SENATE BILL REPORT
This analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent.
As Passed Senate, March 12, 2019
Title: An act relating to incentivizing the development of commercial office space in cities located in a county with a population of less than one million five hundred thousand.
Brief Description: Incentivizing the development of commercial office space in cities located in a county with a population of less than one million five hundred thousand.
Sponsors: Senate Committee on Financial Institutions, Economic Development & Trade (originally sponsored by Senators O'Ban, Brown, Palumbo and Wagoner).
Committee Activity: Financial Institutions, Economic Development & Trade: 1/17/19, 1/22/19 [DPS, DNP].
Passed Senate: 3/12/19, 39-10.
SENATE COMMITTEE ON FINANCIAL INSTITUTIONS, ECONOMIC DEVELOPMENT & TRADE
Majority Report: That Substitute Senate Bill No. 5051 be substituted therefor, and the substitute bill do pass.
Signed by Senators Mullet, Chair; Hasegawa, Vice Chair; Wilson, L., Ranking Member; Braun, Das and Hobbs.
Minority Report: Do not pass.
Signed by Senator Ericksen.
Staff: Kellee Gunn (786-7429)
Background: Sales and Use Tax. Retail sales taxes are imposed on retail sales of most articles of tangible personal property, digital products, and some services. A retail sale is a sale to the final consumer or end user of the property, digital product, or service. If retail sales taxes were not collected when the user acquired the property, digital products, or services, then use taxes apply to the value of the property, digital product, or service when used in this state. The state, cities, and all counties levy retail sales and use taxes. The state sales and use tax rate is 6.5 percent. Local sales and use tax rates vary depending on the location.
Property Tax. All property is subject to a tax each year based on the highest and best use, unless a specific exemption is provided by law. The county assessor determines assessed value for each property and calculates property taxes. The property tax bill for an individual property is determined by multiplying the assessed value of the property by the tax rate for each taxing district in which the property is located.
Regional Transit Authority. State law provides that a Regional Transit Authority (RTA), for the purpose of financing and supporting public transportation services within an urban area, may finance a high capacity transit system through voter-approved revenue measures. Subject to voter approval, an RTA may impose certain taxes including a motor vehicle excise tax, a property tax, and a sales and use tax of up to 1.4 percent. There is currently only one RTA, Sound Transit, which operates light rail, commuter rail service, and express bus service in the metropolitan areas of Pierce, Snohomish, and King County.
Summary of Engrossed First Substitute Bill: The governing authority of a city may establish a local sales and use tax exemption or a local property tax exemption, or both, for the development of class A commercial office space in certain designated urban centers.
Cities in a county of less than 1.5 million people, would be eligible to adopt these tax exemptions. According to population data from the Office of Financial Management from April 2018. King County would not be eligible to adopt these tax exemptions.
A class A commercial building is defined as being the most competitive and highest quality on the local market, as determined by a city's governing authority. The qualifying commercial office space must also be:
centrally located within the city;
provide close access to public transportation and freeways;
offer amenities and advanced technology options to tenants;
be at least 50,000 square feet;
be professionally managed; and
at least three stories.
Local Sales and Use Tax Exemption. Any city that decides to use the local sales and use tax exemption for the development of class A commercial office space must:
obtain written agreement from the taxing authority that imposes the sales and use tax;
hold a public hearing on the proposed use of the exemption;
provide public notice of the hearing and include a description of the project and the amount of revenue to be exempted;
establish criteria for a project to qualify for exemption, which must include: (1) the minimum number of new family wage jobs created; (2) a definition of the features and characteristics of a class A commercial office space project; and (3) other criteria indicated as necessary by the city; and
adopt an ordinance that describes the project in certain detail, provide an estimate of local sales tax revenue that would be exempted, provide an approximate date that the sales tax will be remitted to the taxpayer, and when the project shall receive certification confirming eligibility.
Tax imposed on the sale of, or charge made, for labor and services in the construction or rehabilitation of a qualifying project and sales of tangible personal property incorporated into the qualifying project are eligible for exemption.
The amount of the exemption is 100 percent of the local sales tax paid for qualifying purchases. After the qualifying project has been operationally complete for four years, but not later than five years, the purchaser on the qualifying project may apply to the Department of Revenue (DOR) for a remittance of local sales taxes. The purchaser must obtain certification from the governing authority of a city verifying that the qualifying project has satisfied the criteria and specifying the amount of exempted tax claimed.
The local portion of the use tax does not apply to tangible personal property incorporated as a component of a qualifying project during construction or rehabilitation. The use tax exemption shall be in the form of a credit, remitted to the person after submitting certain information to the DOR specifying the amount claimed for exemption.
This exemption shall apply to local sales and use taxes made on or after October 1, 2019.
Regional Transit Authority Sales and Use Tax. If there is written agreement from the taxing authority, the tax exemptions for the development of class A commercial office space shall extend to the sales and use tax imposed by an RTA. The tax exemption shall be in the form of a remittance.
Local Property Tax Exemption. In order to use the property tax exemption, a city must establish the criteria for qualifying for the exemption, which must include:
a minimum number of new family wage jobs created;
the features and characteristics of the project defined as a class A commercial office space; and
location in a designated commercial office development targeted area.
A designated commercial office development targeted area must:
be within an urban center;
be currently lacking certain commercial office space; and
not relocate a business within the city from outside of the commercial office development area, but within the state.
To qualify, the project must be within an urban center, meet criteria adopted by the governing authority, be completed within three years from the date of approval if it is new construction, and have entered into a contract with the city that has been approved by the governing authority.
