HOUSE BILL REPORT

                  HB 1741

                  As Amended by the Senate

Title:  An act relating to simplifying tax reporting by revising the active nonreporting threshold so that it parallels the small business credit.

Brief Description:  Simplifying tax reporting by revising the active nonreporting threshold so that it parallels the small business credit.

Sponsors:  Representatives Fortunato, Lovick and Thomas; by request of Department of Revenue.

Brief History:

  Committee Activity:

Finance:  2/16/99, 3/8/99 [DP].

Floor Activity:

Passed House:  3/12/99, 96-0.

Senate Amended.

Passed Senate:  4/13/99, 48-0.

                 Brief Summary of Bill

$Non-retailing businesses with gross receipts of $28,000 per year or less are required to register with the Department of Revenue but do not need to file tax returns.

HOUSE COMMITTEE ON FINANCE

Majority Report:  Do pass.  Signed by 11 members:  Representatives Dunshee, Democratic Co-Chair; Thomas, Republican Co-Chair; Carrell, Republican Vice Chair; Reardon, Democratic Vice Chair; Cairnes; Conway; Cox; Pennington; Santos; Van Luven and Veloria.

Minority Report:  Do not pass.  Signed by 1 member:  Representative Dickerson.

Staff:  Linda Brooks (786-7153).

Background:

Washington's major business tax is the business and occupation (B&O) tax.  This tax is imposed on the gross receipts of business activities conducted within the state.   Deductions for the costs of doing business are not allowed.

In 1997, some temporary B&O tax surcharges expired.  The Legislature also consolidated some B&O tax categories and made some rate changes in 1997.  As a result of these events, B&O tax rates for some types of business activities were reduced.

Presently, the principal B&O tax rates and categories are as follows:

Type of Business Tax Rate

     Manufacturing, wholesaling and extracting0.484 percent

     Retailing0.471 percent

     Services1.5     percent

A small business credit is provided for the B&O tax.  The maximum amount of tax credit is $420 per year.  The $420 credit offsets any tax liability.  The credit is phased out dollar-for-dollar by the amount the B&O tax liability exceeds $420.  If the tax liability is more than $420 but less than $840, the tax credit is equal to $840 minus the initial tax liability.  

Given that there are different B&O tax rates, the maximum amount of gross receipts exempted by the small business tax credit varies by B&O tax category.  The lower the B&O tax rate, the more a taxpayer benefits from the tax credit.   A taxpayer's total gross receipts would have to exceed the following amounts in order for any tax to be owed after taking the small business credit:

        Maximum Gross Income Exempted

Type of Business  by Small Business Tax Credit

  Manufacturing, wholesaling and extracting$86,777

  Retailing  89,172

  Services  28,000

Since the 1.5 percent service B&O tax rate is the highest B&O tax rate, the $28,000 represents the threshold amount above which it is possible for a taxpayer to owe any B&O tax after taking the small business tax credit.

Non-retailing businesses with gross receipts of $24,000 per year or less are required to register with the Department of Revenue but do not need to file tax returns.  When this provision was originally enacted, the threshold amount above which it was possible for a taxpayer to owe any B&O tax after claiming the small business tax credit was $24,000.    This threshold amount has risen to $28,000 from $24,000 as a result of the surcharges that expired and the legislative changes that were made to B&O tax rates in 1997.

Summary of Bill:

Non-retailing businesses with gross receipts of $28,000 per year or less are required to register with the Department of Revenue but do not need to file tax returns.

EFFECT OF SENATE AMENDMENT(S): For taxpayers who must file returns or pay remittances, the Department of Revenue may allow the returns or remittances to be filed electronically.  An electronic return or remittance will be deemed filed according to procedures set forth by the department.

Appropriation:  None.

Fiscal Note:  Available.

Effective Date:  The bill contains an emergency clause and takes effect on July 1, 1999.

Testimony For:  You should only have to file taxes at the same level at which you have to start paying taxes.  This adjusts the filing threshold to match the level at which tax is actually owed.

Testimony Against:  None.

Testified:  Tim Sekerak, Department of Revenue.