AWC Legislative Bulletin - Final Bulletin
2007 Regular Session
61st Legislature
January 8 to April 22, 2007  (Plain Text Version)

Return to Graphical Version | Search back issues

In this issue:
From the Director - 2007 Legislative Session: Productive For Cities
Energy & Telecommunications
Environment & Water
General Local Government
Infrastructure, Transportation, & Economic Development
Land Use & Housing
Law & Justice
Municipal Finance
Personnel & Labor Relations

Municipal Finance

Session Overview

An extremely successful session for cities within the municipal finance arena in 2007 highlighted by the passage of SSB 5089 regarding Streamlined Sales Tax (SST). SST legislation is a significant tax policy change and one that occurred only after years of work both with the Legislature and within the city family.
AWC’s work is not done – we will continue to work with the Department of Revenue to insure mitigation is calculated and distributed as envisioned in the bill. Please contact Jim Justin or Sheila Gall of the AWC staff if you have questions now or in the future regarding this bill or mitigation. Finally, thanks to all of you who worked very hard over the last few years to secure passage of this legislation – we would not have succeeded without your help.

A number of other helpful measures were passed including four flexibility pieces: SSB 5647 clarifying the use of hotel/motel tax proceeds, SHB 1910 expanding the multi-family property tax abatement program, ESB 5498 modifying supplanting requirements and HB 2161 regarding the allocation of investment earnings in code cities. All are helpful measures as we try to secure the greatest flexibility possible with local revenues.
The State operating and capital budgets also provided ample resources for cities. Full mitigation for SST was secured as was ongoing assistance for smaller cities and counties, and new funds for public health and outdoor recreation.

Two priorities for AWC were not addressed: local business and occupation taxes, and property taxes. Significant and financially damaging changes will take place on January 1, 2008 with the implementation of apportionment associated with the local B&O tax. We attempted to modify and reduce those impacts this year. It appears no changes will be seriously considered by this Legislature without the approval of the business community. We will continue to work with the Association of Washington Business on this issue during the interim.

The Legislature also did not address property taxes. A King County Superior Court has ruled the 1% cap via I-747 unconstitutional and this ruling has been appealed to the Supreme Court. The Legislature did not address this issue, in large part to disagreement over the “fix”. Some would like to reinstate the 1% cap, others support different modifications.

AWC sought a property tax cap tied to the implicit price deflator. In the end nothing happened. If the Supreme Court upholds the lower court decision (a decision is likely this summer) we expect a special legislative session to address the issue. If they overturn the lower court ruling and reinstate the 1% cap we don’t expect any action on property taxes through the 2008 session.

In general we expect the 2008 session to be rather quiet in regards to municipal finance issues. While some cities still have needs for additional criminal justice assistance and smaller cities need basic operating revenue, the Governor, every House member and half the Senate are up for election in 2008. Tax issues and elections simply don’t mix. Pending Board and Legislative Committee direction we will seek additional resources but the climb will be steep given a short session heading into a significant election year.

Major Bills

AWC Priority - Streamlined Sales Tax (SSB 5089)

SSB 5089 is the result of a multi-year effort by cities, counties, the state and businesses to bring Washington State in compliance with the national Streamlined Sales Tax Agreement. The bill will implement the remaining provisions of the agreement, including destination-based sourcing, and provide mitigation for negatively impacted jurisdictions. AWC very much appreciates the leadership of Governor Gregoire, Sen. Regala (D-Tacoma) and Rep. McIntire (D-Seattle) over the last several years to secure passage of this legislation.

Washington State has been participating in the Streamlined Sales Tax Project, with a coalition of more than 40 other states to simplify, modernize, and create uniformity in state sales tax structures nationwide. In 2003, the state adopted the majority of the Streamlined Sales Tax Agreement, with the exception of the sourcing provisions. In October 2005, the agreement went into effect and the Governing Board was established. Twenty-one states are full or associate members, and more than 1000 companies have registered to voluntarily comply with the terms of the agreement, which include collection of sales tax on behalf of the member states and local governments in exchange for protections from potential past tax liability.

