Business tax varies from city to city, has businesses asking why

Matt Gagne

Protesting taxes has been a long-standing American tradition since the Boston Tea Party. The argument over taxes is as old as the Constitution and as American as apple pie and baseball.

So the recent grumbling about Bellingham’s business taxes might make one look to see if boxes of tea are floating in our own Bellingham Bay.

The protest against the city’s business and operating (B and O) tax is subtler than the one in 1773, however. Instead of turning over crates into the bay, some businesses are simply taking their party outside the city limits by constructing new facilities in the county or even out of state.

Although Washington is one of only seven states that do not have an income tax, businesses know that doesn’t mean they are excluded from the pain of taxation. Most states tax businesses on net income, where expenses can be deducted before the government takes its share. But Washington taxes on gross income, calculated on how much is made before paying out what it costs to run a business.

The practice, called the business and operating (B and O) tax, is controversial, but it’s been in place since the 1930s, when the state Supreme Court overturned a voter-approved income tax structure and found the B and O system passed muster.

And business does not seem to be doing that badly in Washington. Forbes Magazine ranked Washington the fifth-best place for business last month — the state is a fast-mover on the list and is predicted to go even higher in upcoming years.

But even more controversial than the state tax are the 38 cities that impose a municipal version of the B and O. Bellingham is one of those cities and has imposed a B and O tax since the 1950s. The practice raises the hackles of some businesses.

“Why do some cities have it and others do not?” asked Larry Wieber, CEO of Aluminum Chambered Boats (ACB). Wieber cited the Bellingham B and O tax as a major reason the company located its new manufacturing facility near Ferndale rather than in Bellingham. “They’ve got themselves in a trap making the B and O tax a big part of the budget.”

Bellingham’s B and O tax accounted for 19 percent of the city’s 2006 revenues — the largest slice of the pie, gathering $11.3 million.

But while the tax is significant to Bellingham’s budget, city tax representative Stuart Rice said the B and O is a small fee for businesses. Three sectors, manufacturing, wholesale and retail, have a rate of 0.17 percent; services have a B and O rate of 0.44 percent.

“It’s pretty marginal and helps keep the city afloat,” Rice said.

While the city may argue that the tax is marginal, Bellingham’s B and O rate for service businesses is still one of the highest in the state. The services rate is above the threshold allowed by the state because it was in place before a 1982 law that regulates municipal B and O taxes. Only two other cities have higher services rates: Black Diamond and Westport. Bellingham ranks in the middle of the pack for the other categories.

Wieber said although the city claims the percentage is small, when revenue numbers get big, those small pebbles turn into a big pile of rocks.

“On one side of a line we have a $340,000 decision,” Wieber said. “That’s not too hard of a decision to figure out.”

Bad for business?

Wieber drew on observations from Spokane, which he said lost businesses to Spokane Valley because of the B and O. Other cities have felt the same pull because of the tax, he said.

“Many great places to live that lost that commerce are no longer great places to live,” Wieber said.

One city dropped the tax last year. Dave Schmidt, the city administrator of Buckley, a city of fewer than 5,000 people, said many of the largest commercial businesses came to the city to complain about the B and O tax after it was implemented in 1999.

“They said what we’re doing is punishing most successful businesses,” Schmidt said. “They said it gives an unfair competitive advantage to businesses right outside city limits.”

However, Schmidt said, despite the complaints, there was no major exodus of Businesses outside city limits, and although there was limited growth during that time, it most likely had to do with other factors. But the revenue from the tax was minimal enough, so the city listened to owners who said the tax was sending a strong anti-business message, he said.

Wieber said Bellingham has the same message: business is a bad thing.

“We’re like the plague,” he said. “My enthusiasm for doing business here has been greatly diminished. They say they want us here, but they don’t show it.”

Wieber pointed to an exodus of businesses out of Bellingham besides ACB. Long-time Bellingham businesses Wilson Furniture, Absorption Corp., Walton Beverage, Hempler’s Meat & Sausage Co. and Bellingham Marine Industries have moved outside the city limits in recent years.

But Wilson Furniture owner John Wilson said the move was not because of the B and O tax.

“The B and O tax wasn’t a big enough number to be significant,” Wilson said. “It’s a noise level expense. It would be really foolish to make a monumental decision on where to locate a business on such a small expense.”

Wilson said the main driver in his decision to move was he wanted to locate his business in the middle of the county’s growth . But if the opportunity had come up within the city limits, he might have jumped at the chance.

“If I could locate right off Old Fairhaven Parkway, that’s where I’d be,” he said.

Staying in Bellingham, getting out of the B and O

Bellingham and Everson are the only Whatcom County cities with B and O taxes. Everson only taxes manufacturing, at a rate of .20 percent. Bellingham has experienced steady revenue growth in recent years, while most of the county areas have remained fixed. But unincorporated Whatcom County and Ferndale are beginning to grow as well, as businesses relocate to the area. ACB is one of those, and Wieber predicted Bellingham’s adherence to the B and O will eventually hurt the community. He said the B and O tax revenue can hide the holes left by manufacturers leaving Bellingham.

“It’s like feeding kids candy and sugar,” Wieber said. “They get addicted to having it, but in the end, it rots their teeth.”

Despite the complaints, Rice said the tax is a necessity.

“There’s nothing to substitute that revenue. You’re talking about [salaries for] half the police force here. It’s like any tax, people would rather not pay it.”

But there are exemptions to both the state and municipal B and O tax.

The state B and O tax structure is complicated, woven with exemptions to prevent the possibility of double taxation that spurred a U.S. Supreme Court decision in 1987 banning the tax on interstate transactions. There are nearly 100 exemptions to the tax.

Bellingham’s B and O tax is on the lighter side of complicated. Its exceptions are simple and outlined in the municipal code: If a business has revenues of less than $20,000 each year, it is exempt from the B and O.

Wieber hinted that other manufacturers are looking to move out from under Bellingham’s B and O umbrella. As business owners, he said it comes down to looking for the best return for investors.

“That’s what business is,” he said.

And despite the Forbes high ranking of Washington in places to do business, it ranks the state 33rd for the cost of doing business — a ranking affected by both state and municipal B and O taxes.

The state B and O tax generates a larger portion of tax revenue than other states’ income taxes, and according to the state Department of Revenue (DOR) in a publication analyzing the B and O, this means a large initial tax burden for businesses.

“Any person that has created a successful brand will look at the effect of the B and O tax on their business,” Wieber said. “Not to recognize that is just kidding yourself.”

Download a list of all 39 local cities (B&O) Tax Rates. Click Here