Retail 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 tax applies to the value of property, digital product, or service when used in this state. The state, all counties, and cities levy retail sales and use taxes. The state sales and use tax rate is 6.5 percent. 
 
Tax Deferral Program for Redevelopment of Underdeveloped Property.  In 2022, the Legislature established a sales and use tax incentive program to encourage the redevelopment of underdeveloped property in targeted urban areas.  The legislative authority of a city with a population of at least 135,000 and not more than 250,000 may authorize a sales and use tax deferral for an investment project within the city if the city finds there are both significant areas of underdeveloped land and a lack of affordable housing, and adopts a resolution that includes information regarding the process for application, approval, appeals and any additional requirements, condition, and obligations that must be followed after approval.  Underdeveloped property is defined as land used as a surface parking lot as of June 9, 2022. 
  
Application.  The city may approve an application if:

• the project is set aside primarily for multifamily housing units and the applicant commits to renting or selling at least 50 percent of the units as affordable rental housing or affordable homeownership housing to very low, low, and moderate-income households;
• in a mixed-use project, only the ground floor of a building may be used for commercial purposes with the remainder dedicated to multifamily housing units;
• at least 50 percent of the investment project set aside for multifamily housing units must be rented at a price at or below fair market rent for the county or sold at a price at or below county median price; and
• the applicant commits to any additional affordability and income eligibility conditions adopted by the local government.  

Sales and Use Tax Deferral Certificate.  A program participant must submit an application to the Department of Revenue (DOR) before initiation of the construction of the investment project.  The application must include a copy of the conditional certificate of program approval issued by the city, estimated construction costs, time schedules for completion and operation, and any other information required by DOR.  DOR must rule on the application within 60 days.  DOR must keep a running total of all estimated sales and use tax deferrals and may not accept applications for the deferral after June 30, 2032. 

Cancelation of an Exemption.  If a conditional recipient maintains the property for qualifying purposes for at least ten years, deferred sales and use taxes need not be repaid.  If a conditional recipient voluntarily opts to discontinue compliance, they must notify the city and DOR within 60 days of the change in use or intended discontinuance.  If the city finds that a portion of an investment project is changed or will be changed to disqualify the recipient from eligibility, they must notify DOR and taxes deferred are immediately due and payable.  DOR must assess interest at the rate provided for delinquent taxes and penalties retroactively to the date the sales and use tax deferral certificate was issued.  The transfer of an investment project ownership does not terminate the deferral if the successor meets the eligibility requirements and the transferer notifies the city and DOR.

Tax Deferral Program for Redevelopment of Underdeveloped Property.  Tax deferral program for redevelopment of underdeveloped property is updated.  The legislative authority of a city with a population of at least 135,000 and not more than 275,000 may authorize a sales and use tax deferral for an investment project within the city if the city finds there are both significant areas of underdeveloped property and a lack of affordable housing.  Underdeveloped property is defined as any vacant, partially used, or underutilized land identified by a qualifying city as suitable for development of affordable housing.

In addition to other requirements, the resolution adopted by the city to create the program must include any additional affordability and income eligibility conditions.  The governing authority may also designate an area or areas of reduced affordability requirements by resolution after providing the required notice and holding a public hearing.   The area of reduced affordability requirements must:

• be within an urban center;
• have a high number of underdeveloped, underutilized, or vacant properties;
• be proximate to the land with insufficient available, desirable, and convenient residential housing, including affordable housing, to meet the needs of the public;
• a significant number of existing improvements proximate to the area do not meet the maximum permitted density for the property that allows for multifamily, mixed-use, commercial and industrial uses; and
• the provision of additional housing opportunity in the area will assist in achieving the purpose of the sales and use tax incentive program.

Application.  Authorizes a city to approve an application for a project located in an area of reduced affordability requirements if the project is set aside primarily for multifamily housing units and the applicant commits to renting or selling at least 20 percent of the units as affordable rental or homeownership housing to very low, low, and moderate-income households.  The governing authority must adopt and implement standards and guidelines to be used when considering applications in an area of reduced affordability requirements and may implement as a contractual prerequisite:

• a requirement that applicants pay at least the prevailing rate of hourly wages for journey level apprentice workers on residential and commercial construction;
• payroll record requirements;
• apprenticeship utilization requirements; and
• a contracting inclusion plan.

Sales and Use Tax Deferral Certificate.  If the city finds that the work was not completed within the required time period due to circumstances beyond the control of the conditional recipient and that the conditional recipient has been acting and could reasonably be expected to act in good faith and with due diligence, the governing authority may extend the deadline for completion of the work for a period not to exceed 24 consecutive months, and must notify DOR of the extension.  

The application the recipient of a conditional certificate of approval must submit to DOR is updated to require that the application include specifics of the investment project conditionally approved and clarify any portions of the project not approved for tax deferral.  DOR must review the application for completeness and provide a tax deferral certificate within 60 days.  If a recipient of a conditional certificate of approval submits an application for a sales and use tax deferral certificate after initiation of construction the deferral certificate will only apply to the applicable purchases made on or after the effective date of the deferral certificate.  No certificate may be issued for an investment project that has already received an excise tax deferral.

Cancelation of an Exemption. If the city finds that the investment project is no longer eligible they must notify DOR and a portion of the deferred taxes are immediately due based on a schedule.  DOR must assess interest at the rate provided for delinquent taxes, but not add penalties, retroactively to the date the sales and use tax deferral certificate was issued.  If the transferer fails to notify the city and DOR within 60 days, all deferred sales and use taxes are immediately due and payable.  All other penalties and interest applicable to delinquent taxes may be assessed and imposed for delinquent payments.  

Other.  These provisions apply to projects that initiate construction on or after the effective date of the bill.

• Changes the term "residential targeted area" to be "area of reduced affordability requirements."
• Clarifies that multifamily housing units may result from new construction or rehabilitation or conversion of vacant, underutilized or standard buildings to multifamily housing.
• Allows underutilized land to include any surface parking lot that is open to public use with or without charge.
• Requires the affordable housing be provided to very low, low, and moderate income housing.
• Clarifies criteria for investment projects located in an area of reduced affordability requirements.
• Clarifies that any application for sales and use tax deferral after initiation of construction will only apply to applicable purchases made on or after the effective date of the deferral certificate.
• Clarifies that deferrals may not be issued for an investment project that has received any excise tax deferral, rather than deferrals for business investment projects in rural counties.
• Requires the city notify the DOR if it finds that an investment project is no longer eligible.
• Clarifies that all other penalties and interest applicable to the delinquent taxes may be assessed and imposed for delinquent payments.
• Specifies a 60 day timeframe to notify the city and DOR of a sale or transfer.
• Applies the changes made to the program to projects that initiate construction on or after the effective date of the act.

The committee recommended a different version of the bill than what was heard. PRO:  Spokane is determined to develop low income and workforce housing and has seen success using this incentive even though it is a narrowly applied incentive.   Vancouver is severely cost burdened and pulling every lever possible to address affordable housing including adopting this program last year.  Kent has evolved into a major employment center but many sites have been underutilized.  This bill will provide a practical tool to help cities transform neglected and underutilized sites for housing by providing more predictability in the approval process and expanding the definition of underdeveloped property.  Properties most in need of redevelopment don't fit into the current narrow definition.  Cost is almost always the reason that development of underutilized property doesn't happen.  Deferrals are the most effective way to reduce upfront costs.  They directly improve a projects debt service recovery ratio which is often the deciding factor for whether financing is available.  These are projects that are unlikely to proceed without the incentive.  We need more people living in our urban core and if we modify this incentive it will help develop housing.  Would like an amendment to expand eligibility to at or around 95,000 so that it can be a tool other local jurisdictions, like the city of Bellingham, can use. 

CON:  Section 5 (6) is unnecessary in this legislation because it allows local jurisdictions to require project labor or community workforce agreements which put a chilling effect on non-union local contractors to bid on the work.   The conditions local jurisdictions are allowed to set for the tax incentive may exclude qualified contractors through no fault of their own.  We support policies such as this that encourage redevelopment and economic growth and  make projects more viable, but this particular provision unintentionally disadvantages a large segment of the construction industry and should be modified so all contractors can qualify.  

OTHER:  We would like for the bill to include counties as well.  Urban Growth Areas are part of the responsibility of counties and are also urban areas that have properties that are underutilized just like this bill calls for and this would be a good tool for counties to use to encourage more housing development. 

PRO: Senator Marcus Riccelli, Prime Sponsor; Jesse Bank; Michael Lilliquist, City Councilmember for the City of Bellingham; Council Member Kitty Kliztke, City of Spokane; Patrick Quinton, City of Vancouver; Kyle Moore, City of Kent/Government Affairs Manager.