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Utility Excise Tax Reporting Guidelines

WFOA 2008 ANNUAL CONFERENCE. Utility Excise Tax Reporting Guidelines. September 19, 2008. Presented By Chris Gonzalez Project Consultant 425-867-1802 www.fcsgroup.com. Introduction. The State of Washington imposes excise taxes on public service businesses operating in Washington State.

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Utility Excise Tax Reporting Guidelines

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  1. WFOA 2008 ANNUAL CONFERENCE Utility Excise Tax Reporting Guidelines September 19, 2008 Presented By Chris Gonzalez Project Consultant 425-867-1802 www.fcsgroup.com

  2. Introduction The State of Washington imposes excise taxeson public service businesses operating in Washington State. Basis for Computation Examples Gross Revenues Net Allowed Deductions & Exemptions Public Utility Tax Business & Occupation (B&O) Tax Sales and Use Tax* *Not included in today’s presentation.

  3. Public Utility Tax • RCW 82.16.020 • Imposed on public service businesses (including water and sewer utilities) conducting enterprise activities • Applies to revenue received from existing customers from utility operating activities • Includes rate revenue and miscellaneous service charges imposed on existing customers • Excludes late fees and other penalties for non-payment • Rates: • Water Distribution: 5.029% • Sewer Collection: 3.852%

  4. B&O Tax Examples of “Services & Other Activities” • RCW 82.04.290 • Applied to revenues from new customers and revenues for services that are not explicitly addressed elsewhere in the RCW or WAC. • 1.5% “Service & Other Activities” tax rate • Late Fees & Other Penalties for Non-Payment • Connection Charges (GFCs, SDCs, Latecomers’ Fees, etc.) • Stormwater Charges • Solid Waste & Recycling

  5. Key Deductions & Exemptions (RCW 82.16.050 and WAC 458-20-179) • LID / ULID Assessments(including interest & penalties) • Wholesale Water Sales (deductible by seller only) • Irrigation Revenue(agricultural or non-agricultural) • Amounts Paid To Another Taxpayer For Jointly Provided Services(only includes specific services outlined in RCW 82.16.020) • Cash Discounts & Credit Losses(if included in gross revenue)

  6. Key Issues • Applicable tax laws change over time • Taxpayer’s responsibility to keep up with rule changes • Issues addressed in recent Dept. of Revenue audits: • Sewer Revenue (Classification For Tax Purposes) • Irrigation Revenue • Stormwater Revenue • Connection Charges • Political Subdivision Revenue • Municipal Utility Taxes

  7. Sewer Revenue • Sewer revenue should be split between “collection” and “related business activities” for tax purposes. • The collection portion is taxed at 3.852% (RCW 82.16.020) • The remainder is taxed at 1.5% (WAC 458-20-251) • Expenses are used as a proxy to split sewer revenue between service functions (collection, transmission, treatment). • Taxpayers paying other entities for sewage treatment deduct their payments prior to the split; taxpayers owning a treatment plant may incorporate treatment and disposal expenses into the split.

  8. Sewer Revenue Regional Sewage Treatment Treatment Plant Owners Sewer Revenue Sewer Revenue Less: Amounts Paid to AnotherAgency for Treatment & Disposal Net Sewer Revenue Collection Transmission Collection Transmission Treatment Disposal

  9. Splitting Collection & Transmission Expenses • Not a straightforward process • Both related to mains • Pumping expenses are also transmissionexpenses • Possible Approaches: • Definition Based On Pipe Size • Definition Based On Layout (transmission occurs after last point of input in sewer system) • Current Approach: Layout-Based, From Spokane v. DOR (collection pipes; no upstream junctions except side sewers)

  10. Collection & Transmission Side Sewers Laterals Interceptor • Prior to Spokane vs. DOR, the intersection of two public mains defined the transition from collection to transmission. • Under the currently accepted approach, the entire interceptor would be classified as transmission.

