HOUSE BILL REPORT

                  HB 2593

             As Reported By House Committee On:

                           Finance

Title:  An act relating to taxation of railroad‑related businesses.

Brief Description:  Changing the taxation of railroad‑related businesses.

Sponsors:  Representatives Schoesler, Mason, B. Thomas and Boldt; by request of Department of Revenue.

Brief History:

  Committee Activity:

Finance:  1/31/96, 2/5/96 [DP].

HOUSE COMMITTEE ON FINANCE

Majority Report:  Do pass.  Signed by 12 members:  Representatives B. Thomas, Chairman; Carrell, Vice Chairman; Boldt, Vice Chairman; Morris, Ranking Minority Member; Dickerson, Assistant Ranking Minority Member; Hymes; Mason; Mulliken; Pennington; Schoesler; Sheldon and Van Luven.

Staff:  Rick Peterson (786-7150).

Background:  Public and privately-owned utilities, such as power and light, natural gas, and water distribution companies, pay a gross receipts public utility tax instead of the Business and Occupation (B&O) tax.  Railroads, airlines, and trucking companies are also taxed under the public utility tax.

The principal difference between the B&O and public utility taxes is a higher rate schedule applied under the public utility tax.  Although many businesses subject to public utility tax are also subject to regulation by the Utilities and Transportation Commission, there is no direct connection between regulatory status and tax status.

Public utility tax rates are as follows:

!  Railroad, express,  telegraph, natural gas, and sewerage collection - 3.852 percent

!  Light and power - 3.873 percent

!  Water distribution  - 5.029 percent

!  Taxicabs, limousine services, other urban transportation carriers,

and marine vessels for hire under 65 feet (except tugboats) - 0.642 percent

!  Motor transportation (except urban transportation), tugboats, and public utilities

not elsewhere classified - 1.926 percent

Railroad car businesses operate rail cars or rent rail cars that are used on another company's railroad.  Railroad car businesses are taxed at the 3.852 percent rate.

The Federal Railroad Revitalization and Regulatory Reform Act of 1976 (often called the 4-R Act) prohibits tax discrimination against railroads.  The state's public utility tax imposes a rate of 3.852 percent on railroad businesses and a rate of 1.926 percent on trucking and airline businesses.  The public utility tax on railroads was challenged as discriminatory.  The Department of Revenue settled the case and agreed to tax railroads at the lower 1.926 percent rate.

The sales tax is imposed on retail sales of most items of tangible personal property and some services.  The state tax rate is 6.5 percent and is applied to the selling price of the article or service.  In addition, local sales taxes apply.  The total rate is between 7 percent and 8.2 percent, depending on the location.  The sales tax applies to the sale of most goods and some services.  The rental of goods is subject to the sales tax.

Summary of Bill:  The public utility tax rate for railroads and railroad car businesses is reduced to 1.926 percent.  The rental of rail cars is removed from the public utility tax and made subject to sales tax.

Appropriation:  None.

Fiscal Note:  Available.

Effective Date:  The bill contains an emergency clause and takes effect immediately.

Testimony For:  In an out-of-court settlement, the Department of Revenue has already agreed to lower the tax rate for railroads.  The bill conforms the law to this settlement.  A court may invalidate the entire tax if the Department of Revenue attempts to enforce the current utility tax rate on railroads.

Testimony Against:  None.

Testified:  Ryan Spiller, Department of Revenue; and Patrick Halstead, Burlington Northern Railroad and Union Pacific Railroad.