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Home My WebLink AboutFIN 2018-07-17 Item 2D - Consideration - Business & Occupation Tax Next StepsCityof�TukwilaTukwila Tukwila INFORMATIONALAllan Ekberg, Mayor U��U�x��U� x�x��nmn��x�x�*nmu��nmx TO: Finance Committee FROM: Peggy McCarthy, Finance Director CC: Mayor Ekberg DATE: July 11.201B SUBJECT: Business & Occupation (B&O) Tax Next Steps ISSUE During its review of the Public Safety Pan financing,, the Committee requested additional information on B&O taxes, ultimately deciding to re-evaluate with regard to the General Fund. This is a follow up to the April 17, 2018 briefing where the Committee requested additional information about scaling the tax to be higher for larger commercial businesses and the personnel cost for various thresholds. BACKGROUND Sales tax revenue has not grown in the past two years at the rate anticipated or budgeted. Additionally, the State's sales tax mitigation payments of approximately $1.1 million annually wiU cease in 2019 based on a decision by the state legislature. These two revenue shortfalls have the potential to create a more than $2 million annual budget gap. This budget gap was discussed with the Finance Committee in February through May in connection with the Public Safety Plan financing. Funding options comprise new and increased revenues in addition to expenditure reductions, including: • Establish a B&O tax, $700K - $3 million • Increase the gambting tax rate by 1% - 5%, potential revenue: $380K - $1.9 million • Transportation Benefit District car tabs, $200K to $500K • Increase other tax rates to the extent allowed without voter approval • Reduce General Fund operational expenditures across-the-board • Reduce General Fund operational expenditures based on Priority Based Budgeting • Reduce the Genera Fund contribution to the CIP by $500,000 annually The B&O tax provides the greatest potentialadditinna|ravenue.B&OTaxrotesanaoe|culab*don gross receipts multiptied by the tax rate set by government. The rate can be set atO.2%mlower. An exemption threshold exempts businesses with gross receipts below the threshold from B&O tax. The lower the exemption threshold, the higher the number of returns to process since a greater number of businesses are subject to the tax. The four mjor business sectors subject to the tax are: 1. retailing, 3. manufacturing 2. wholesaling, 4. service and other activities. Taxation rates can vary across neok>rs, but not within them. Out of the 43 cities in the State with a B&O tax, 16 have varying rates from sector to sector; with the remainder having one rate for all sectors. Some cities have structured their rates to encourage growth in a specific sector. Table 1 shows the rates and thresholds for some Puget Sound cities and for the State. 108 INFORMATIONAL MEMO Page 2 Table 1. B&0 Tax Rates, Puget Sound Cities and Washington State Exemption Location Year Manufacturing Retail Rate Services Wholesale Threshold Implemented Rate Rate Rate (Annual) Burien 2007 0.001 0.001 0.001 0.001 $ 200,000 Des Moines 2004 0.002 0.002 0.002 0.002 $ 75,000 Kent 2013 0.00046 0.00046 0.00152 0.00152 $ 250,000 Renton 2016 0.00085 0.00050 0.00085 0.00085 $ 500,000 Shoreline 2019 0.001 0.001 0.002 0.001 $ 500,000 WA State 0.00484 0.00471 0.015 0.00484 $20,000 Administering a B&O tax can be complex. Some businesses may engage in multiple activities, requiring them to report in more than one classification. Depending on whether a business is required to file quarterly or annually, a business may be subject to taxation in one quarter, but not in others. Cities surveyed by staff — Kent, Renton and Shoreline - established a revenue target and set taxation rates and threshold based on their projections. Both Kent and Renton collected more tax than projected; Shoreline's tax goes into effect in 2019. Once the cities had been through a budget cycle, projections became more accurate. One city's initial target revenue was $5 million, and their actual collected was over $9 million. Another city's target revenue of $3 million resulted in over $4 million collected. All cities queried hired additional staff for implementation and ongoing administration. The City of Kent has the highest number of returns and employs four full time B&O tax staff: two field auditors, one customer service specialist, and another in-house auditor. Table 2 shows number of staff, program costs, and number of filings for three cities. Table 2: Staffinj, Costs, and # of Filings 4_91y_ City FTE Program Cost # of Filings Quarterly Annual Kent 4 $780,000 4,000 N/A Renton 1 5250,000 N/A 1,200 Shoreline 1 $245,0001 N/A N/A ' Estimated. Source: 12/4/2017 City of Shoreline Staff Report. DISCUSSION Adoption of a B&O tax could close the budget gap created by the sales tax and sales tax mitigation revenue shortfall and continue to diversify and stabilize revenues. Additional revenue could reach $3 million or more. See Table 3 provides a range of revenue estimates. Z:lCouncil Agenda Items\Financel7 17.181InfoMemo-B0 tax PMc.docx INFORMATIONAL MEMO Page 3 Table 3. Annual Projections for Tukwila based on 2017 Sales Tax Receipts* Rate $200,000 Threshold $500,000 Threshold 0.00050 $807,398 $760,720 0.00085 $1,372,577 $1,293,224 0.001 $1,614,796 $1,521,440 0.002 $3,229,593 $3,042,881 Estimated # of Taxpayers 941 575 `Tukwila 2017 sales tax data set. Assumes 80% of total subject to the tax. Based on initial analysis and research, staff recommends the following should Council decide to pursue a B&O tax: 1. apply the same rate among all sectors for simplicity in filing, 2. establish a $500,000 threshold to exempt smaller businesses and reduce the number of returns to be processed, 3. adopt a rate of .15% to .2% to ensure budgetary goals are met and, 4. collect the tax on a quarterly basis to enhance the City's cash flow. A potential timeline and action plan follows should work on implementing a B&O tax in the City of Tukwila continue: Timeframe Action Item By Whom July and August, 2018 Outreach to businesses Staff August 21, 2018 Finance Committee Meeting Ordinance review, policy decisions on: • Tax rates, • Exemption threshold, • Reporting frequency Ordinance approval Council Finance Committee Full City Council September 4, Council Regular Meeting September through December 2018 FileLocal Agreement — taxpayer portal Staff Acquire software for interface between FileLocal and EDEN accounting system Staff Recruit for 6&O tax analyst Staff Continue outreach and communication with business community Staff and City Council January 1, 2019 Legislation becomes effective. n/a RECOMMENDATION The Committee is being asked to provide direction on the next steps that should be undertaken, if any, to establish and institute a Business & Occupation tax for the City. Z:ICouncii Agenda Items\Finance17.17,181InfoMemo-B0 tax PMcdocx 109 110