HomeMy WebLinkAboutFIN 2022-10-24 Item 1D.1 - Update - Business and Occupation (B&O) Tax
City of Tukwila
Allan Ekberg, Mayor
INFORMATIONAL MEMORANDUM
Finance Committee
TO:
Vicky Carlsen, Finance Director
FROM:
Tony CullertonDeputy Finance Director
BY:
Mayor Ekberg
CC:
October 24, 2022
DATE:
Business & Occupation Tax Information
SUBJECT:
ISSUE
This memo provides information pertaining to the proposed Business and Occupation (B&O) tax
in Tukwila to take effect January 1, 2024, including information on the tax rates, implementation,
and potential revenue.
BACKGROUND
Like many jurisdictions in Washington State, the City of Tukwila has experienced a structural
deficit for multiple biennia. This is due to several factors, including the 1% limitation on regular
property tax, the sunset of streamlined sales tax mitigation revenue, and ongoing expenses that
are growing significantly faster than revenues.
rd
On October 3, 2022, Mayor Ekberg presented his budget to the City Council. As part of the
-legged
o includes using one-time funds and keeping
some open positions vacant over the coming biennium.
The State of Washington Revised Code of Washington (RCW) allows for local jurisdictions to
levy a local B&O tax which is paid to the local government. While sales tax is collected by the
State, local B&O taxes are administered by the taxing jurisdiction. This means the exemptions,
collection, enforcement, and the administrative code are the responsibility of the taxing
jurisdiction. Additionally, the implementation of a local B&O tax will require additional effort by
both the taxing entity and the business. For example, the City will need to administer the tax,
and businesses in Tukwila that are subject to it will need to file an additional tax return.
B&O Categories (NAICS Category Codes)
The following categories are subject to B&O tax, per state law:
Manufacturing
Wholesaling
Retail
Service & Other Activities
These classifications are assigned a category rate that is assessed to all businesses within that
category. Rates may differ among categories but all businesses within the same category must
be assessed the same rate.
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INFORMATIONAL MEMO
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DISCUSSION
Businesses subjectedto the local B&O tax are entities that meet all of the following criteria:
The business falls into one (or more) of the NAICS category codes.
The business maintains a physical address within the Tukwila city limit.
Generate annual gross receipts equal to or more than $20,000.
Nonexempt businesses
Exempt Businesses
Per the State Model Ordinance for B&O taxes, the following eleven business and revenue types
are exempt from being assessed a B&O tax.
(1) Public utilities
(2) Investments
(3) Insurance business
(4) Employees.
(5) Amounts derived from sale of real estate.
(6) Mortgage brokers' third-party provider services trust accounts.
(7) Amounts derived from manufacturing, selling or distributing motor vehicle fuel
(8) Amounts derived from liquor, and the sale or distribution of liquor
(9) Casual and isolated sales
(10) Accommodation sales
(11) Taxes collected as trust funds
In addition to the State mandated exempt businesses, the City is proposing exemptions for
nonprofit organizations exempt from federal income tax under section 501(c)(3) of the Internal
Revenue code, businesses operating as a card room, and
professional/amateur/semiprofessional sports teams. The City Is proposing a threshold of
$750,000, meaning any business that earns $750,000 or less is exempt from the tax.
Surrounding Jurisdictions B&O Thresholds and Rates
The State Model Ordinance for B&O tax requires cities to adopt an exemption threshold
allowing businesses that gross revenues less than the adopted threshold to opt out of
participation in the B&O tax program. The minimum allowable threshold as stipulated by RCW is
$20,000. The City of Tukwila is proposing a minimum threshold amount of $750,000.
Businesses generating gross revenues equal to or less than the $750,000threshold will be
exempt from B&O taxes.
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INFORMATIONAL MEMO
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Proposed Revenue
Proposed B&O applies only to businesses with gross income over $750,000 and includes higher
exemptions than State law.Revenues are estimate until B&O implemented, forecast above
assumes 100%collection and likely captures501(c)3. Actual revenues expected to be $3M.
MODEST B&OTAX proposal
Highest gross revenue threshold of surrounding cities ($750,000)
Lowest rates of surrounding cities
Proposed Exemptions:
501(c)(3) organizations
o
Professional/Amateur/Semiprofessional sports teams
o
Cardrooms
o
Effective January 1, 2024, giving businesses over a year to budget for the new tax.
Forecasted revenues to be approximately $3M per year.
Benefits of a B&O Tax
also includes holding vacancies open and using one-time funds.
Without a B&O more cuts will be necessary throughout the organization.
B&O tax revenues are unrestricted and may be used for any lawful governmental
purpose.
