Governor signs bill changing the way cities tax business

The Associated Press
4/21/03 7:35 PM

OLYMPIA, WA(AP) -- Dave Bulger manages a wholesale chain saw and outdoor equipment business in Chehalis. So he was mystified a few years ago when he got a bill from the city of Tacoma.

"I was scratching my head on this one, as to how a city could have such long tentacles to grab tax money from such a distance," Bulger said.

Turns out that a territory manager for Stihl Northwest had stopped in Tacoma to chat with an independent dealer. A sharp-eyed Tacoma tax officer spotted the company's truck, noted the business name, and sent a tax bill to Stihl Northwest.

Bulger got a few more letters from Tacoma, threatening $1,000-per-day fines and a 90-day jail sentence for nonpayment of taxes.

"I thought I was living in Russia at that point," Bulger said.

The Virginia-based Stihl Inc. agreed to pay Tacoma, because as the company discovered, the city had the law on its side. If your company does business in one of 37 Washington cities that collects a business and occupation tax, the city can tax you on 100 percent of your business -- even if you do only do a tiny amount of business in that city.

On Monday, Gov. Gary Locke signed a bill to change that.

Business groups say House Bill 2030 will make the collection of business and occupation taxes more fair and predictable.

But cities that depend on money from those taxes complain the new law will cost them millions of dollars and devastate their already suffering budgets.

The new law makes two major changes:

--Requires cities that have a B&O tax to agree on and adopt a "model ordinance," so that all the cities will have the same B&O tax regulations, definitions and penalties. Cities must comply with the model ordinance by Jan. 1, 2005.

--Allows cities to collect only their portion of the tax. For example, a business that does 90 percent of its business in Tacoma would be taxed on 90 percent of its gross receipts, while a business that does 5 percent of its business in that city would be taxed on 5 percent of its gross receipts. This part takes effect Jan. 1, 2008.

Most of the 37 cities that have a B&O tax are in Puget Sound, and the average tax rate is about one-tenth of 1 percent, according to the Association of Washington Business.

Seattle will lose about $15 million a year, according to Seattle Finance Director Dwight Dively.

"That's roughly 2 percent of our general fund budget, which doesn't sound like a lot, but $15 million buys a lot of services," Dively said. "It's roughly half of what we spend annually on the library."

Tacoma will lose $5 million, Everett will lose $3.7 million, and Bellevue will lose $2.1 million, according to the Association of Washington Cities. Many cities are already struggling with budget problems. Seattle shut down its libraries for two weeks last year because of budget woes, and plans the same this year.

"This just adds to the cities' difficulties," said Stan Finkelstein, executive director of the Association of Washington Cities. He said cities set their business and occupation tax rates based on certain assumptions about what is taxable, and the new law pulls the rug out from under them.

But business groups said the time for change has come -- and the Legislature and the governor agreed.

"It's patently unfair for two cities to impose taxes on a single transaction," Locke said Monday after signing the bill.

Rep. Lynn Kessler, D-Hoquiam, who sponsored the bill, said the five-year phase-in period should give the cities time to prepare themselves and their budgets. She said the new law "helps the state maintain a competitive edge" in attracting and retaining businesses.

The bill-signing was good news to Bulger in Chehalis, too.

"I'm not trying to avoid taxes," Bulger said. "Taxes have to be paid, but they have to be fair."


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