non -Resident license fee is waived if the annual gross income of the business within Tukwila is $4,000 or less. 29 EXHIBIT 2 - Business License Revenue Detail Proposed Business License Fees License Type Non -Resident Home Occupation General Tukwila Business ` I 0-9 employees 10-24 employees 25-49 employees 50-99 employees 100+ employees BL Fee # of Businesses Total Revenue $150 1,722 $258,300 $75 544 $40,800 $150 1,295 $194,250 $300 297 $89,100 • $500 115 $57,500 $750 72 $54,000 $1,000 36 $36,000 Grand Total 4,081 $729,950 Forecasted BL Fee Revenue $729,950 FY 2025 Actual Revenue $2,803,411 Variance ($2,073,461) 30 EXHIBIT 3 - B&O Tax Rate Comparison 2026 Gross Receipts B&O Tax Comparison Jurisdiction Taxable gross revenue in the city Gross Receipts Tax Rates Annual Threshold Quarterly Threshold Retail Sales Wholesaling Manufacturing Service & Other Burien $20,000 $5,000 0.00200 0.00200 0.00200 0.00200 Kent $250,000* $62,500* 0.00100 0.00200 0.00125 0.00200 Renton $500,000 n/a 0.00070 0.00121 0.00121 0.00121 Auburn $4,000** n/a 0.00050 0.00180 0.00100 0.00100 Tukwila $750,000 n/a 0.00050 0.00085 0.00085 0.00085 Seattle $2,000,000* n/a 0.003420 0.003420 0.003420 0.006580 *Kent and Seattle provide an exemption, not a threshold Businesses only pay tax on revenues that exceed the exemption amount. * *Auburn's threshold is within the confines of a $500,000 companywide threshold. 2026 Square Footage B&O Tax Comparison Jurisdiction Business Warehouse Floor Space Threshold Other Business Floor Space Threshold Square Footage Tax Rates (Annual) * Business Warehouse Other Business Floor Space Auburn 4,000 n/a $0.40 n/a Kent 4,000 12,000 $0.48 $0.08 * Beginning 1/1/2028, Kent's square footage tax rates will increase to $0.60 and $0.12. Tukwila Gross Receipts Tax Option Jurisdiction Taxable revenue in the city Companywide gross revenue Gross Receipts Tax Rates Annual Threshold* Quarterly Threshold* Retail Sales Wholesaling Manufacturing Service & Other Tukwila $1,000,000 $250,000 0.00070 0.00125 0.00125 0.00125 Tukwila Square Footage Tax Option Jurisdiction Business Warehouse Floor Space Threshold* Other Business Floor Space Threshold* Square Footage Tax Rates (Annual)** Business Warehouse Other Business Floor Space Tukwila 4,000 12,000 $0.24 $0.06 *The square footage threshold is independent from the gross receipts threshold. **Businesses pay the greater of the gross receipts tax or the square footage tax. 31 EXHIBIT 4 - B&O Tax Revenue Estimate 2027 B&O Tax Rates and Estimate Gross Receipts Tax Square Footage Tax Retailing / Retail Services Wholesaling Manufacturing Service & Other Activities Warehouse SFT Other SFT Total B&O Tax Revenue 0.00070 0.00125 0.00125 0.00125 $0.24 $0.06 $4,728,380 Fiscal Year Revenue Differences Tax Year Current Proposed Revenue Difference BL Revenue B&O Revenue BL Revenue B&O Revenue 2027 $2,803,411 $2,654,000 $729,950 $4,914,463 $187,002 2028 $2,803,411 $2,654,000 $729,950 $4,728,380 $919 RELATED INFORMATION 1.) Square footage tax is estimated based on limited information available concerning the size of business facilities in the city. 2.) Gross receipts tax estimates are based on taxable amounts reported for the previous year for which information is available. 3.) The difference between tax year revenue and fiscal year revenue in 2027 is due to the timing of Annual 2026 tax returns (due April 30, 2027). Beginning in 2027, all businesses owing tax would be placed on a quarterly filing frequency. 4.) The DOR requires a minimum 75 days advanced notice to change the City's business license fee structure. 32