Local Government Partnership Meeting May 18, 2010

1. Local Government Partnership Meeting May 18, 2010

2. Welcome and Introductions Trim Smith, Deputy DirectorDepartment of Revenue

3. Announcements & Housekeeping Items Miki Gearhart, Local Government Partnership Facilitator

4. Highlights of 2010 Legislation Panel: Drew Shirk and Mark Mullin

5. Revenue Tax Package2ESSB 6143 Minimum Nexus Standards • Out-of-state businesses that currently do not pay any Washington taxes, but engage in significant business here may have tax liability under economic nexus standards. • Establishes minimum nexus standards and apportionment requirements for the B&O tax on services and royalties. • Special rules included that benefit financial institutions. 

6. Revenue Tax Package2ESSB 6143 Minimum Nexus Standards (cont.) • Changes the apportionment of income from the current cost apportionment or three-factor formula for financial institutions to a single sales factor formula.  This will generally reduce tax for in-state businesses and increase tax for out-of-state businesses doing business in Washington.  • Effective June 1, 2010.

7. Revenue Tax Package2ESSB 6143 Corporate Board of Directors Fees • Compensation received by members of corporate boards of directors is taxed under the service and other activities B&O tax classification at a rate of 1.8 percent.  • Effective July 1, 2010.

8. Revenue Tax Package2ESSB 6143 Tax Avoidance • Clarifies that the Department has the power to impose tax on some specific transactions where taxpayers have tried to avoid taxes by elevating the form of the transaction over the substance of the activity.   • Closes several current legal loopholes that have been used by tax practitioners to avoid the payment of use tax and real estate excise tax.  • Effective May 1, 2010.

9. Agency or Governor Request Bills E2SHB 1597 Improving the administration of state and local tax programs • Updates and clarifies the confidentiality of taxpayer information. • Incorporates the Streamline Sales and Use Tax Agreement’s definition of “retail sale” into Washington law.

10. Agency or Governor Request Bills E2SHB 1597 Improving the administration of state and local tax programs (cont.) • Allows sellers of direct mail the choice of sourcing their in-state sales of advertising and promotional direct mail to the place where the mail is delivered or to the location of the printer. • Numerous other clarifications and technical corrections to the excise tax and property tax statutes. • Effective July 1, 2010 - Chapter 106, Laws of 2010

11. Impacts to Local Government Revenues Panel: Drew Shirk , Mark Mullin, Joanne Gordon, Alyson Fouts and Matthew Bryan

12. Revenue Tax Package2ESSB 6143 Sales Tax on Candy and Gum and B&O Jobs Credit • Sales of candy and gum are subject to the retail sales or use tax.  • Bill directs Department to compile a list of taxable candy and nontaxable candy-like products and post to web site. • Candy manufacturers may receive a B&O tax credit of $1,000 for each employment position maintained for a calendar year.  • Effective June 1, 2010.

13. Revenue Tax Package2ESSB 6143 Repeal Bottled Water Exemption • Repeal Bottled Water Exemption Sales of bottled water are subject to the retail sales or use tax.  • Includes bottled water that is delivered to the buyer in a reusable container.  • Sales of bottled water for medical reasons or where consumers lack a potable water source are exempt from the retail sales and use tax. • Effective June 1, 2010; Expires June 30, 2013.

14. Agency or Governor Request Bills ESHB 3014 Qualifying County Deferral & Credit • This bill modifies the existing Rural County Sales/Use Tax Deferral/Waiver Program by: • Changing the expiration date from July 1, 2010 to July 1, 2020 • Limiting “qualifying” counties to those with an unemployment rate 20 percent higher than the statewide rate • Changing employment requirement for businesses locating in a CEZ • Allowing continuation of the deferral during periods of temporary shutdown

15. Agency or Governor Request Bills ESHB 3014 Qualifying County Deferral & Credit (cont.) • This bill modifies the existing Rural County Sales/Use Tax Deferral/Waiver Program by: • Retroactively clarifying the definition of manufacturing in both programs (Sales/Use Tax Deferral/ and Rural County B&O Credit for New Employees) • Prospectively eliminates computer programming and computer related services from the manufacturing definition in both programs. • Effective July 1, 2010

16. Agency or Governor Request Bills ESSB 6789 Data Center • Provides a retail sales tax and use tax exemption for qualifying data centers purchasing: • New server equipment installed (including installation) on or after April 1, 2010 in a computer data center. • Replacement server equipment. • Power infrastructure required to operate the exempt server equipment, including charges for construction, installation, repair, alteration, and improvement.

