HOUSE BILL REPORT

HB 404

BYRepresentatives Appelwick, Taylor, Grimm and Holland; by request of Governor Gardner

Extending the sales tax to services and providing business and occupation tax and public utility tax deductions and reducing the state sales and use tax rate.

House Committe on Ways & Means

Majority Report:  The substitute bill be substituted therefor and the substitute bill do pass.  (20)

      Signed by Representatives Grimm, Chair; Bristow, Vice Chair; Allen, Appelwick, Basich, Braddock, Brekke, Ebersole, Hine, Locke, Madsen, McMullen, Niemi, Peery, Rust, Sayan, H. Sommers, Sprenkle, Valle and Winsley.

Minority Report:  Do not pass.  (8)

      Signed by Representatives Belcher, Fuhrman, Holland, Nealey, Schoon, Silver, L. Smith and B. Williams.

House Staff:Bill Freund (786-7093)

AS REPORTED BY COMMITTEE ON WAYS & MEANS APRIL 6, 1987

BACKGROUND:

The Governor has proposed several new programs in the areas of K-12 education, higher education and economic development.  To fund the proposed education programs, additional state revenues may be necessary.  The economic development proposals consist of granting business and consumer tax relief.

Most services performed for businesses and individuals (e.g., accounting, engineering, medical, legal, services, etc.) are not subject to the sales tax.  Many services rendered to real and tangible personal property (e.g., auto repair, laundry, carpentry, painting, etc.) are currently subject to sales tax.

Through a recent court decision Group Health secured a Business & Occupation (B&O) tax exemption for amounts received from state and local governments for health insurance premiums.

The Department of Revenue interprets current law as allowing an exemption from tax for wholesale sales of power from a public utility district to a private company which in turn sells the power to a subsidiary.

Cities and towns may levy up to a 6 percent tax on public utilities.  Counties do not have the authority to levy a public utility tax.

A county sales tax equalization program provides a guaranteed revenue floor from sales tax receipts for counties of $182,000 for calendar year 1987.  In addition there is a program to supplement revenues for counties which receive less than 70 percent of the per capita state average of county sales tax revenues.

Audit activity by the Department of Revenue determined that adult family homes are not paying B&O tax and that fruit packing companies are not paying saves tax on containers and supplies.  Without clarification the tax status of these may change.

SUMMARY:

SUBSTITUTE BILL:  The sales tax is extended to the following services:  computer/data processing; consulting and public relations; barbers and beauty shops; miscellaneous personal services (e.g., spas, massage parlors, steam baths, escort services); and cable television.

An additional 10 percent Business and Occupation (B&O) tax surcharge is levied on manufacturers, extractors, wholesalers, retailers and services.

Amounts received by social and health welfare organizations like Group Health from state and local governments for health insurance for their employees are made subject to B&O tax.

The Public Utility Privilege tax is extended to include purchases of electricity for resale which are not subject to tax under the Public Utility Tax.

The distressed area sales tax deferral program is extended from 1991 to 1994.  The distressed area B&O tax credit program is extended from 1988 to 1991.

The tax status for the following is clarified:  miniwarehouses are subject to B&O tax; adult family homes are exempt from B&O tax; and materials and supplies used for fruit packing are exempt from sales tax.

Counties are authorized to levy a utility tax of up to 1.5 percent countywide.  A credit is provided for city utility taxes against the county tax up to the amount of the county tax.  The city utility tax lid is increased from 6 percent to 7 percent.

The county sales tax equalization program is changed.  First, the "minimum floor" program is increased from a guaranteed $182,000 annually to $250,000.  Second, the per capita equalization program is increased from 70 percent per capita to 75 percent.

SUBSTITUTE BILL COMPARED TO ORIGINAL:  The original bill (governor's tax bill) contained a variety of tax changes some of which had the effect of increasing revenues and some of which provided tax relief.  The major revenue raising provisions included expansion of the sales tax base to cover most services and eliminating the exemption for business interest from B&O tax.  The major tax relief provisions included a reduction of the state sales tax rate to 6 percent, eliminating the B&O tax surcharges currently in effect, and extending the sales tax deferral program to in-state manufacturers and research and development (R&D) firms.  The net effect of the governor's tax bill was to raise $510 million in general fund-state revenues.

Major provisions of the substitute bill are an extension of the sales tax to selected services and an additional B&O tax surcharge of 10 percent.  The net effect of the substitute is to raise $313.5 million in general fund-state revenues.

Revenue:    The bill has a revenue impact.

Fiscal Note:      Not Requested.

House Committee ‑ Testified For:    Testimony was given in favor of this bill.  A copy of signature sheets may be obtained from committee staff.

House Committee - Testified Against:      Many people testified in opposition to this bill.  A copy of signature sheets may be obtained from committee staff.

House Committee - Testimony For:    Broadening the sales tax base is desirable because it makes revenues more stable and minimizes the increases necessary on those already being taxed.  Since the tax reform climate is not favorable at this time, base expansion is the best alternative left.  Many counties and cities are having revenue problems due to loss of federal revenue sharing and a depressed economy.  They need additional tax capacity in order to continue providing essential services.  More funds should be provided for education and any measure providing sufficient funds to meet this objective is a desirable measure.

House Committee - Testimony Against:      The service sector should not be picked on.  Taxing services is full of complications not dealt with in this measure.  Increasing utility taxes is regressive.  Washington has one of the highest business taxes in the nation, so there should not be any further increases in such taxes.  Education and local governments do not need more funds, but if that need exists it can be met within existing revenues.