The task force of city and business representatives established in EHB 2005, which passed in 2017, has continued to meet and review the two-factor apportionment formula for service-income for local B&O taxes. EHB 2005 requires the task force to submit a report to the Legislature by October 31, 2018, to recommend changes to simplify the two-factor service income formula in RCW 35.102.130 using a market-based model and methods that rely on information typically available and captured by common business recordkeeping systems.
Over the past few meetings, the task force members have been evaluating elements of market-based tax apportionment models used in other state tax systems and discussing how these models differ from the current system for various examples of business locations, industries, and activities. Now that the education portion of the task force’s process has concluded, the task force will begin evaluating these alternatives with the goal of simplifying the administration of the portion of the allocation formula related to service income based on contacts with customers. The current model in RCW 35.102.130 requires a two-factor test, payroll, and service income. The first test for allocating service income is based on the majority of physical contacts with customers.
AWC continues to monitor this process closely given the importance of this revenue source to the 44 cities with local B&O taxes and the impact to city revenues that occurred when the state required the shift to the two-factor formula in 2008.
The agenda for the next meeting of the task force on March 6 includes evaluating options to change the service income apportionment model and defining which will achieve simplification. If your city has a local B&O tax and has begun to estimate what impact a change to service income apportionment or would like to provide input on the task force process, please contact Sheila Gall.