Making the Business and Occupation Tax Work

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Washington has a unique business tax system:  businesses are taxed on their gross income (Business and Occupation Tax – B&O Tax), rather than their profits.  There’s a statewide B&O Tax, and some 40 cities have local B&O Taxes.  And there are three different ways that cities can charge this tax:  on gross receipts (like the state does), on a per-employee basis (“Head Tax”), or on the amount of space that the business occupies (Square Footage Tax).

This makes life complicated for businesses, and, in addition to long-standing debates about whether Washington should move to an income tax, and whether taxes should be reduced, business organizations have asked for tax simplification to make it easier for businesses to know and process their tax liabilities.

We have just gone through a flurry of activity on business tax simplification over the last few months.  The end result is good news.  What started out as a proposed State action that would have caused potentially serious problems for Seattle (including the possible loss of up to $45 million in revenue per year), has now become agreement on a win-win process that will take steps that will work for businesses and state and local governments as well.  Here’s the story of how Seattle made that happen.

Last fall the State began an effort to take over the collection of local B&O Taxes.  As a talking point, the idea of setting up a central collection for both state and local taxes sounds good – in principle, this makes a lot of sense.  But we had a lot of concerns, and this issue is a great example of why details matter.  When you look at how this would actually work, it turns out to be much more complicated.  For example:

  • State collection does not actually benefit most businesses very much – only a tiny fraction of businesses operate in more than one city, so most businesses will see little or no reduction in their paperwork.
  • Cities have very few classifications with different tax rates (there are only three of significance in Seattle), while the state has almost fifty different classifications and rates.  It is much harder to interpret the State system than the City systems.
  • It was unclear how the State would account for businesses that operate in different cities and how auditing would be managed.  A failure to enforce which cities were owed B&O taxes would result in significant projected revenue losses for Seattle and the other cities charging the B&O tax.

We were able to turn this issue around:

  • The five cities that collect about 90% of B&O revenues (Seattle, Tacoma, Bellingham, Bellevue, and Everett) are working together to develop a common web portal that will eliminate most of the issues for businesses that operate in more than one City, and we believe that we can do this for much less than it would take the State to develop new software.
  • Seattle worked closely with our local Seattle Metropolitan Chamber of Commerce, and was able to work out an agreement to address some important issues for Seattle business.  The Chamber understood our concerns, and agreed that losing tax revenue for Seattle was a problem.  Seattle is fortunate to have a business community that is willing to pay its fair share for City services – while, of course, urging the City to be more efficient and effective.
  • The Association of Washington Cities supported us in Olympia.
  • Legislators were responsive and understood our concerns.
  • Ultimately, cities wound up in productive discussions with the Governor’s office.

The agreement at the State level is that the Governor and legislature will focus on reducing the number of classifications and rates – which would help business at little or no cost to government.  Of course, those who benefit from classifications that give them tax breaks are likely to oppose changes, so this will not be easy, but the principle is widely accepted.

At the local level, the five cities have agreed to move forward with their common portal, which will greatly reduce paperwork for those businesses that operate in multiple cities.  Seattle has also agreed to work on policies that will clarify some provisions of our tax code that are ambiguous – a task force has been working on this, and revisions will come before the Council in the next few weeks.  We are also exploring a potentially more far-reaching simplification, with a common agreement that the City is ready to take steps that make it easier for businesses to calculate and pay taxes, as long as these do not reduce the amount of taxes that we collect.  We think there may be more win-wins to find as we explore this issue through the City-business tax forces that have been created.

Four months ago we faced struggles between business and government, and the prospect of losing millions of dollars in the Seattle budget.  Because we reached out and worked to find common ground, we have averted the problem and are seeing cooperation instead of conflict.  It’s a good news story for all of us.