17. Agency or Governor Request Bills ESSB 6789 Data Center (cont.) • Data centers must meet certain location, square footage, and hiring requirements to qualify. • Construction must commence after March 31, 2010 and before July 1, 2011. • Effective April 1, 2010; Expires April 1, 2018. • Chapter 1, 2010 Laws 1st Special Session

18. Revenue Tax Package2ESSB 6143 PUD Privilege Tax Clarification • The public utility district privilege tax applies to all amounts received from the sale of electric energy, including any regularly recurring charge to customers as a condition of receiving electric energy, and excluding any tax levied by cities. • Effective May 1, 2010.

19. Local Sales Tax Increases From Bottled Water, Candy Legislation

20. BREAK

21. Local Taxes Panel: Miki Gearhart, James Petit, and David Saavedra

22. Highlights of 2010 LegislationLocal Excise Taxes • EHSB 3179 (Chapter 127, Laws of 2010) Local excise tax provisions for counties and cities • E2SHB 1591 (Chapter 105, Laws of 2010) Use of certain transportation benefit districts funds • SSB 6271 (Chapter 19, Laws of 2010) Annexations by cities and code cities located with in the boundaries of a regional transit authority • SSB 6846 ( Chapter 19, Laws of 2010 1st Special Session) Enhanced 911 emergency communications services

23. ESHB 3179 - Local Excise TaxesEffective June 10, 2010 • Public Safety Tax (Local sales and use tax used for public safety purposes) • Mental Health Tax (Local sales and use tax used for mental health purposes) • Brokered Natural Gas Tax (Use tax on Natural or manufactured gas that is consumed with the state) • Criminal Justice Tax (Local sales and use tax used for criminal justice purposes) • Local Gambling Tax (Local excise tax imposed and administered by the cities and counties on various gambling activities)

24. Public Safety Tax (PST)Current Law, RCW 82.14.450 • With voter approval, counties can impose a local sales/use tax up to 0.3%. • One third of the money must be used for criminal justice purposes, fire protection, or both. • 60% of PST receipts are retained by the county and 40% are distributed to cities within the country on a per capita basis.

25. Public Safety Tax (PST)ESHB 3179, Section 1 City PST • Cities can impose the PST beginning January 1, 2011, if: • The tax is approved by voters; and • The county in which the city is located has not imposed the PST at the full 0.3% rate. • The maximum rate a city can impose is 0.1% if: • The county in which the city is located has not impose the PST; or • The county in which the city is located has imposed the PST but at a rate of 0.2% or lower.

26. Public Safety Tax (PST)ESHB 3179, Section 1 (Cont.) City PST continued • The rate a city can impose must be lower than 0.1% if: • The city adopts an ordinance/resolution for ballot proposition to the voters to impose the PST after (or at the same time) the county has adopted an ordinance/resolution for ballot proposition; and • The total city and county PST rate would exceed 0.3%. (e.g. If the county has a PST at 0.25%, then the city can impose the PST at a rate no greater than 0.05%)

27. Public Safety Tax (PST)ESHB 3179, Section 1 (Cont.) County PST • Counties may continue to impose the PST at a rate up to 0.3% with voter approval. • A county must allow a credit for a city’s PST if: • The county’s tax is greater than 0.2%; and • The date the county adopted its ordinance/resolution to submit the ballot proposition to the voters to impose the PST (at the rate greater than 0.2%) is after the date the city adopted its ordinance/resolution to submit the ballot proposition to the voters. • The amount of credit that a county must allow against its PST for a city PST is equal to the amount that exceeds the combined total of city and county PST of 0.3%. (Example: city imposes PST at 0.1% and county imposes the PST at 0.25%, then only 0.05% of the city tax will credit against the county tax collected within the city location.)

28. Public Safety Tax (PST)ESHB 3179, Section 1 (Cont.) Distributions of PST • County PST receipts must be shared with the cities in the county, as stated in current law: 60% retained by the county; 40% distributed to the cities within the county based on population. • City tax receipts must be shared with the county in which the city resides: 85% retained by the city; 15% distributed to the county. Non-supplant language • Non-supplant language pertaining to the use of funds was removed from the PST.

29. Mental Health TaxCurrent Law, RCW 82.14.460 • A county can impose a local sales/use tax up to 0.1% without voter approval. • Revenues from the tax must be used for operation or delivery of chemical dependency or mental health treatment programs and operation or delivery of therapeutic court programs and services. • A specified portion of revenue from the Mental Health Tax can be used to supplant other funds depending on the year.

30. Mental Health TaxESHB 3179, Section 2 City Mental Health Tax • A city may impose the mental health tax if: • The city has a population over 30,000 in a county with a population over 800,000; and • The county in which the city is located has not imposed the tax by January 1, 2011. • The rate of tax for the city is 0.1% (Same as the county rate) • Cities of Puyallup, Lakewood, Tacoma, and University Place would qualify if Pierce County does not impose the tax by January 1, 2011

31. Mental Health TaxESHB 3179, Section 2 (Cont.) County Mental Health Tax • Counties may continue to impose the Mental Health Tax under current law. • If a city imposes the mental health tax, the county in which the city resides may still impose the tax after January 1, 2011, but it must provide a credit for the full amount of the city’s tax. Non-supplant restrictions • The non-supplant restrictions on the use of funds remain for the county and pertain as well to the city use of funds.

32. Brokered Natural Gas (BNG)Current Law • The state imposes a BNG use tax on the use of natural gas and manufactured gas, if the person who sold the gas to the consumer has not paid the state public utility tax. • Cities may also impose a local BNG use tax. • BNG use tax rates are identical to state and local utility tax rates on the sale of natural gas and manufactured gas.

33. Brokered Natural Gas (BNG)ESHB 3179, Sections 4 & 5 • Effective June 10, 2010, “use,” means the first act within this state by which the taxpayer consumes the gas by burning it or storing it in the taxpayer’s own facilities for later consumption by the taxpayer. • For periods before June 10, 2010, the place of first use for purposes of the BNG use tax will depend on the outcome of the G-P Gypsum litigation. Depending on the holding of the Supreme Court in the G-P Gypsum appeal, refunds of local BNG tax may be required. Additional information will be made available when the G-P Gypsum decision is final. • The credit against the local BNG use tax for certain taxes paid to another state is narrowed so that it only applies to taxes paid to another municipality or other unit of local government.

34. Criminal Justice Tax & Gambling TaxESHB 3179, Sections 3 & 6 Criminal Justice Tax • Regarding use of these revenues, definition of “criminal justice purposes” is expanded to include human services. • The non-supplant restriction is removed. • The definition of “criminal justice purposes of mutual benefit” is expanded to include “services with ancillary benefits to the civil justice system.” Gambling Tax • Can be used for “public safety”

35. E2SHB 1591 Transportation Benefit District (TBD) Funds Current Law • TBDs may impose a sales and use tax up to 0.2% for up to 10 years • The 10 years can be extended with voter approval E2SHB 1597 • TBDs that first impose a voter-approved sales and use tax after July 1, 2010, may impose the tax for a longer period than 10 years, if the revenue is dedicated to repayment of general obligation bonds. • Effective June 10, 2010

36. SSB 6271 City Annexations & RTA boundaries Current Law • If a city within a regional transit authority (RTA) annexes, then another annexation to the RTA is required in order to expand the boundaries of the RTA SSB 6271 • Annexations by cities located within a RTA are simultaneously annexed to a RTA and subject to all RTA taxes, liabilities, and obligations applicable in the city. • Effective June 10, 2010

