Form revised February 6, 2008
FISCAL NOTE FOR NON-CAPITAL PROJECTS
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Department: |
Contact Person/Phone: |
DOF Analyst/Phone: |
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DEA |
Denise Movius/4-9259 |
Lawand Anderson/3-2780 |
Legislation Title:
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AN ORDINANCE relating to taxation; adding two minor exemptions from the parking tax; adding a new section 5.45.085 relating to the taxation of business transactions between related parties; deleting section 5.45.060 relating to the taxation of business conducted with the City when there is no physical nexus; amending the definition of casual sale; expanding the adult family homes business license tax exemption to include for-profit adult family homes; deleting the boarding homes deduction under the business license tax; amending certain exemption, credit and deduction provisions of the square footage business tax; changing the gambling tax rate from 10% to 5% for bingo and raffles; making technical corrections to reference the proper Utility Tax section and amending sections 5.30.010, 5.30.020, 5.30.030, 5.30.050, 5.30.060, 5.35.050, 5.37.020, 5.45.090, 5.45.100, 5.46.030, 5.46.040, 5.46.050, 5.46.060, 5.52.030, 5.55.010, 5.55.040, 5.55.080,5.68.020 and 3.02.125, respectively, of the Seattle Municipal Code.
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· Summary of the Legislation:
The proposed amendments add needed exemptions to the commercial parking tax, make a minor change to the definition of “employee” for the employee hours tax, delete the requirement that businesses conducting business with the City but without a physical presence within the city acquire a license and pay the business license tax, amend the definition of casual sale, expand the adult family home exemption to include for-profit businesses, delete the boarding home deduction, make technical changes to the business license tax, and adjust the exemptions and credits within the square footage business tax. The proposed amendments also correct the gambling tax rate for bingo and raffles.
There are numerous small technical changes to correct references or add the word “business” after “square footage” when referring to the square footage business tax.
The correction of the gambling tax rate is necessary due to an oversight by the City in changing the gambling rate in the Seattle Municipal Code after the State changed the mandatory rate for cities in 2000.
· Background: (Include brief description of the purpose and context of legislation and include record of previous legislation and funding history, if applicable):
In 2006 and 2007, the commercial parking tax, the employee hours tax, and the square footage business tax were adopted and codified into Title 5 of the Seattle Municipal Code. After imposing the taxes for several tax reporting periods, several exemption and deduction issues and technical inconsistencies were identified, requiring specific amendments to the applicable tax chapters. This legislation incorporates the needed amendments and technical corrections.
Gambling tax rates are controlled by the State of Washington. In 1999, the legislature mandated a change in the gambling tax rate for bingo and raffles from 10% to 5%. The City was not aware of this change and therefore did not change its bingo and raffle gambling tax rate. The City is in the process of refunding all taxes collected erroneously since January 1, 2000, the date the new tax rate became effective. This is a mandatory rate change. The refunds total $105,000 for seven years.
The proposed amendment relating to the taxation of business activities between related businesses needs to be addressed to provide the City clear authority to value these transactions in a manner that would reflect an arms-length transaction. Some businesses are forming out-of-state related business entities to aggressively avoid taxation of their business activities by funneling their business transactions through the out-of-state related party at a reduced price. This practice is becoming more prevalent, and the clarifications contained in this Bill would curtail any loss of future revenues and reduce the number of court challenges.
SMC 5.45.060, which requires all businesses conducting business with the City to acquire a business license and pay taxes even though the business has no physical presence within the city (super nexus) is being deleted to conform to the new allocation and apportionment requirements mandated by the State of Washington. This will result in a very small loss of tax revenue (less than $20,000 per year); however, it should also result in a similar small decrease in expenditures since these businesses add the license fee and tax into their bid or invoice charge to the City. This will only affect those businesses that never enter into the City of Seattle. The requirement for these businesses to get a business license and pay the tax has always been subject to complaints since it is a tax requirement that few states or cities impose.
The proposed amendment to the definition of casual sale restricts the casual sale deduction to only the casual sale of tangible personal property. This eliminates any chance that a service or sale of intangibles will be considered a casual sale. A taxpayer who provides a service or receives royalties from intangibles is considered to be engaging in the business of selling those services or rights.
The proposed amendment to expand the exemption for adult family homes to include for-profit homes would bring Seattle in line with the State’s taxation of such businesses. Adult family homes are limited to six persons per home, so these are small in-home businesses. This proposed change would result in very little revenue loss.