Only business with annual gross revenues above $750k will be subject to B&O Tax.
501(c)3, cardrooms and amateur/semi-professional/professional sports teams exempt
regardless of gross revenues.
Several major surrounding cities have already implemented a B&O tax; other cities
currently deliberating implementation as a part of the 2023/2024 budget process.
The City establishes the Category Rates, exemptionsand gross revenue threshold
amount, thus maintaining significant influence over the impacts of the tax.
A new revenue source diversifies our revenue sources and will assist with maintaining
our current strong bond rating.
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INFORMATIONAL MEMO
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Required next steps
B&O Tax Ordinance.
Approve two new FTE positions in Finance (one in early 2023 to develop the program,
one additional in late 2024 to help administer).
Ongoing outreach with local businesses.
Conclusion
The implementation of a local B&O tax provides the City with an additional revenue source that
will assist with current ongoing operations and programing, and provide a new continuous
revenue stream for an additional, enhanced level of providing of services. The strategic
identification of a $750,000 gross revenue threshold will ensure that sole proprietors and small
businesses are exempt. Without the addition of a new revenue source the City will have to
reduce at lease $3M in services, resulting in reduction of staff, as well as programs and services
important to the Tukwila community.
RECOMMENDATION
Discussion Only
ATTACHMENTS
PowerPointPresentation
Deviations from Model Ordinance
Local B&O Tax Rates2022
Exempt Business Exemption
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CITY OF TUKWILA
Business & Occupation Tax Discussion
WHAT IS A BUSINESS
& OCCUPATION TAX
A B&O tax is a gross receipts tax. It is measured on the gross income of
the business.
Washington, unlike many other states, does not have an income tax.
Sales tax is collected by the State, local B&O taxes are administered and
collected by the taxing jurisdiction.
Exemptions, collection, enforcement, and the administrative code are the
responsibility of the taxing jurisdiction.
BUSINESSES SUBJECT TO
B&O TAX PER STATE LAW
Categories Criteria
Manufacturing Physical Tukwila address
Wholesaling Annual gross receipts
threshold greater than $20k
Retail
Nonexempt businesses
Service & Other Activities
While these are state requirements, jurisdictions can do more than
what the State requires. We are proposing a higher threshold and
additional exemptions.
BUSINESSES AND REVENUES EXEMPT
FROM B&O TAX PER STATE LAW
Public utilities • Amounts derived from manufacturing,
selling or distributing motor vehicle fuel
Insurance businesses
Amounts derived from liquor, and the
Investments sale or distribution of liquor
Employees • Casual and isolated sales
Amounts derived from sale of real estate Accommodation sales
Taxes collected as trust funds
Mortgage brokers' third -party provider
services trust accounts
While these are state requirements, jurisdictions can do more than
what the State requires. We are proposing additional exemptions.
SURROUNDING JURISDICTIONS
B&O CATEGORY RATES & THRESHOLDS
Tukwila
Category (Proposed) Renton Kent Des Moines Auburn Burien
Manufacturing 0.00085 0.00085 0.00100 0.00200 0.00100 0.00100
Retail 0.00050 0.00050 0.00100 0.00200 0.00050 0.00100
Services & Other 0.00085 0.00085 0.00200 0.00200 0.00100 0.00100
Wholesale 0.00085 0.00085 0.00200 0.00200 0.00180 0.00100
Threshold $750,000 $500,000 $250,000 $50,000 $500,000 $200,000
* Renton Retail rate increase to 0.0007, effective 1/1/23
MAYOR'S PROPOSED B&O:
FORECASTED REVENUE
Proposed B&u apples only to businesses with
gross income over $750,000 and includes higher
exemptions than State law.
Row Labels
Manufacturing
Retail
Service & Other Activities
Wholesale
Grand Total
Sum of Gross Income
346,896,394
1,689,165,125
2,155,345,125
913,639,413
5,105,046,057
Count
38
208
355
75
676
Rate $ Amount
0.00085 294,862
0.0005 844,583
0.00085 1,832,043
0.00085 776,594
3,748,081
Revenues are estimate until B&O implemented, forecast above assumes 100%
collection and likely capture 501 (c)3. Actual revenues expected to be $3M.
MODEST B&O TAX PROPOSAL
Highest gross revenue threshold of surrounding cities ($750,000)
Lowest rates of surrounding cities
Proposed Exemptions:
501(c) (3) organizations
Professional/Amateur/Semiprofessional sports teams
Cardrooms
Effective January 1, 2024, giving businesses over a year to
budget for the new tax.
Forecasted revenues to be approximately $3M per year.
