Form revised April 22, 2003

FISCAL NOTE FOR NON-CAPITAL PROJECTS

Department:	Contact Person/Phone:	DOF Analyst/Phone:
Executive Administration	Mel McDonald/3-0071	Jennifer Devore/5-1328

Legislation Title:

AN ORDINANCE relating to taxation; amending Title 5 of the Seattle Municipal Code to implement provisions of Washington State 2003 legislation providing for uniformity and fairness in municipal business and occupation tax; providing for taxation and deductions on interstate and intrastate trucking; clarifying provisions relating to transactions involving more than one city and apportioning between cities; repealing the credit for high technology research and development; amending interest and penalty calculations; adding safeguards to disclosure of tax information provisions; providing for civil penalties; adding specific police powers for special commissioned officers; making technical clarifying changes to Seattle’s tax laws; adding Sections 5.45.075, 5.45.082, 5.55.215, 5.55.216, 5.55.225; repealing Section 5.45.105; and amending Chapters 5.45, 5.30, 5.55, and 5.48, respectively, of the Seattle Municipal Code.

Summary of the Legislation:

Many of the changes contained in the proposed legislation are the result of the adoption of a model B&O tax ordinance by the Legislature earlier this year. Other changes are intended to clarify existing provisions of the law. The most substantive changes relate to how the B&O tax applies to the trucking industry. Substantive changes will be explained below under group headings.

Items changed due to mandated requirement by 2003 State Legislation in ESHB 2030.

Definitions

· Changed the definition of “engaging in business” to establish a tax threshold rather than the previous licensing safe harbor of a number of days of doing certain activities within Seattle. The tax threshold does not impact Seattle since the Legislature mandated at least a $20,000 threshold for amounts subject to tax, and Seattle already has a higher threshold ($50,000).

Penalties

· The penalty section, SMC 5.55.110 has been substantially changed to match the requirements in RCW 82.32.090. This includes increasing the penalty percentages for late filing from the present 5%, 10%, and 20% provisions to 5%, 15%, and 25%, depending on how late the payment was made. The RCW previously had the same percentages as those contained in the SMC; however, due to the State budget crisis the percentages were increased. This change will result in approximately $185,000 in more penalty revenue. The penalty for failure to pay an assessment on time was previously 10% in both the RCW and SMC. It will also now be 5%, 15%, and 25% depending on the lateness of the payment. This will result in very little change in revenue since very few of our assessments are paid late. The penalty for failure to follow specific written instructions is currently 25% in the SMC. The City is now required to lower that penalty to 10% according to the RCW. We have used this penalty very few times. Finally, there will now be an automatic 5% penalty on any underpaid tax found in an audit assessment. This 5% penalty will add approximately $250,000 in revenue annually.

Interest Rates on Refunds

· Beginning on January 1, 2005, the City will be required to give the same interest rate on refunds as the City receives on assessments. Presently, there is a 4% difference since the City can not earn interest at the higher rate and the differential rates act as an incentive for the taxpayer to report correctly at time of filing. This higher interest rate on refunds will add about $125,000 to our budget expenditures.

Items clarified or ordinance clean up items.

· SMC 5.45.075 takes the place of revenue assignment deductions that are currently maintained in SMC 5.45.100 Q and R. There is a slight change in the reporting or tax requirements, as follows. If multiple cities maintain an eligible gross receipts tax and have nexus over the transaction, the current codes gives first priority to the city of delivery, then to the city where the customer is located, and finally to the city where the seller is located. Under this ordinance the priority goes to delivery city and then to the seller’s city. The customer’s city is left out of the revenue assignment picture. This change is in response to the agreement between the Association of Washington Cities (AWC), the Association of Washington Businesses (AWB), and the Department of Revenue (DOR).

· SMC 5.45.080 was redrafted to reflect more accurately the City’s actual practice. The current code is not as specific or as detailed as both the City and taxpayers need.

· The definition of “Artistic and Cultural” was changed to reflect the admission tax code rewrite currently before the Council. The proposed definition now reads like the State’s definition.

· SMC 5.55.060 provides more specific authority for the director to investigate places of business to ascertain whether taxes and fees are being accurately reported.

New additions or deletions to Title 5

Trucking

· Adds a trucking tax classification that revamps the measure of the tax. Existing law taxes all hauls to and from the city and hauls done within the state by a trucking firm located in Seattle. This has proven to be very difficult to enforce and has been burdensome for taxpayers. The proposed approach would tax only those hauls that are picked up within Seattle. This will insure that there will be no double taxation between two or more cities with an eligible gross receipts tax, and will treat truckers located within the cities the same as truckers located outside the cities.

· Treats a trucker acting only as agent the same as a trucking company with interstate authority.

· Establishes the exemption of the pickup of an empty container associated with a roundtrip haul.

We do not have the ability to ascertain what sort of revenue impact this will have. The current system’s complex rules have clearly led to underreporting by trucking firms. We expect that the new system will increase compliance and will likely not reduce or expand City revenues.