  11. Raw Percentages Based on Sewer System Infrastructure: COLLECTION ASSETS Mains with no upstream connections except side sewers; measured in lineal feet (LF) Collection Mains • Only includes length of pipe in the public ROW • Standard assumption is 30 LF per connection • May be taxpayer-specific variations Side Sewers TRANSMISSION ASSETS Transmission Mains Mains not associated with “collection” Pump Stations Converted into equivalent pipe length Treatment Plant Converted into equivalent pipe length

  12. Calculation of “Raw” Percentages Length of Pipe Assigned to Collection Divided by Total Equivalent Pipe Length COLLECTION % = CAUTION: The Department of Revenue prefers cost-based allocations into functions of service (collection, transmission, treatment) whenever possible. 100% Minus Percentage Assigned to Collection TRANSMISSION & TREATMENT % =

  13. The Percentages Sewer Assets Sewer Revenue Sewer Expenses Collection Mains Side Sewers Transmission Mains Pump Stations Treatment Plant Collection Transmission Treatment Disposal Collection Transmission Treatment Disposal 3.852% 1.5% The “raw” percentages represent a breakdown of sewer assets into “collection” and “transmission” functions, but do not correspond to revenues (the basis for taxes). Expenses provide the linkage between physical and financial systems.

  14. Example Sewer Pipe Network: Collection Mains: 65,000 LF Transmission Mains: 85,000 LF Side Sewers: 2,000 Connections @ 30 LF / Connection = 60,000 LF Pump Stations: $3,000,000 Total Cost / $120 per LF = 25,000 LF equivalent Treatment Plant: $10,200,000 Total Cost / $120 per LF = 85,000 LF equivalent

  15. Example

  16. Calculation of weighted percentages with sample budget: These percentages (22.95% collection, 77.05% transmission and treatment) are used to split revenue for tax purposes. Note that this results in annual variations in the specific percentages used. Example

  17. Other Tax Issues Not subject to tax per RCW 82.16.050 (7). A number of taxpayers have not been taking advantage of this deduction, paying over 5% tax on this revenue. Irrigation Revenue Subject to the B&O tax under the “Service & Other Activities” classification per WAC 458-20-251 (2)(c). The DOR did not originally consider stormwater mitigation to be an enterprise activity, but this changed as of 10/12/03. A number of taxpayers have not been paying taxes on this revenue. Stormwater Revenue Subject to the B&O tax per WAC 458-20-179 (4) as revenue received from new customers prior to the receipt of regular utility service. There used to be a deduction for capital contributions, but it was repealed in 1993. Connection Charges

  18. Other Tax Issues • RCW 82.04.4291 provides a deduction for revenue received from political subdivisions for services subject to the B&O tax. This includes: • Sewer Revenue (Transmission & Treatment Share) • Stormwater Revenue • Garbage / Recycling Revenue • WAC 458-20-201 provides a deduction for interdepartmental revenue. • Taxpayers should take care to avoid double deductions (wholesale treatment, irrigation, etc.). Political Subdivision Revenue

  19. The Municipal Utility Tax Debate

  20. Cities affected by the municipal utility tax issue can appeal the Department of Revenue’s decision. An appeal by multiple cities might be more effective and efficient than individual appeals. File a refund request with the DOR based on the discussed tax issues. Taxpayers filing a refund request letter with the DOR by 12/31/08 can claim a refund on tax payments made from 1/1/04 onward. Be aware an audit will consider all of the discussed tax issues (and possibly others). Liabilities will be used to offset refund requests – in cases where there is a net refund, the DOR will issue a refund with interest. Revise tax reporting practices to take advantage of available deductions. Particularly after an audit, the revised practicescan be used for future reporting (resulting in tax savings). Next Steps

  21. Meet the Speaker • CHRIS GONZALEZ, Project Consultant – FCS GROUP • Chris Gonzalez is a project consultant at FCS Group. As a member of the Utility Rates & Finance program, Chris’ expertise is primarily oriented toward utility rate and related financial studies – his work to date includes cost-of-service rate studies, connection charge studies, and the derivation of specialized rate structures such as interruptible water service rates and wholesale water rates. He is also experienced with Washington State’s excise tax rules, having spent a substantial amount of time working with the Washington State Department of Revenue on excise tax audits on behalf of FCS Group clients around Washington State. • EXPERTISE • Excise Tax Audits • Utility Rate Studies • Wholesale Rates • Impact Fee Studies • Revenue Sufficiency Studies • Connection Charges • Comprehensive Plans • Financial Planning • Revenue Requirements • Negotiation/Mediation • Demand Impact Analyses • EDUCATION • B.S.E, Operations Research and Financial Engineering Princeton University • Mathematical and Economic Theory • University of Bath, England (One-year program) Contact Chris at FCS GROUP: (425) 867-1802 ext. 238 chrisg@fcsgroup.com www.fcsgroup.com

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