City officials recommend changing current business tax structure

Officials are proposing a change in how Renton administers B&O and per employee business taxes.

Renton businesses might soon see a change in what kind of taxes they would pay.

City officials are proposing a change in how Renton administers Business and Occupation (B&O) taxes and per employee business taxes (head tax).

They are recommending the Renton City Council vote to eliminate the head fee, reduce B&O tax threshold to $500,000, and maintain the current tax cap and rates. The recommendations follow the passing of House Bill 2005, which seeks to improve “the business climate in this state by simplifying the administration of municipal general business licenses.”

Currently in Renton, businesses that have a gross revenue of $1.5 million or more pay a B&O tax, and businesses that make less pay a head tax. Businesses that fall under the exception (for example small businesses that have one or two employees) need to only pay the licensing fee.

There are nearly 6,000 businesses registered within the city of Renton. About 7.5 percent pay B&O tax, 30 percent pay head tax and the remaining pay for licensing.

The bill, which went into effect July 23, requires the city to join one of two portals that will help administer taxes and licenses.

The first option is a state business license system administered by the Washington Department of Revenue. This online portal helps with licensing but does not allow businesses to pay city-administered taxes.

The other option is FileLocal, a system sponsored by the cities of Seattle, Bellevue, Everett, Tacoma and Lake Forest Park. The system allows for businesses to pay licensing fees and city-administered taxes.

Officials are recommending FileLocal “due to their tax integration and providing a one-stop shop for our business community and providing excellent customer service,” said Nate Malone, the city’s tax auditor, at the Nov. 6 Committee of the Whole meeting.

The city’s current code isn’t compatible with either system and customization fees will be substantial, Malone said. To simplify the tax structure, maintain consistency with other cities and reduce confusion between when B&O and head taxes are due, officials are recommending the elimination of the head tax.

During the last 12 months, the city has collected about $500,000 in head tax, which constitutes less than 10 percent of the total business license and tax revenues, according to Malone.

To make up for that cost while keeping the net revenue neutral and impact to small businesses as low as possible, officials are recommending reducing the B&O threshold from $1.5 million to $500,000.

Renton’s $1.5 million B&O threshold is the highest in the region, compared to Kent’s $250,000, Seattle’s $100,000 or Bellevue’s $160,000. However, Renton’s rate — 0.085 percent — is lower compared to other cities. Kent’s rate is 0.152 percent, Seattle is at 0.425 percent, and Bellevue is at a 0.15 percent.

Malone walked the council through multiple scenarios and how it could help make up for the lost head tax. At a $500,000 threshold, officials estimate the city would make up an additional $410,000. About 583 businesses would move into paying B&O taxes and 1,267 businesses would move into paying only the license fee.

Malone also laid out potential tax cap options. In 2016, the maximum tax rate paid by any one business in a calendar year was $4.25 million. This cap is adjusted annually by the Consumer Price Index. This means in 2017, the cap is around $4.34 million and in 2018, it would be about $4.42 million. The city considered raising the cap beyond the CPI adjustment to recoup the lost head tax revenue, as well as a mixture of lowering the B&O tax threshold and increasing the tax cap.

Officials are recommending not adjusting the cap rates or the tax rates.

“(The recommendations) are going to create a revenue that’s neutral-net situation and still protecting small businesses… over 1,200 will see a tax decrease by having the elimination of the (head tax),” said Malone. “Also there will be no impact to businesses that are already subject to the per employee license fee.”

The city recommendations would require 1,033 businesses to pay B&O taxes and 4,967 businesses to pay license fees. Around 541 businesses will see an increase in taxes by an average of $570, while around 42 businesses will see a decrease in taxes by an average of $515.

City officials are scheduled to meet with Chamber of Commerce on Nov. 16. The council is expected to vote on the adoption later this year.

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