NFIB Making Progress on Local Licensing, B&O Tax Reform

Date: November 28, 2016

Business licensing victory on horizon.

Since 1977 the Washington Legislature has been trying to get a grip on the state’s patchwork of local business taxes and licensing requirements, recognizing, among other things, “small businesses … lack of financial wherewithal to seek sophisticated tax and licensing assistance,” according to the language in House Bill 2959, which was signed into law by the Governor in March.

HB 2959 is the latest attempt to find a way to streamline local Business & Occupation (B&O) taxes and licensing requirements imposed by more than 40 cities that have both, and 212 cities that require just business licenses. The bill created a task force to develop a central, comprehensible, consistent thread through the confusing regulatory minefield.

Signed into law by Gov. Jay Inslee on March 29, HB 2959 also made it a point to include representation from the National Federation of Business on the new task force. Patrick Connor, NFIB’s Washington state director, sits on the task force, which must come up with a plan by the end of the year for the Legislature’s consideration when it convenes in January 2017. The task force ceases existence on Feb. 1, 2017.

Connor and task force representatives from other business associations, together with representatives from cities and FileLocal, a joint effort by Seattle, Tacoma, Bellevue, and Everett to issue general business licenses and collect local B&O taxes in those four jurisdictions, have been working diligently to address, what HB 2959 called, a “lack of uniformity, in conjunction with any lack of centralized administration” that “has created confusion and an undue burden on Washington businesses.”

Among the problems the task force is working on is the state’s unique apportionment formula prescribed under state law for local taxation of service activities that has proven difficult for municipalities to administer and businesses to understand.

The income factor in the formula, customer location, is defined as the majority of contacts between a taxpayer and their customer. Customer location is typically not tracked by businesses in the course of executing transactions or maintained in common business records.  Both municipalities and businesses have found it challenging, costly, and cumbersome.

To address this, the task force has agreed on a recommendation to empanel a small group of tax administrators and practitioners, with specific expertise in this area of tax law, to revise the definition and tie it to commonly used business records and receipts. The goal is to have the new language take effect in mid-2018.

At its November 17 meeting, the task force finally reached agreement on a top NFIB priority. The cities have committed to establishing a minimum threshold before a local business licenses will be required. Most likely, that threshold will be income-based. This will be particularly helpful to small businesses that make very few sales or deliveries in a given city where they are not physically located. Under existing law, any sale, service call, or even a delivery made in a company vehicle may be enough to trigger a business license obligation. With an average cost of $45 – and some more than $100 – local business license fees can eliminate the profit on a one-time transaction. The Association of Washington Cities (AWC) has pledged to convene a process to amend the model B&O tax ordinance and to develop a parallel state law establishing a statewide minimum licensing threshold that will be mandatory for every city requiring a general business license. NFIB also secured language guaranteeing business input in the process, which the cities expect will take two years to complete. While NFIB would have preferred a more expedient approach, winning this concession from the cities is a major victory and should preclude a protracted legislative battle which had no guarantee of success. NFIB greatly appreciates AWC’s leadership and work to address this difficult demand from the business community.

Agreement on a mandate for all 212 local business-licensing jurisdictions to use the state’s online Business Licensing Service (BLS) has proven elusive. The task force was only able to agree to a timeframe and implementation plan directive for the Department of Revenue to step-up its efforts to encourage cities to use the new web-based BLS. NFIB will support expected budget requests for the department to provide need-based grants to cities joining BLS, as well as a feasibility study and implementation plan to provide a seamless user interface and data exchange between BLS and the FileLocal system. While the five-year phase-in is longer than NFIB preferred, this is the most progress toward a “one-stop” state and local business licensing hub that has been made in nearly 40 years of debate on the topic.

NFIB/Washington will provide members with periodic updates on the task force’s work and the end product, which can be read on the NFIB/Washington webpage.

Both the governor and legislative leaders recognize NFIB’s involvement as a necessary ingredient for any success any task force would hope to achieve. NFIB was a lead participant on a task force creating an All-Payer Claims Database, called for under Senate Bill 5084, which laid the groundwork for consumers to compare quality and cost among the state’s health-care providers.

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