The proposed amendment deleting the deduction for boarding homes would result in very little change. As it currently exists, the definition of boarding homes under state law is very confusing and the City already has a deduction for the rental of real estate for a period of longer than 30 days. The present 25% deduction for “room rental” appears arbitrary and some businesses can show that room rental is valued at a higher percentage. The percentage also depends on what services, beyond room and board, the boarding home supplies. Because of the multiple services provided by boarding home and similar businesses, it is very difficult to measure how much of an impact this will make on our yearly revenues, but it is estimated to be less than $5,000.
· Please check one of the following:
____ This legislation does not have any financial implications. (Stop here and delete the remainder of this document prior to saving and printing.)
__X_ This legislation has financial implications. (Please complete all relevant sections that follow.)
Appropriations: This table should reflect appropriations that are a direct result of this legislation. In the event that the project/programs associated with this ordinance had, or will have, appropriations in other legislation please provide details in the Notes section below.
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Fund Name and Number |
Department |
Budget Control Level* |
2009 Appropriation |
2010 Anticipated Appropriation |
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TOTAL |
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*See budget book to obtain the appropriate Budget Control Level for your department.
Notes: There are no budget appropriations or budget decreases associated with the ordinance.
Anticipated Revenue/Reimbursement: Resulting From This Legislation: This table should reflect revenues/reimbursements that are a direct result of this legislation. In the event that the issues/projects associated with this ordinance/resolution have revenues or reimbursements that were, or will be, received because of previous or future legislation or budget actions, please provide details in the Notes section below the table.
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Fund Name and Number |
Department |
Revenue Source |
2009 Revenue |
2010 Revenue |
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General Fund 00100 |
DEA |
Estimated tax revenue lost from for- profit adult family homes.
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$(25,000) |
$(25,000) |
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General Fund 00100 |
DEA |
Estimated tax revenue lost for gambling rate adjustment. |
$(15,000) |
$(15,000)
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General Fund 00100 |
DEA |
Estimated tax revenue increase for boarding homes adjustment. |
$5,000 |
$5,000 |
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General Fund 00100 |
DEA |
Estimate tax revenue lost from loss of super nexus. |
$(20,000) |
$(20,000) |
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TOTAL |
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$(55,000) |
$(55,000) |
Notes:
There will be a very small gain in tax revenue generated by eliminating the boarding home deduction (estimated at less than $5,000 per year). A review of taxpayer accounts classified as boarding homes indicate that most taxpayers under this classification were not taking this 25% deduction for rental of real estate. Additionally, we expect a small decrease in the amount of expenditures (approx. $20,000 per year) due to the elimination of super nexus requirements, however the decreases would be spread across many departments and accounts, and have little impact. These decreases in expenditures would be equal to the loss of revenue from the business license fees and taxes that had been paid by businesses doing business with the City that had no physical taxing nexus (line four in the box above).
Total Regular Positions Created, Modified, Or Abrogated Through This Legislation, Including FTE Impact: This table should only reflect the actual number of positions affected by this legislation. In the event that positions have been, or will be, created as a result of other legislation, please provide details in the Notes section below the table.
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Position Title and Department |
Position # for Existing Positions |
Fund Name & # |
PT/FT |
2009 Positions |
2009 FTE |
2010 Positions* |
2010 FTE* |
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TOTAL |
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* 2010 positions and FTE are total 2010 position changes resulting from this legislation, not incremental changes. Therefore, under 2010, please be sure to include any continuing positions from 2009.
Notes: N/A
· Do positions sunset in the future? (If yes, identify sunset date):
Spending/Cash Flow: This table should be completed only in those cases where part or all of the funds authorized by this legislation will be spent in a different year than when they were appropriated (e.g., as in the case of certain grants and capital projects). Details surrounding spending that will occur in future years should be provided in the Notes section below the table.
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Fund Name & # |
Department |
Budget Control Level* |
2009 Expenditures |
2010 Anticipated Expenditures |
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TOTAL |
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* See budget book to obtain the appropriate Budget Control Level for your department.
Notes: N/A
· 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.) The City would retain up to $60,000 in current tax revenue, and forgo up to $5,000 in new tax revenue, but would not achieve the goal of aligning the City with the state’s current taxation procedures. There is also a potential of future lost revenue on transactions between related companies.
· 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.) None
· 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):
Please list attachments to the fiscal note below: