Background:

The business and occupation (B&O) tax is Washington's major business tax. The tax is imposed on the gross receipts of business activities conducted within the state. Revenues are deposited to the state General Fund. Depending on the types of activities conducted, a business may have more than one B&O tax rate. Firms that provide services are generally taxed at a rate of 1.8 percent.

The state public utility tax (PUT) applies to public service businesses. It applies to a variety of public and privately-owned utilities. The PUT is applied to the gross receipts of the business. The tax rate depends on the business classification. Classifications include distribution of water (5.029 percent), generation/distribution of electrical power (3.873 percent), telegraph, distribution of natural gas, and collection of sewerage (3.852 percent); urban transportation and watercraft vessels (0.642 percent), hauling of logs (1.3696 percent), and railroads and motor transportation (1.926 percent).

Neither the PUT nor the B&O tax permits deductions for the costs of doing business, such as payments for raw materials and wages of employees. A number of exemptions, credits, deductions, and other preferences have been enacted for specific types of business activities under the PUT and the B&O tax statutes. For example, B&O taxpayers with annual taxable service activity under $46,667 and PUT taxpayers with annual taxable activity under $24,000 do not have to file tax returns. Businesses that pay the PUT are exempt from the B&O tax on the same activity.

The B&O tax provides a deduction of government payments made to nonprofit businesses that provide health care services and therapeutic, diagnostic, rehabilitative, or restorative services for the care of the sick, aged, physically-disabled, developmentally-disabled, or emotionally-disabled individuals. The PUT does not have a similar exemption.

Community residential service businesses provide habilitation, instruction, and support to persons with developmental disabilities (DD) who live in their own homes. DD community Residential Services includes Supported Living, State Operated Living Alternative (SOLA) and DD Group Homes. Supports provided to clients may vary from a few hours per month up to 24 hours per day of one-to-one support. Clients pay for their own rent, food, and other personal expenses.

Developmental disabilities community residential providers are paid a client specific rate that includes administrative costs, transportation, direct care costs, and professional services. The direct care staff component of individual client rates are based on a benchmark rate. Data used to arrive at the determination of the benchmarks included average wage, cost of living and labor statistics that identified county or regional variations. In 1999, benchmark rates were segregated into three categories to reflect provider input on the differential cost of administration, operations, and direct care staff wages. The three service categories are Metropolitan Statistical Area (MSA), Non-MSA, and King. An MSA must include:

one city with 50,000 or more inhabitants; or
a Census Bureau-defined urbanized area (of at least 50,000 inhabitants) and a total metropolitan population of at least 100,000.

King County is recognized as having unique characteristics relative to other MSA counties.

Summary of Bill:

Community residential service businesses are added to the public utility tax at a rate of 5.029 percent.

Of the revenue from the tax on community residential services, 80.5 percent is deposited into the new Community Residential Investment Account. Money in this account may be used to increase rates paid to community residential service businesses over amounts provided in the budget bill adopted in 2009 and to increase compensation to staff providing habilitative instruction and support services.

The differential between the benchmark rate paid to Snohomish county which is an MSA, and to King county, must remain the same as established in 2010.