This issue is possibly the most divisive issue the Association has seen in the last three decades due to the shift in local sales tax revenues caused by the change from origin-based sales tax allocation to destination-based allocations. Three years ago we had cities with opposing views entrenched in their positions. It was clear without some sort of city agreement; no SST bill would be advanced by the Legislature.

In September 2005, cities, working through a Streamlined Sales Tax Committee appointed by the AWC Board with representatives from six negatively impacted and six positively impacted cities, reached agreement on a compromise mitigation proposal that was incorporated into this AWC priority legislation. We offer special thanks to former Federal Way city manager David Moseley and former Kent city administrator Mike Martin who were key to brokering this city agreement.

Of most concern to cities, SSB 5089 will provide full mitigation of jurisdictional net losses due to revised sourcing rules, based on actual losses, and transfers $31.6 million in the first year for estimated mitigation payments to local jurisdictions. In future years, funding will be transferred from the State’s general fund in an amount sufficient to provide mitigation for net losses. The net losses will be calculated based on sales tax losses from sourcing offset by new revenues from remote sales and voluntary compliance. Mitigation will decrease or be eliminated over time as jurisdictions receive additional revenues from remote sales. Based on Department of Revenue estimates, 99 cities will have a net negative impact after remote sales revenues and 182 cities will have a net positive impact after remote sales revenues.

For first-year mitigation distributions, sales tax collections from July 1, 2007 through June 30, 2008 will establish the pre-sourcing "base year" from which losses will be compared. For mitigation distributions based on sales tax revenues from July 1, 2008 through June 30, 2009, the Department of Revenue will compare each quarter’s post-sourcing sales tax revenues with the previous base-year quarter to establish the loss, subtract any new voluntary compliance/remote sales revenues and remit mitigation quarterly. Due to the two-month delay in sales tax revenue collections and distributions, the first mitigation distribution will be December 1, 2008, for July through October sales tax collections.

For mitigation distributions based on sales tax collections from July 1, 2009 through June 30, 2010, and subsequent years, the Department of Revenue will distribute mitigation quarterly taking the base-year losses less voluntary compliance/remote sales new revenues. A jurisdiction will continue to receive mitigation until its voluntary compliance/remote sales new revenues exceed its losses due to the change to destination-based sourcing. The base-year sourcing loss calculation will not change in future years, and it will not grow to reflect inflation.

A Department of Revenue oversight committee will also be set up under the legislation to review distributions based on loss projections. Cities negatively and positively impacted by the sourcing change will be represented on the Committee.

In addition, some changes were made to the definitions of telecommunications in the state’s tax statutes (RCW 82.04.065). Because some cities reference these definitions in their local utility tax ordinances, the old definitions were moved to another section related to the state utility tax statutes (RCW 82.14.010) so that those city taxes would remain unaffected by the state definition changes. Those cities that adopted definitions by reference in their telecommunications utility tax ordinances should update the reference to the new section in order to comply with the new state definitions. Those cities that have not adopted definitions by reference to the state law will not be impacted by these changes.

Finally, the bill contains some assistance to businesses to comply with the new sourcing rules. Businesses not otherwise required to collect sales tax in Washington that register to voluntarily comply with the streamlined sales tax agreement and agree to collect sales taxes on behalf of the member states will receive monetary allowances for the use of certified service providers, tax compliance software, or other means of collecting sales taxes authorized under the agreement.

The bill also contains $11.8 million in state tax credits for in-state small businesses to comply with the destination-based sourcing provisions of the legislation. These funds will be allocated to small businesses with significant deliveries. Small businesses are defined as under $500,000 annual revenues with 5% of sales from deliveries. They will be allowed to credit up to $1000 for the costs of software or other technology needed to comply with the new sales tax sourcing rules.

For more background information, including a description of how mitigation will work, see the AWC website: www.awcnet.org/streamlinedtax. In addition, over the next year the Department of Revenue is planning to undertake a significant education and business outreach program to educate businesses and others on complying with the new sales tax sourcing rules.

[C 6 L 07; Effective Date: July 1, 2008, except sections 301, 1301, 1602, and 1701-1703, which take effect July 22, 2007; and sections 302, 1003, 1006, 1014, and 1018, which have a contingent effective date.]

