Residents pay tax on a tax with utility bills

When Kent resident Pam Morgan took a close look at her garbage bill, she discovered a charge connected to a city of Kent tax that didn’t seem to add up.

Morgan learned that the city charges Republic Services an 18.4 percent utility tax, which the company in turn charges to the customer. That made sense to her, she understands how that works. But she noticed the final customer fee ends up amounting to 22.4 percent, not 18. 4.

Why the higher amount?

Barbara Lopez, city deputy finance director, explains.

“By passing the tax onto its customers, it has generated additional gross receipts that are then subject to the tax,” Lopez said in an email. “This creates the perceived difference between the stated rate of the municipal utility tax and the effective rate to the customer.”

State law allows cities to collect the tax based on the additional revenue.

Jim Hutchinson, an area municipal services manager for Republic Services, said court rulings have backed up the way cities collect utility taxes.

“A city can do a tax on a tax,” he said in a phone interview.

Morgan appreciates she now knows how the tax works. But she still doesn’t like it.

“In the end, it still seems wrong to me,” Morgan said. “I am familiar with factoring out taxes collected so as to be charged and pay tax on the base income, so for us all to be charged tax on the tax we already paid… it does not sit right.”

Kent, similar to other Washington cities, taxes cable, telephone, cellphone and electric companies at the 6 percent allowed under state law. That rate can only go higher if voters approve an increase.

But the state sets no limit on the rates cities tax for garbage, water and sewer.

The Kent City Council approved a garbage tax hike to 18.4 percent from 7.8 percent in 2014. That brings in about $3 million per year for street maintenance in neighborhoods. The council approved three years ago a 6 percent tax on cable television bills to raise about $1.3 million per year for information technology staff and equipment.

Cities have turned to the new taxes and higher taxes to help bring in more revenue after voters in 2001 approved a 1 percent cap on property tax increases each year by jurisdictions. In the 1990s, cities and counties could raise the property tax rate as much as 6 percent per year.

Morgan contacted the city and Republic Services to ask about the garbage tax and the 4 percent difference.

“They basically are saying that the company charges and collects the tax, but that instead of that being considered a pass through, they then are required to show it as revenue and are then taxed by the city on the entire revenue amount,” Morgan said.

Other residents also have contacted city staff about the garbage tax.

“We have received a number of questions/concerns regarding calculation of the solid waste utility tax,” Lopez said. “To my knowledge, we rarely receive similar questions/concerns for other utilities.”

It can be difficult for customers to look at a bill and figure out the fees and taxes. Lopez said the city recommends that businesses list the tax amount on customer billings as “Effect of city tax.” Some companies simply list a charge.

The Municipal Research and Services Center (MRSC), a nonprofit organization that helps local governments across Washington by providing legal and policy guidance on any topic, suggests on its website that only the dollar amount be listed for utility taxes and not the percentage because the city tax rate wouldn’t match up to the fee.

MRSC used an example of a 10 percent city utility tax on $100 that customers would assume to be a $10 fee. But because that money collected is considered additional revenue, the tax line ends up at $11.11.

“If customers do the math and determine that the actual markup percentage is 11.11 percent, that is an accurate conclusion when they multiply the percentage by the amount excluding the tax itself,” according to the MRSC. “However, if the rate of the city utility tax is already widely known in the community, such an approach might still engender some confusion and mistrust.”

Morgan certainly considered herself confused when she compared Kent’s garbage tax rate to what’s actually charged. She’s also unsure just how much all of the explanations helped and just because it’s legal, whether it’s right.

“I personally still find it wrong, as it seems to me that the tax should be a pass through,” she said. “I get that it is their tax that they are allowed to obtain from us (versus a tax on us). But why we pay it and they consider it income and then charge us again, that part I still find sketchy.”