The Association of Washington Cities states that as of October 2007 approximately 188 cities required a local business license (including the 40 with a city B & O tax). The city B & O taxes, like the Washington Sate B & O taxes are levied at a percentage rate on the gross receipts of the business, less some deductions. Business are put in different classes such as manufacturing, wholesaling, retailing and services. Within each class, the rate must be the same, but it may differ among classes. As cities like Seattle reach out for additional tax revenue, more businesses are finding out that the city B & O tax classifications, and the procedures for audit and appeal, differ widely from city to city, and that the city laws often differ from the State’s tax law. The result is confusion among business that operate statewide and must report in multiple cities.
While city B & O taxes usually have the same general characteristics as the State’s B & O tax the cities are free, within certain limits, to depart from the state tax structure. Any question of the cities’ freedom was laid to rest in the 1999 Washington Supreme Court case of Enterprise Leasing v. City of Tacoma, 139 Wn 2d 546. That case held that the City of Tacoma was free to classify automobile rental activity as a “service” and not as a “retail sale” (the State’s classification) for imposition of local B & O taxes. The rationale for the decision is that in the absence of a legal or constitutional prohibition, municipalities have the power to define taxation categories as they see fit in order to respond to the unique concerns and responsibilities of local government.
This general freedom of cities has allowed them not only to self define many of their B & O classifications but, again within limits, to also self define their own taxing jurisdiction. The ability to tax broadly has created numerous instances of multiple or overlapping jurisdictional claims, that is, the same activity being taxed by two or even more cities. This creates obvious compliance headaches for businesses, especially for smaller businesses which cannot maintain an in house state and local tax staff. The smaller businesses are the ones most likely to fail to understand the law of each city, and they are therefore also the ones most likely to owe interest and penalties for late payment when their noncompliance comes to light.
To bring some common sense to this situation the State legislature passed a bill in 2003 that required the Association of Washington Cities to convene a committee to develop a model ordinance that must be adopted by all cities imposing a B & O tax. Beginning January 1, 2008, cities that levy the B & O tax were also required to allow for allocation and apportionment, as set out in portions of the 2003 law. The legislation also required the cities with B & O taxes to implement certain mandatory provisions by December 31, 2004. These included, for example, the uniform adoption of the State tax code definitions for the basic components of a gross receipts tax, such as “value of products,” “gross income of the business,” and “gross proceeds of sales.”
Unfortunately for taxpayers, while the state legislation (RCW 35.102.040(4)) requires mandatory provisions to be included in the model ordinance, it does not bar cities from adopting their own version of the model ordinance’s nonmandatory provisions. Recognizing the potential for confusion the Legislature at least required that if a city adopts nonmandatory provisions which differ from the uniform nonmandatory provisions it must “make a description of such differences available to the public, in written and electronic form.” These descriptions are available at the Municipal Research and Services Center of Washington website, mrsc.org.
This is a cumbersome and less than satisfactory system which still places a time consuming and expensive burden on smaller business. It is important for a business receiving an assessment it wishes to appeal to be aware that appeal requirements appear to be permissive, not mandatory, so that each city is free to prescribe its own rules for appealing an adverse audit result. Therefore a business must check a particular city’s appeal rules if it is going to appeal that city’s assessment.
Recognizing that the chaos has not been eliminated, despite some 10 years of legislation and work by numerous organizations, still another piece of legislation was proposed in February, 2013, intended to, in its own words “increase uniformity between state and local B & O taxes” and “reduce state B & O tax classifications.” As of now the legislation has not advanced. Apparently the legislature finds the job of ending the confusion so daunting that it has decided it is easier to just leave it to taxpayers to wind their own way through the maze of city taxes. That is not a good solution.
Learn more about Attorney Martin Silver, PS.