About 1,600 small businesses in Kent might not have to file business and occupation tax forms with the city anymore because they don’t bring in enough revenue to have to pay the tax.
Finance Department staff told the City Council about potential B&O tax program changes during a Feb. 21 workshop. The city began collecting a B&O tax in 2013 to help pay for street repairs. The tax will bring in about $8 million in 2016 once all payments are made.
“The goal is what can we do to help simplify the B&O tax structure,” said Council President Bill Boyce. “What they (staff) are looking at is trying to reduce some of the compliance for smaller businesses, 1,600 businesses could possibly not have to file tax forms.”
If a company’s gross receipts are under $250,000 and its square footage doesn’t exceed the size to have to pay taxes, those businesses do not owe any tax to the city but still are required to file the forms.
Those 1,600 businesses represent about 40 percent of the companies that file with the city.
“We really want to reduce the compliance burden for our smaller businesses,” said Barbara Lopez, city assistant finance director. “The code says now all must file whether or not they owe taxes. All businesses must register for the B&O and fill out forms.
“The tax burden is heavy on small businesses because they tend to be the ones that don’t have tax expertise or have trouble getting accounting help. It’s stressful for them.”
Under the proposed plan, all businesses must still get a business license. The handful of businesses with under $12,000 in gross receipts per year (the same threshold used by the state’s B&O program) won’t even have to register for the B&O tax. The businesses will fill out a form for the license that includes a line where gross receipts are expected to be under $12,000.
“We can go back and audit to make sure that is true,” Lopez said.
Businesses above the $12,000 threshold but under $250,000 in gross receipts will still need to register for the B&O but can qualify for non-reporting status.
“We will know about them but they don’t need to take that step of filing the return that would be a zero-dollar return anyway,” Lopez said.
With fewer filers, city staff will have more time to handle businesses that do have to pay the tax.
“We hope to focus our energies on the larger taxpayers and do more thorough audits in those areas,” Lopez said.
City staff plans to bring back formal proposals in late March or early April to the council’s Operations Committee and then to the full seven-member council in April or May.
Resolve tax inequity
Another proposed change would aim to resolve a tax inequity between businesses with multiple activities and companies that fall into one category, such as a manufacturer, retailer or wholesaler.
Lopez used a bakery as an example of a business with multiple activities. The bakery produces goods so it’s a manufacturer, but then they also have a retail store or sell them to supermarket.
“What we don’t want to do is tax both activities, so one of them goes away with multiple activities tax credit,” Lopez said.
There are about 110 to 120 multiple activity businesses in the city and their tax rates end up being different than single activity businesses.
Under the proposal, the city would convert what is now a $250,000 exemption to a $250,000 threshold. The change would become effective in January 2018.
“The first $250,000 is exempt, but a threshold means once you exceed the threshold, the tax starts with the first dollar not the first dollar after $250,000,” Lopez said.
About 1,200 businesses that pay tax on gross receipts over $250,000 might see an increase in taxes of $115 to $380 per year because of the change but also could be eligible for a tax credit if the council decides to go with that proposal so taxes won’t be higher.
Another 1,200 businesses pay tax bases on their square footage because the square footage tax rate is higher than the gross receipts tax.
“As we go forward our goal is to reach out to the business community and the chamber about what we are trying to do,” Boyce said. “We are trying to simplify and not create more dollars.”
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