Civil Penalties

· Adds civil penalties and due process procedures for non compliance with the City’s licensing and tax requirements. Presently, there are only criminal penalties. DEA believes that civil penalties will make the enforcement of our laws easier and less onerous on the taxpayer. Criminal penalties will continue to be used if the civil penalties fail to obtain compliance or as other needs arise.

Deletes the High Tech R & D Credit

· In the 2003 legislative session ESHB 1462 was passed that prohibits the City of Seattle from taxing the creation of intellectual property. Prior to the passage of this legislation Seattle taxed the development of software and biotech substances and then provided a high tech R & D credit to partially offset the tax. Since the new legislation prohibits the City from taxing the creation of intellectual property no credit is needed to offset the now nonexistent tax.

Evidence Gathering Authority

· The ordinance adds clear seizure authority for enforcement officers to obtain evidence to be used in enforcing business license and regulatory licenses requirements, and the ticket scalping law.

Background: (Include brief description of the purpose and context of legislation and include record of previous legislation and funding history, if applicable): See above summary.

· Please check one of the following:

_____ This legislation does not have any financial implications. (Stop here and delete the remainder of this document prior to saving and printing.)

__X _ This legislation has financial implications. (Please complete all relevant sections that follow.)

Increase in Expenses. Due to the increase of interest paid out on refund request starting in January 1, 2005, the 2005 budget and subsequent budgets will have to be increased by approximately $125,000 annually. The 2003 and 2004 budgets will not be affected due to the delayed nature of the legislation.

Increase in Revenues. Since the penalty section has been amended to follow EHB 2030 of the 2003 State legislative session beginning in January 1, 2004 the revenue from increased penalties will be approximately $435,000. The State legislated a 5% penalty on all assessments, and our assessments have averaged approximately $5,000,000 annually. At 5%, the increase from the assessments equals $250,000. The State also legislated that any payment later than thirty (30) days would be assessed a 15% penalty (previously 10%), and any payment later than sixty (60) days would be assess a 25% penalty (previously 20%). The increase penalty revenue from this change is approximately $185,000

Appropriations (in $1,000s): (Please only reflect the dollar amount actually appropriated by this legislation.)

Fund Name and Number	Department	Budget Control Level*	2003 Appropriation	2004 Anticipated Appropriation
General Fund	DEA	C8510	0	$0
TOTAL			$0	$0

* This is line of business for operating budgets, and program or project for capital improvements

Notes: There is no expenditure impact in 2003 or 2004. Only after January 1, 2005 will the City see an increase in interest expense equal to approximately $125,000 per year.

Anticipated Revenue/Reimbursement (in $1,000s) Resulting From This Legislation:

Fund Name and Number	Department	Revenue Source	2003 Revenue	2004 Revenue
General Fund	DEA		$0	$435
TOTAL

Notes: This amount is made up of increased penalties for assessments and increased penalties for late payments.

Total Regular Positions Created Or Abrogated Through This Legislation, Including FTE Impact:

Position Title*	Part-Time/ Full Time	2003 Positions	2003 FTE	2004 Positions**	2004 FTE**
N/A
TOTAL		None		None

· Fund Name and Number: N/A___________________________________

· Department: N/A______________________________________________

* List each position separately

** 2004 positions and FTE are total 2004 position changes resulting from this legislation, not incremental changes from 2003.

· Do positions sunset in the future? (If yes, identify sunset date):

N/A

Spending/Cash Flow (in $1,000s): (Please complete this section only in those cases where part or all of the funds will be spent in a different year than when they were appropriated (e.g., as in the case of certain grants and capital projects.)

Fund Name and Number	Department	Budget Control Level*	2003 Expenditures	2004 Anticipated Expenditures
N/A
TOTAL

* This is line of business for operating budgets, and program or project for capital improvements

Notes:

· What is the financial cost of not implementing the legislation? (Estimate the costs to the City of not implementing the legislation, including estimated costs to maintain or expand an existing facility or the cost avoidance due to replacement of an existing facility, potential conflicts with regulatory requirements, or other potential costs if the legislation is not implemented.)

If the proposed legislation covering the penalty provisions and interest expense is not adopted, the city essentially would forfeit the ability to maintain its gross receipt tax system because of the State mandate that we adopt these penalties.

The cost of not clarifying the apportionment methodology contained in SMC 5.45.080 would be increased litigation due to the confusion over the interpretation of the current apportionment code.

The cost of not creating the civil penalties and evidence gathering authority would be increase enforcement time and effort and increased litigation to collect what is owed to the City

· What are the possible alternatives to the legislation that could achieve the same or similar objectives? (Include any potential alternatives to the proposed legislation, such as reducing fee-supported activities, identifying outside funding sources for fee-supported activities, etc.)

N/A

· Is the legislation subject to public hearing requirements: (If yes, what public hearings have been held to date, and/or what plans are in place to hold a public hearing(s) in the future.)

No.

· Other Issues (including long-term implications of the legislation):

None