The governing authority must adopt a resolution of intention to designate commercial office development targeted areas and provide a public hearing on the number of commercial office buildings that will be newly constructed or rehabilitated within the proposed targeted areas and other estimates on construction costs and jobs created.
For a period of ten successive years, beginning January 1st of the calendar year following the exemption filing with the county assessor, the following is exempt:
new construction and rehabilitation improvements of qualifying property from the city share of ad valorem property taxation; and
the value of new construction, conversion, and rehabilitation improvements of real property upon approval by a county legislative authority.
This exemption does not apply to:
increases in assessed valuation made by the assessor on nonqualifying portions of building and value of land; or
increases made by the order of a county board of equalization, the DOR, or a county to a class of property throughout the county or specific area of the county, to achieve the uniformity of assessment or appraisal required by law.
If the property changes ownership, it must continue to qualify for the exemption as long as the new owner complies with all conditions on the approved application.
At the conclusion of the exemption period, the new or rehabilitated property must be considered as new construction for the purpose of collecting property tax.
This exemption is in addition to any other incentives, tax credits, grants, or other incentives provided by law.
This exemption shall apply to taxes levied for collection in 2020 and thereafter.
Application Procedures for Property Tax Exemption. The owner must secure authorization from the governing authority before starting rehabilitation improvements or new construction.
Procedures relating to project application and approval by the governing authority may differ depending on if the project is a series of rehabilitation improvements or new construction. An application fee may be implemented by the governing authority but cannot exceed the total amount required to cover the cost of administering the exemption.
The governing authority has 90 days after receipt of the application to approve or deny it. Once approved, the city must issue the property owner a conditional certificate of acceptance of the tax exemption. The certificate must contain a statement by an authorized administrative official of the governing authority that the property has complied with the standards and guidelines developed by the city or county.
If the application for the exemption is denied, the deciding administrative official or commission must state in writing the reasons for denial and send the notice to the applicant at the applicant's last known address within ten days.
Project Completion. Upon completion of the approved project, and after the certificate of occupancy is issued, the owner must file with the city:
a statement of the amount of rehabilitation or construction expenditures made;
a statement of the number of new family living wage jobs created with the qualifying project;
a description of the work completed with a statement regarding the qualification of the property for the tax exemption; and
statements that the project meets local requirements and that the project was completed within three years of when the tax exemption was issued.
Within 30 days after receipt of the statements, the authorized representative of the city must determine whether the project is complete and consistent with its contract and is qualified for a the tax exemption.
If the city determines that everything is consistent for approval, the city must file the certificate of tax exemption with the county assessor within 10 days of the expiration of the 30-day period.
Cities must publish on the their website certain information regarding the number of tax exemptions granted and other specific information relating to the approved projects.
Disqualification of Property Tax Exemption and Penalties. If the owner intends to convert the qualifying project to another use, or to discontinue compliance, then the owner must notify the assessor within 60 days.
If the governing authority discovers that the property, or a portion of the property, no longer qualifies for the tax exemption then the exemption will be canceled and an additional real property tax will be imposed plus a 20 percent penalty. The additional tax will be calculated based on the difference between the property tax paid and the property tax that would have been paid, starting on the date that the improvements were converted to a use that no longer qualifies them for the exemption.
The tax paid must include interest at the same statutory rate charged on delinquent property taxes. This additional tax shall become a lien on the land at the time the property no longer qualifies for the exemption. Interest may be charged and any additional tax unpaid on its due date is delinquent. A lien may be foreclosed upon for delinquent property taxes.
The owner may appeal the determination within 30 days by filing a notice of appeal with the clerk of the governing authority. The appeal hearing shall affirm, modify, or repeal the cancellation of the exemption based on the evidence. After that decision, the aggrieved party may appeal the decision to the superior court.
Fiscal Note: Available.
Creates Committee/Commission/Task Force that includes Legislative members: No.
Effective Date: Ninety days after adjournment of session in which bill is passed.
Staff Summary of Public Testimony on Original Bill: The committee recommended a different version of the bill than what was heard. PRO: Class A office space is important to incentivize technology companies to come into an area. This is not just about economics; it is also about traffic congestion. These hubs, attracting higher-paid jobs, would keep people from having to commute and reduce congestion on our freeways. There are areas of the state that have not enjoyed the financial benefits of King County. We need to look for smart ways to attract jobs. This would incentivize office space not only in Pierce County, but throughout the state. A version of this bill, heard in the House, leaves it up to all cities regardless of population and I am amenable to opening it out to all cities if the committee so chooses. The city of Tacoma’s Economic Development Department has spent a lot of time and energy looking into the issue of building class A office space. Even though the cost to build these office spaces are the same throughout the state, the return on investment is not. Lease rates are higher in King County. There is a $20 difference per square foot on lease rates between King County and the city of Tacoma. When the bill was drafted two sessions ago, it was important there was a provision for paying back the tax exemption. The tax benefit is not seen until the property has qualified, and stayed qualified, for a number of years. Class A commercial office space has largely been constructed in King County and has not been built outside of it since 2001. This bill will incentivize building outside King County. Designating an urban center is necessary. The local chambers of commerce are interested in this.
Persons Testifying: PRO: Senator Steve O'Ban, Prime Sponsor; Michael Transue, Tacoma Pierce County Chamber; Briahna Murray, City of Tacoma.
Persons Signed In To Testify But Not Testifying: No one.