City moves forward with easier business tax plan

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Tax season may become easier for small businesses in Port Townsend as the City Council looks to increase the earnings threshold for filing city business and occupation (B&O) tax from $20,000 to $100,000. However, council members are not sure how to price annual business licenses as part of the change.

The council voted unanimously Oct. 16 in favor of the first reading of the new rule. A second and final reading is set for the Nov. 6 council meeting, which begins at 6:30 p.m.

BUSINESS LICENSE COSTS

Currently, the cost of an annual business license is $25 for all businesses. But that cost would change to a three-tier fee in order to keep the plan “revenue neutral.”

The city finance department has recommended that businesses reporting gross receipts of less than $20,000 would pay $35 for the annual business license (with no city B&O reporting required). Businesses reporting between $20,000 and $100,000 would pay $55 (with no city B&O reporting required). And businesses reporting more than $100,000 would pay $75 (and file a city B&O return, as currently required).

In addition to relieving small businesses from having to file a city B&O return, the proposed change would also reduce the amount of time city staff spend processing the city’s B&O returns. At present, city staff must obtain tax returns, process and mail them, and also handle delinquent returns.

City Manager David Timmons said the new plan is more efficient.

“I was also happy to hear from the state that they actually like the look of this approval and this process as a kind of model going forward for the communities that have this,” Timmons said. “It’s a very streamlined process.”

The city sends some 8,100 tax returns out every year with a high delinquency rate, because some small businesses find the tax returns to be either too onerous or they do not understand them.

According to city documents, the city collected $846,882 from the city B&O tax in 2016, but most of that – $785,475 – came from businesses earning $100,000 or more.

Only $53,108 of the tax came from businesses in the $20,000-$100,000 range.

Businesses that claim less than $100,000 annually make up 81 percent of total businesses but pay only 8 percent of collected taxes, according to a city document, requiring hundreds of hours of staff time to process.

The city’s B&O tax is separate from the state B&O tax. Businesses are required to fill out returns for both city and state at present, according to a city document.

The city’s B&O tax rate is 0.002 percent.

AGAINST CHARGING BIG BUSINESSES MORE

Businesses earning $100,000 or more would pay the largest increase in annual licensing – from $25 per year to $75. And, unlike the smaller businesses, the largest businesses would still be required to file a city B&O tax return.

That does not sit well with Port Townsend business owner Kris Nelson, who told council members that the burden of higher annual business license costs should not fall only on the larger businesses.

“To be clear, we think the three-tier idea is great,” Nelson said. “We think that the three principles that the whole thing was formed on are spectacular. But … most of the burden got shifted to tier three, which is above $100,000, so they pay $50 more for their licensing fee plus do all of the paperwork,” which Nelson considers unfair.

The problem, Nelson said, is the assumption that businesses that gross more than $100,000 have more ability to pay.

Restaurants like the one she runs typically make a profit margin of only 3-5 percent, Nelson said, whereas retailers average 10-15 percent.

“So, I’m looking at a retailer doing $80,000 a year at 10 percent [profit margin] actually has more ability to pay an additional fee than my restaurant at $160,000 at 4 percent, which is my average. So, it doesn’t indicate ability to pay.

“That being said, some of the numbers in category three are large. There are some large businesses in that category and a $50 increase is a small amount when you are doing really big numbers.

“To me, I understand the whole purpose is on focusing on the small businesses and being more small-business friendly, but shifting the largest burden to these businesses because they have more ability to pay doesn’t seem like the right thing to do. It seems like it’s an easy answer. And I think that maybe the numbers should be shifted a little bit. And the people that are gaining most maybe pay a little more,” Nelson said.

Council member David Faber was sympathetic.

“I was thinking that exact same thing: that restaurants have extraordinarily low margins,” Faber said.

“They tend to have lots of sales. Though pretty much every restaurant in town probably bumps over that $100,000 mark, a lot of people are barely making it. That complicates my original feelings on this whole thing. When this first came up, I was all for it … I still think this is going in the right direction,” Faber said.

Faber said he wants to explore other options for the cost of annual business licenses.