BENEFITS OF A B&O TAX
Critical foundation of the "third legged stool" to balance this year's bridge budget, which also includes
holding vacancies open and using one-time funds.
Without a B&O more cuts will be necessary throughout the organization.
B&O tax revenues are unrestricted and may be used for any lawful governmental purpose.
Reoccurring revenue that diversifies the City's revenue sources.
BENEFITS OF A B&O TAX
Only business with annual gross revenues above $750k will be subject to B&O Tax. 501(c)3, cardrooms and
amateur/semi professional/professional sports teams exempt regardless of gross revenues.
Several mayor surrounding cities have already implemented a B&O tax; other cities currently deliberating
implementation as a part of the 2023/2024 budget process.
The City establishes the Category Rates, exemptions and gross revenue threshold amount, thus maintaining
significant influence over the impacts of the tax.
A new revenue source diversifies our revenue sources and will assist with maintaining our current strong
bond rating.
REQUIRED NEXT STEPS
Adoption of the State's Model Administrative and B&O Tax Ordinance.
Approve two new FTE positions in Finance (one in early 2023 to develop the program,
one additional in late 2024 to help administer).
Ongoing outreach with local businesses.
Comparison of Deviations from Core Model Ordinance Provisions
City of Tukwila
B&O TAX Summary of Change from Model B&O Tax Ordinance:
PROVISION:
.050 Imposition of (2)Thegrossreceiptstaximposedinthissectionshallnotapplyto any
the tax tax or fee personwhosegrossproceedsofsales,grossincomeofthebusiness,
levied.andvalueofproducts,includingby-products, asthecasemaybe,from
allactivitiesconductedwithinthe Cityduringanycalendaryearisequal
to orlessthan$750,000,orisequaltoor lessthan$187,500 during
anyquarter ifonaquarterlyreportingbasis.
.090 Exemptions.
Nonprofit organizations exempt from federal income tax under
Section 501(c)(3) of the Internal Revenue code (except retail
sales)
Businesses operating as a casino
Amateur/Professional/Semi-Professional sports teams
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Aberdeen0.0020.003e0.0037e0.003e
(360) 533-4100$5,000$20,000
0.000450.000450.000450.00045
(253) 833-2897$10,000$40,000
Auburn****0.0010.00050.00100.0018
(253) 392-6496$500,000
Bainbridge Island0.0010.0050.0010.001
(206) 780-8668$150,000
0.0014960.0014960.0014960.001496
(425) 452-6851$170,000
Bellingham0.00170.00170.0044e0.0017
(360) 778-8010$5,000$20,000
0.0020.002
(360) 332-8311$250,000
Bremerton0.00160.001250.0020.0016
(360) 473-5311$1,000,000
0.0010.0010.0010.001
(206) 241-4647$200,000
Burlington0.001
(360) 755-0531$1,000,000
Cosmopolis0.0020.0020.0020.002
(360) 532-9230$5,000$20,000
Darrington0.000750.000750.000750.00075
(360) 436-1131$20,000
Des Moines0.0020.0020.0020.002
(206) 878-4595$50,000
0.0010.0010.0010.001
(253) 964-8121$5,000$20,000
Everett***0.0010.0010.0010.001
(425) 257-8610$5,000$20,000
0.0020.002
(360) 966-3411$1,000,000
Granite Falls**
(360) 691-6441$5,000$20,000
Hoquiam0.0020.0020.0020.002
(360) 532-5700$5,000$20,000
0.0020.0020.0020.002
(360) 642-3145$20,000
Issaquah0.00120.00120.00150.0012
(425) 837-3054$25,000$100,000
0.0010.0010.0020.001
(360) 423-0900$20,000
*
Kenmore0.002
(425) 398-8900$5,000
0.0010.0010.0020.002
(253) 856-6266$62,500$250,000
0.0010.002
(360) 491-3214$5,000$20,000
Lake Forest Park0.0020.0020.0020.002
(206) 368-5440$5,000
Long Beach0.0020.0020.0020.002
(360) 642-4421$5,000
Longview0.0010.0010.0020.001
(360) 442-5040$20,000
0.0020.0020.0020.002
(360) 826-3033$5,000$20,000
Mercer Island0.0010.0010.0010.001
(206) 275-7783$150,000
North Bend0.0020.0020.0020.002
(425) 888-1211$5,000
Ocean Shores0.0020.0020.0020.002
(360) 289-2488$5,000$20,000
0.0010.0010.0020.001
(360) 753-8327$5,000$20,000
0.0020.0020.0020.002
(253) 929-1100$5,000$20,000
Port Townsend0.0020.0020.0020.002
(360) 385-2700$0$100,000
0.0020.0020.0020.002
(360) 446-2265$5,000
Raymond0.0020.0020.0020.002
(360) 942-3451$5,000$20,000
0.000850.00050.000850.00085
(425) 430-6400$500,000
0.0010.0020.0020.001
(253) 843-1113$5,000$20,000
0.00110.001530.0020.00102
(253) 759-3544$5,000$20,000
0.00222v0.00222v0.00427v0.00222v
(206) 684-8484$100,000
0.0010.0010.0010.001
(360) 426-4491$5,000$20,000
Shoreline0.0010.0010.0020.001
(206) 801-2324$125,000$500,000
Snoqualmie0.00150.00150.00150.0015
(425) 888-1555$5,000
South Bend0.0010.0020.0020.002
(360) 875-5571$5,000
0.00110.001530.004e0.00102
(253) 591-5252$250,000
0.0020.0020.0020.002
(360) 264-2368$5,000$20,000
Tumwater0.0010.0010.0020.001
(360) 754-5855$5,000$20,000
Westport0.0025e0.005e0.005e0.0025e
(360) 268-0131$5,000
0.0010.0020.0020.001
(360) 458-3244$5,000
(v) = voter approved increase above statutory limit
(e) = rate higher than statutory limit because rate was effective prior to January 1, 1982 (i.e., grandfathered).