AWC Priority - Clarifying Use of Lodging Tax Revenues (SSB 5647)

This bill clarifies the ways cities can expend lodging tax revenues to attract tourists. The definition of “tourism promotion” is expanded to include the operations of special events and festivals. The bill also expands the definition of “tourism-related facility”, allowing cities to support facilities owned by nonprofit organizations.

The bill requires that jurisdictions using lodging tax revenues submit an annual economic impact report to CTED beginning January 1, 2008. The report must include items such as: total revenue received; a list of festivals, special events or nonprofit organizations that received funds; the amount of revenue expended on each festival or facility owned by a nonprofit organization; the estimated number of tourists (traveling 50 or more miles to the destination) and remaining overnight; and the estimated increase in sales and use tax attributed to the event or facility. AWC will be working CTED and the Auditor’s Office to craft a model format for the report.

JLARC is to report to the legislature and Governor by September 1, 2012 about the use and economic impact of lodging tax revenues used for festivals, special events and tourism-related facilities owned by nonprofit organizations. The changes expire on June 30, 2013.

[C 497 L 07; Effective Date: July 22, 2007]

AWC Priority - Multi-Family Property Tax Exemption (E2SHB 1910) – Partial Veto

E2SHB 1910 was delivered to the Governor on April 20.The Governor signed the bill on May 11, vetoing Section 12, the emergency clause that would have made the bill effective immediately. The bill now becomes effective July 22, 2007.

Currently only cities above 30,000 population or the largest city in a GMA planning county may offer a 10 year property tax abatement to multi-family housing constructed in an urban center. This bill expands this tool to all cities over 15,000 population and cities over 5,000 population in King, Pierce, Snohomish, Clark, Kitsap and Thurston Counties. The abatement program is modified to an eight year program or 12 years with a state required 20% affordability component. A reporting requirement is included in the legislation. AWC will prepare a model report format for city use.

In her veto message associated with the emergency clause, Governor Gregoire noted a concern that the bill allows cities to grant, without consultation with counties, a property tax exemption that affects counties. The Governor specifically requested that cities include counties in the decision making process associated with the abatement. Additionally, the Governor will be asking the Department of Community, Trade & Economic Development to analyze the required reports from cities in order to evaluate the program’s use, its effects, and to assess the need for legislation to alter the exemption program.

[C 430 L 07; Partial Veto; Effective Date: July 22, 2007]

Partial Veto: As noted above the Governor vetoed the emergency clause in the bill.

State 2007-09 Operating Budget (SHB 1128) – Partial Veto

The 2007-09 State operating budget appropriations total $33.4 billion and will go into effect July 1, 2007. The budget leaves a general fund ending balance of $558.6 million and $165.4 million in the Budget Stabilization Account assuming passage of ESSJR 8206.

Some key impacts to cities in the final budget for the 2007-09 biennium include:

  • $31.6 million to fully mitigate losses to negatively impacted jurisdictions as a result of the new Streamlined Sales Tax legislation (SSB 5089).
  • $20 million for local public health jurisdictions (in addition to continued backfill, $48 million) to address core public health functions of statewide significance.
  • $9 million for local government stormwater grants, with $2 million designated for outside the Puget Sound region. See the Capital Budget write-up on page 21 for additional funds designated for stormwater purposes.
    $3.345 million to the Criminal Justice Training Commission to conduct an additional ten basic law enforcement academies in FY 2008 and four additional academies in FY 2009.
  • Funding for the State Actuary to perform an actuarial study of local government liabilities for Law Enforcement Officers’ and Fire Fighters’ Retirement system Plan 1 (LEOFF 1) post-retirement medical benefits.
  • $5.7 million in maintenance and policy changes to MRSC with a new $400,000 provided so they may provide research and assistance to special purpose districts.
  • $2 million for the Department of Ecology to help local governments find alternatives to backyard burning of organic materials.
  • $100 million is provided to the Interagency Committee for Outdoor Recreation for farmlands, outdoor recreation and habitat conservation.

The budget also maintains continued funding for important city programs such as the city-county assistance account, the Community Economic Revitalization Board, and the Public Works Trust Fund.

For more information on city impacts, see the AWC website at www.awcnet.org. Budget documents can be found on the Legislative Evaluation and Accountability Program Committee’s (LEAP) webpage at http://leap.leg.wa.gov.

[C 522 L 07; Partial Veto; Effective Date: May 15, 2007]

Partial Veto: The Governor vetoed a number of sections of SHB 1128, mostly relating to appropriations to state agencies for programs not concerning cities.

Minor Bills

AWC Priority - Revising Supplanting Requirements (ESB 5498)

An AWC priority this session was to remove non-supplanting language in the voter-approved levy lid lift and the 0.3% sales and use tax. While this bill does not allow cities to completely supplant funds, it allows that certain funds may be supplanted when there is a loss of specific funds or due to specific events impacting expenditures. This includes lost federal funds or state grants or loans, extraordinary events not likely to reoccur, changes in contract provision beyond the control of the jurisdiction receiving services, and major nonrecurring capital expenditures.

The bill also extends the six year levy lid lift authority to special purpose districts, not just counties, cities and towns.

[C 380 L 07; Effective Date: July 22, 2007]

AWC Priority - Regarding the Allocation of Investment Income (HB 2161)

This bill will provide code cities the same provisions as non-code cities regarding the allocation of interest income from commingled investments. Cities are allowed to commingle various funds including utility funds for investment purposes. Once this bill is made law the councils of code cities will be able to choose to allocate investment income to the general fund, instead of apportioning it back as initially invested.

[C 64 L 07; Effective Date: July 22, 2007]

Sales and Use Taxation of Vessels (SHB 1002)

This bill extends the amount of time a non-Washington resident can remain in the State after purchasing a vessel of 30 feet or longer while receiving a sales tax exemption. Buyers wishing to stay in the state for up to 12 months are required to purchase a use permit for $500 for vessels less than 50 feet in length and $800 for vessels greater than 50 feet in length. The use permit is nonrenewable and nonresidents claiming the exemption yet remaining in the State after the permit’s expiration will be required to pay the sales tax with interest.

[C 22, L 07; Effective Date: July 1, 2007]

Creating a Budget Stabilization Account in the State Constitution (ESSB 5311 and ESSJR 8206)

ESSB 5311 together with ESSJR 8206 would amend the state Constitution to establish a Budget Stabilization Account. Provided that ESSJR 8206 is approved by the voters at the November general election, ESSB 5311 creates the Budget Stabilization Account and abolishes the Emergency Reserve Fund, which will have different restrictions. The state treasurer would transfer an amount equal to 1% of the general state revenues for that fiscal year to the account by June 30 of every year. Moneys in the account may be used after a majority vote of each legislative house if:

  • Forecasted employment growth for any fiscal year is less than 1%; or
  • The Governor declares an emergency resulting from a catastrophic event that requires government action to protect life or public safety.

Any amount from the account may be used at any time if approved by three-fifths of the members in each legislative house.

ESSJR 8206 has been filed with the Secretary of State for action by the voters this November.

[C484 L 07; Effective Date: July 1, 2008 contingent upon approval of the voters, except for section 1of ESSB 5311, which was effective May 15, 2007 and sections 9 and 10, which become effective July 22, 2007]

Excise Taxation of Electronically Delivered Financial Information (HB 1981)

This bill clarifies the state’s tax treatment of electronically delivered financial information by providing a sales and use tax exemption for sales of this financial information, if the sale is to an investment management company or a financial institution. Standard financial information is defined as any collection of financial data or facts, not compiled for a specific customer, including financial market data, bond ratings, credit ratings, and deposit, loan, or mortgage reports. Prior to 2005, the Department of Revenue had considered these transactions non-taxable.

[C 182 L 07; Effective Date: August 1, 2007]

Excise Taxation of Sales of Tangible Personal Property Originating from or Destined to Foreign Countries (HB 5434)

This bill clarifies Department of Revenue tax treatment of imported or exported goods. Under current DOR rules, goods in the process of being imported or exported from this state are exempt from the business and occupation (B&O) and sales taxes. This bill places that tax treatment in law by providing a statutory exemption from B&O and sales taxes for the sale of tangible personal property in import or export commerce. The exemption defines property in import commerce when it is in the process of import transportation or when it is flowing through Washington on its way to another destination. The property is no longer in the process of import transportation if the property is: put to actual use; resold after the property has arrived in this state or any other state; or processed in any way not related to shipping.

This bill is not expected to impact the tax treatment of goods under local B&O taxes.

[C 477 L 07; Effective Date: July 22, 2007]

Sales and Use Tax Exemption of Repairs to Farm Machinery and Equipment (EHB 1902)

This bill will provide a sales and use tax exemption for parts and services related to farm vehicles and qualifying farm machinery and equipment. Replacement parts for farm vehicles as well as the labor and services rendered in respect to the repairs will be exempt, even if included in a single itemized transaction with taxable services. Farmers with an annual gross sales or harvesting value of at least $10,000 per tax year may qualify for these exemptions.

The local government fiscal impact is expected to be more than $1 million per year by fiscal year 2009. AWC opposed this bill.

[C 332 L 07; Effective Date: July 22, 2007]

Bills that Failed

AWC Priority - Increasing Assistance to Cities and Counties (HB 2022)

This bill would have enhanced the city-county assistance account by raising the maximum assistance a city could receive to $175,000 a year (from $100,000) plus inflation. The bill would have continued to provide assistance to cities based on a sales tax and property tax equalization formula but would have increased the sales tax threshold as follows:

  • For cities with a population less than 5,000 from the current level of 55% of the per capita statewide average to 70%; and
  • For cities with a population of 5,000 or more, from the current level of 50% of the per capita statewide average to 70%.

The bill also would have transferred an additional $10 million to the account annually from the state general fund. This amount would be split evenly with counties.

AWC Priority - Municipal Business and Occupation (B&O) Tax (HB 2368)

This bill would have made a number of changes to the municipal B&O tax legislation (RCW 35.102) approved in 2003, including a number of changes to the allocation and apportionment provisions that take effect on January 1, 2008. The proposed revisions included the following:

  • Addition of a property factor in the service income apportionment formula and aligning the formula with the Multi-State Tax Commission (a national organization of state tax administrators used by many other states);
  • Technical corrections to the model ordinance requirements; and
  • An exception to apportionment requirements that would have assisted smaller businesses that did not want to adopt new accounting procedures that will be required to comply with the mandatory apportionment provisions.

The apportionment provisions go into effect on January 1, 2008 and AWC will be working with a group of B&O tax cities over the interim to revise the model ordinance to include apportionment. We will have the revised ordinance ready for adoption this fall. Those cities with B&O taxes should also review the conclusions of the 2005 Department of Revenue Apportionment Study and begin planning for any revenue impacts in the upcoming budget process.

AWC Priority - Providing Dedicated Public Health Funding (2ESHB 1825/SSB 5729)

These bills were based on the recommendations of the Joint Select Committee on Public Health Financing.

They would have created a public health financing account in the state treasury for local health jurisdictions to meet core public health criteria of statewide significance. The account would have been funded by a portion of the cigarette tax and funds would have been distributed to local health jurisdictions by formula.

Although neither of these bills passed the Legislature, aspects of 2ESHB 1825 addressing core public health functions and performance measures were amended to SSB 5930, the Governor’s health care legislation.

The operating budget, SHB 1128, also provided $20 million for local public health jurisdictions (in addition to continued backfill) distributed by formula.

AWC Priority - Providing Cities with the Authority to Impose a Local Sales Tax for Criminal Justice Services (HB 1851)

This bill would have provided cities with councilmanic authority to impose a local sales tax of 0.1% for the purpose of funding costs related to criminal justice services. Funds could not have replaced or supplanted criminal justice expenditures funded by other sources.

AWC Priority - Regarding Property Tax Limits (HB 2309)

HB 2309 would give taxing districts, other than the state, the ability to increase property taxes to 101% or 100% plus inflation, whichever is greater (inflation was determined by the implicit price deflator or IPD).

