Revised State Revenue Forecast

On September 18, 2008 the Economic and Revenue Forecast Council revised its forecast for the 2007-09 biennium, and announced that the forecast is $273.1 million lower than was expected in June. This brings the State budget deficit to $3.2 billion for the 2009-11 biennium and assumes total revenue is $31.5 billion. The reduction is due to a further decline in construction and weaker spending, especially on automobiles.

The Governor has already begun to adjust spending, including the implementation of a state hiring freeze. As we enter the 2009 legislative session the budget deficit will play a large role in policy discussions, and will clearly hinder passage of legislation requiring financial resources.

City-Assistance Account and REET Projects

The September Economic and Revenue Forecast projections for Real Estate Excise Tax (REET) revenues also continue to be adjusted downward. This has implications for cities in that a portion of the State’s REET funds the City-County Assistance Account, among other important city programs.

October distributions from this account to the 173 cities that qualify for funds were 25% less than in 2007 and 48% less than in 2006. Cities should take this account’s volatile funding source (the REET) into account when budgeting for 2009. If real estate activity continues to slow, the cities that depend upon assistance from this account will continue to see their allocations ratably reduced.

For more information on the City-County Assistance Account visit: www.awcnet.org/ESSB6050

Streamlined Sales Tax Update

Destination-based sales tax sourcing took effective July 1, and the Department of Revenue (DOR) now has the first full month of data under this new system and has begun analyzing it.

The mitigation advisory group met on September 26 to review final questions regarding mitigation and initial impacts. The first mitigation payments to local jurisdictions that experience a net loss in sales tax revenues due to the sourcing changes will be distributed by December 31, 2008 for July, August and September losses. Mitigation payments will continue to be distributed quarterly until a jurisdiction’s new revenues from voluntary compliance exceed the sourcing loss.

Electronic access to the first set of impact data by business will be sent via e-mail to local jurisdictions shortly after the first payment in December. Because this data will be confidential like the sales tax detail by business, DOR is in the process of updating its files for confidentiality agreements with local government officials. They recently sent e-mails to every city asking for updated contact information, requesting designation of a contact for the SST information, and providing information about confidentiality agreement requirements. If your jurisdiction has not yet responded, please do so. Contact Jim Harden, Taxpayer Account Administration with the Department of Revenue at jimh@dor.wa.gov or 360-902-7103.

In addition, in anticipation of increased reliance on confidential sales tax information by jurisdictions in the wake of the switch to destination-based sourcing, DOR also formed a workgroup to review how local governments can share tax information between jurisdictions and still protect confidential tax payer information. We will keep you posted on the work of the committee.

Forecasting Impacts of SST

The Department of Revenue developed several helpful documents as part of its presentations to educate local government staff and elected officials about the changes. In particular, the last several presentations included information about the difficulty of forecasting revenues and the availability of data to analyze impacts.

Streamlined Agreement: The Difficulty of Forecasting Impacts: http://dor.wa.gov/Docs/Pubs/Misc/Streamline/Streamline%20Sales%20Tax%20Impacts%20Difficult%20to%20Forecast%20(2008-08-12).pdf
Forecasting Sales Tax Revenues: http://dor.wa.gov/Docs/Pubs/Misc/Streamline/Forecasting%20Local%20Sales%20Tax%20Revenues%20(2008-08-12).pdf
Industries in Mitigation Analysis: http://dor.wa.gov/Docs/Pubs/Misc/Streamline/09%20-%20NAICS%20(2208-08-12).pdf

DOR has also developed a fact sheet from a citizen perspective about the changes that may be useful when you get questions: http://dor.wa.gov/Docs/Pubs/Misc/Streamline/DBST-KnowYourRate.pdf.

For more information, see the DOR website at www.dor.wa.gov/mitigation.

Business Licenses and SST

As part of our work with the business community to allay concerns about the impact of the change to destination-based sales tax sourcing on city business license or tax requirements, AWC developed model letters that cities could use when contacting businesses about business license requirements if the city uses sales tax data as a check on license compliance. The model letters were distributed to cities in June, and cities are encouraged to be sensitive to business concerns when reacting to new data received due to compliance with SST. Copies of the letters are available on the AWC streamlined sales tax website: www.awcnet.org/streamlinedtax.

In addition, during the 2008 legislative session SHB 3126 passed, clarifying that mere registration or compliance with the streamlined sales tax agreement does not by itself subject a business to business license or tax requirements. Although AWC worked with the business community on this bill to address their concerns, it appears the legislation may not fully meet AWB’s objectives regarding when a city may require a business license, and legislation in 2009 may be introduced.

AWC supported SHB 3126 but we have not supported and will not support legislative efforts to unduly restrict when a city may require a business license.

Taxation of Digital Goods Study

The Department of Revenue was directed to establish a study committee on the tax treatment of digital goods to address the changing technology and marketplace.

The committee has been meeting over the past year to determine how these goods are currently treated under our state’s laws, the laws of other states, and the national streamlined sales tax agreement (SSUTA). Legislation will be introduced in 2009 because, under the terms of the SSUTA, states may no longer tax all digital goods as an equivalent to the tangible good, as Washington State currently does, after 2010 for certain goods and 2012 for others. States must specifically address the taxation of these goods and must comply with definitions provided in the agreement for three specific types of digital goods: digital audio-visual, digital audio and digital books. States must provide specific definitions and taxation provisions for certain digital goods in order to tax them after 2012.

The committee met on September 25 to review a draft legislative proposal, and copies of that proposal and more information on the digital goods committee are at www.dor.wa.gov/Content/AboutUs/StatisticsAndReports/DigitalGoods/Default.aspx.

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