*Kenmore's B&O tax applies to heavy manufacturing only.
**Granite Falls repealed its B&O tax for all businesses other than extracting.
***For manufacturing gross reciepts over $8 billion, the B&O rate drops to 0.00025.
Exempt Businesses Per State
(1) Public utilities. This chapter shall not apply to any person in respect to a business activity with
respect to which tax liability is specifically imposed under the provisions of \[local utility tax cite\].
(2) Investments - dividends from subsidiary corporations. This chapter shall not apply to amounts
derived by persons, other than those engaging in banking, loan, security, or other financial businesses,
from investments or the use of money as such, and also amounts derived as dividends by a parent from
its subsidiary corporations.
(3) Insurance business. This chapter shall not apply to amounts received by any person who is an insurer
or their appointed insurance producer upon which a tax based on gross premiums is paid to the state
pursuant to RCW 48.14.020, and provided further, that the provisions of this subsection shall not
exempt any bonding company from tax with respect to gross income derived from the completion of
any contract as to which it is a surety, or as to any liability as successor to the liability of the defaulting
contractor.
(4) Employees
the capacity as an employee or servant as distinguished from that of an independent contractor. For the
purposes of this subsection, the definition of employee shall include those persons that are defined in
the Internal Revenue Code, as hereafter amended. (b) A booth renter is an independent contractor for
purposes of this chapter.
(5) Amounts derived from sale of real estate. This chapter shall not apply to gross proceeds derived
from the sale of real estate. This, however, shall not be construed to allow an exemption of amounts
received as commissions from the sale of real estate, nor as fees, handling charges, discounts, interest
or similar financial charges resulting from, or relating to, real estate transactions. This chapter shall also
not apply to amounts received for the rental of real estate if the rental income is derived from a
contract to rent for a continuous period of thirty (30) days or longer.
(6) Mortgage brokers' third-party provider services trust accounts. This chapter shall not apply to
amounts received from trust accounts to mortgage brokers for the payment of third-party costs if the
accounts are operated in a manner consistent with RCW 19.146.050 and any rules adopted by the
director of financial institutions.
(7) Amounts derived from manufacturing, selling or distributing motor vehicle fuel. This chapter shall
any fuel not subjected to the state fuel excise tax, or any other applicable deduction or exemption, will
be taxable under this chapter. (Mandatory)
(8) Amounts derived from liquor, and the sale or distribution of liquo r. This chapter shall not apply to
liquor as defined in RCW 66.04.010 and exempt in RCW 66.08.120. (Mandatory)
(9) Casual and isolated sales. This chapter shall not apply to the gross proceeds derived from casual or
isolated sales.
57
(10) Accommodation sales. This chapter shall not apply to sales for resale by persons regularly engaged
in the business of making retail sales of the type of property so sold to other persons similarly engaged
in the business of selling such property where (1) the amount paid by the buyer does not exceed the
amount paid by the seller to the vendor in the acquisition of the article and (2) the sale is made as an
accommodation to the buyer to enable the buyer to fill a bona fide existing order of a customer or is
made within fourteen days to reimburse in kind a previous accommodation sale by the buyer to the
seller.
(11) Taxes collected as trust funds. This chapter shall not apply to amounts collected by the taxpayer
from third parties to satisfy third party obligations to pay taxes such as the retail sales tax, use tax, and
admission tax.
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