Reenacting I-747 (HB 1155, HB 1170, HB 2117, HB 2272, HB 2403, SB 5001)

Each of these bills sought to limit property tax increases to one percent by reenacting the provisions of Initiative Measure 747. All but one of these bills was introduced by members of the House of Representatives. Since the legislature did not choose to address this issue during this session, the Supreme Court heard testimony on Tuesday, May 8 about whether or not voters where mislead when they approved the initiative in 2001. In the summer of 2006 a King County Superior Court ruled the 1% cap on property taxes to be unconstitutional because it referenced I-722, which was declared unconstitutional by the Supreme Court prior to vote on I-747. The Supreme Court’s ruling is pending.

Authorizing Property Tax Increases for Infrastructure (HB 2334)

This bill would have allowed cities to increase property taxes to 100% plus the implicit price deflator (IPD) in lieu of imposing impact fees. City property taxes in excess of 101% would be for infrastructure system improvements before any other purposes.

Annual Sales and Use Tax Holiday (HB 1012)

HB 1012 would have added a new section to the sales tax law to authorize an annual tax holiday on the second Saturday and Sunday of August for purchases associated with education. The following items would have been exempt from state and local sales tax:

  • Clothing items
  • Computers
  • School art supply items
  • School computer supply items
  • School instructional material items
  • School supply items.

Local Sales and Use Tax for Annexation (ESHB 1139/SB 5330)

These companion bills would have modified the local sales and use tax that is credited against the state sales and use tax when a large annexation occurs. The legislation would have allowed the City of Seattle to receive a tax credit currently available to other cities in King, Pierce and Snohomish counties, but at a different rate, for large annexations.

Modifying Local REET Provisions (HB 1161)

Currently, cities can impose a real estate excise tax (REET) at the rate of 0.25% or 0.5%. Cities also have the authority to impose an additional 0.5% REET in lieu of levying the second 0.5% optional sales tax. HB 1161 would have modified the tax rate cities may impose. The original version of HB 1161 would have prohibited cities from levying the additional 0.5% REET if the county in which they were located levied any portion of the second 0.5% optional sales tax. SHB 1161 would have required that, if the county in which a city is located, chooses to levy a portion of the second optional sales tax, the city’s additional REET must be reduced by the same rate.

Sales & Use Tax Exemption for Propane by Farmers (HB 1376)

HB 1376 would have provided a sales and use tax exemption to farmers or people who provide horticultural services to farmers for propane used for horticultural services. The bill did not include highway use or residential space or water heating. The local government fiscal impact was estimated to be nearly $1 million.

State Capital Funding Assistance for Fire Districts (HB 1470)

HB 1470 would have expanded the allowable list of local governments eligible for Public Works Trust Fund loans to include fire protection district stations in:

  • Towns and cities with fewer than 10,000 residents
  • Counties with fewer than 50,000 residents
  • Unincorporated rural areas with a population of less than 10,000

Local Tax Administration (HB 2260)

The bill would have required state collection and administration of city business and occupation (B&O) and utility taxes and would have represented a significant loss of local control over two major revenue sources for cities. While the bill never had a formal hearing, its provisions were discussed by the business community in conjunction with the debate on SHB 2368 related to changes to the municipal B&O tax model ordinance.

Taxpayer Relief (SHB 2380)

SHB 2380 would have expanded the state assistance to businesses for implementing the destination-based sourcing provisions in SSB 5089, the streamlined sales tax legislation that passed this session. This bill would have provided state B&O tax credits up to $1000 to businesses with revenues between $500,000 and $3 million, if deliveries were at least 95% of their sales revenues, to assist with the costs of compliance with destination-based sourcing of sales taxes. This would have expanded the businesses eligible to receive a share of the $11.8 million provided to small businesses under $500,000 annual revenues, with 5% of sales from deliveries.

Limiting Power of Cities and Towns to License Businesses (SB 5471)

This bill would have limited cities’ ability to require business licenses to business located within the city. The bill would have amended the statute that gives cities taxing authority and could have impacted a city’s ability to levy other taxes as well.