37. SSB 6846 - Enhanced 911 Tax Current Law • The state and counties are authorized to impose an E-911 excise tax on switched access lines and on radio (wireless) access lines. • County tax up to 50 cents per line. • County tax is collected from customers by the telecommunication companies and remitted directly to the counties. SSB 6846 • Beginning January 1, 2011, county E-911 tax rate increases up to 70 cents per line • The telecommunication companies will remitted funds to the Department of Revenue who will distribute the funds to counties in the same manner as county sales and use taxes. • Counties will need to contract with DOR for the administration of the tax (admin fee of up to 2% of revenues is authorized)

38. Local Infrastructure Financing Tool (LIFT) • Local Revitalization Financing (LRF) June 2009

39. What is LRF and LIFT? • Essentially a form of tax increment financing • Estimates the growth of certain state and local tax revenues from economic development in a specified area as a result of local public improvements • Allows use of incremental local tax revenues to pay for local public improvements • Provides a limited amount of state funding to pay for public improvements as long as there is a local match and anticipated growth in state revenues that equal or exceed the state contribution

40. LIFT • 7.5 Million per state fiscal year awarded by the Community and Economic Revitalization Board to nine projects • The projects awarded, Bellingham, Bothell, Everett, Federal Way, Mount Vernon, Puyallup, Spokane County, Vancouver and Yakima • Puyallup is implementing the LIFT state shared tax July 1

41. LIFT Legislative Change Second Substitute Senate Bill (SSSB) 6609 • Prior to 2010 legislation to receive the state award the state had to realize a benefit equal to award amount • Legislative change – project can receive less then award amount equal to the amount of the estimated state benefit • Amount of state contribution increases up to the full award amount as the state benefit increases

42. LRF • The department in 2009 approved 7 demonstration projects with a total award amount of $2.2 million • Demonstration projects – Auburn, Bremerton, University Place, Tacoma, Whitman County, Vancouver, Spokane (city) • September 1, 2009, 12 projects were submitted on a first come basis applying for a total of $2.5 million in annual award • The first 6 applications were funded with available funds • First come basis projects funded – Wenatchee, Clark County Bellevue, Kennewick, Federal Way, partially funded Renton (Port Quendall) • Auburn is implementing the state shared tax July 1

43. LRF 2010 Legislative Changes • Provides $1.95 million in annual funding for the six first come basis projects not funded in 2009 • Projects – Richland, Lacey, Mill Creek, Puyallup, Renton (South Lake Washington), New Castle • Applications must be updated and resubmitted by September 1, 2010 • An economic review of applications by the Department of Economics (University of Washington) to confirm there is an 85% reliability of jobs created and increased tax receipts • Allows taxing districts to partially participate

44. DOR Contacts General Program Questions: • James Petit, DOR Tax Account Administration, JamesP@dor.wa.gov, (360) 902-7037 Property Tax Questions: • Leslie Mullin, DOR Property Tax Division, LeslieM@dor.wa.gov, (360) 570-5865 • Diann Locke, DOR Property Tax Division, DiannL@dor.wa.gov, (360) 570-5885 Questions about estimating incremental tax revenues: • Diana Tibbetts, DOR Research Division, DianaT@dor.wa.gov, (360) 570-6085

45. Property Tax Legislation • Farmer’s Markets, • Community Facilities Districts, • Electronic Bill Presentment and Payment

46. Questions?

47. State of the EconomyPresented toSpring 2010 Local Government Partnership Meeting Eric Swenson Senior Economist May 18, 2010 Tumwater, WA

48. Summary • We are coming out of the “Great Recession” • The recovery is gaining traction • Private spending – both consumer and business – is firming • Job growth has finally returned • Probability of a double-dip is receding • Headwinds • Financial markets – volatility; credit to small business • Construction • Greek sovereign debt crisis’ impact on WA will be minimal, if contagion is avoided • WA outperformance still on track • Exports • Stable aerospace and software publishing

49. We have had 3 consecutive quarters of GDP and consumer spending growth Source: BEA, data through 2010 Q1

50. We have had job growth in 5 of the last 6 months Source: BLS; data through April 2010