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B&O Filing Frequency Recommendations.docx 1
FINANCE DEPARTMENT
CITY OF KENT BUSINESS & OCCUPATON TAXES
FILING STATUS AND FILING FREQUENCY
RECOMMENDATIONS
January 15, 2014
Recommendations:
1. All firms not otherwise exempt from the B&O tax would be required to
file at least annual tax returns (KCC 3.28.090). Illustration: Not for
profit 501(c) organizations not engaged in retail sales activity.
2. All firms owing $1,000 or less quarterly and having a City business
license go to annual filing.
3. All firms owing greater than $1,000 quarterly remain on quarterly
filing.
4. Administrative requirements:
• Any new firms reporting are on a quarterly filing for their first
year.
• Requests for change to annual filing must be authorized in
advance by the Finance Director or his/her designee.
• Finance Director or his/her designee authorized to initiate
placement of firms on annual filing status.
• In order to qualify for annual filing status, the firm must be
current on City business license fees and City-imposed
admission, B&O, gambling, utility taxes.
Overview:
1. The goal is to minimize the administrative burden on taxpayers and
the City while ensuring monitoring, audit and cash flow considerations
are addressed.
2. Advantages of requiring filing for all firms that are not otherwise
exempt:
• Firms are included in the City's accounting system enhancing
ability for monitoring and audit
• Firms are making an affirmative statement that they owe no tax
3. There are three questions for every firm:
• Required to obtain a City business license?
• Required to file a B&O tax return?
• Owe B&O tax?
Page 1 of 2
B&O Filing Frequency Recommendations.docx
Filing Requirements - Kent and Other Selected Jurisdictions:
Kent Bellevue Seattle Tacoma
Non-Filing Option? No Yes - $155,000 * No Yes - $12,000**
Quarter) Filing? Yes Yes Yes Yes
Annual Filing? No Yes - $170,500 * Yes - $85,000 ** Yes - $250,000**
* Taxable B&O Tax Gross Receipts (after exemptions/deductions).
** B&O Tax Gross Receipts (.before exemptions/deductions).
• Kent: Quarterly filings required for all firms not otherwise exempt
(e.g. credit unions) whether or not tax owed or amount of tax due.
• Bellevue: Non-filing threshold adjusted annually based on change in
CPI. Annual filing threshold scheduled to be implemented during 2014
based on 110% of the non-filing threshold. Bellevue uses a combined
tax return, i.e. includes all locally imposed taxes.
• Seattle: Seattle used to have a non-filing option; however, eliminated
this option due to adverse administrative and audit impacts.
Summary Analysis of Kent B&O Taxes by Firm (Q1 - Q3, 2013):
B&O Tax Firms Dollars
Range Total % of Cum % Total Taxes Average % of Cum 0/0
Tota I of Tota I per Firm Tota I of Total
$30,000 and 15 .94% .94% $728,022 $48,535 20.14% 20.140/0
Above
$20,000 to 17 1.07% 2.01% $397,098 $23,359 10.99% 31.13%
$29,999
$10,000 to 45 2.82% 4.83% $610,635 $13,570 16.89% 48.02%
$19,999
$5,000 to 93 5.84% 10.67% $663,102 $7,130 18.35% 66.37%
$9,999
$3,000 to 107 6.72% 17.39% $411,565 $3,846 11.39% 77.76%
$4,999
$1,000 to 299 18.77% 36.16% $522,471 $1,747 14.460/a 92.22%
$2,999
$100 to $999 612 38.42% 74.58% $267,395 $437 7.40% 99.62%
Less than 405 25.42% 100.00% $13,867 $34 .38% 100.00%
$100 **
Totals 1,593 $3,614,155 $2,269
* Analysis is based on B&O tax revenues as of December 17, 2013
** Includes 12 zero dollar returns (does not include all zero dollar returns
filed)
Page 2 of 2
Exemptions Deductions Recommendations.docx vi�Gf/�rl�SG7��0
FINANCE DEPARTMENT
CITY OF KENT BUSINESS & OCCUPATON TAXES
EXEMPTIONS AND DEDUCTIONS
RECOMMENDATIONS
January 15, 2014
Recommendations:
1. Amend KCC 3.28.090(A) to establish B&O tax exemptions for all
501(c) nonprofit organizations, except with respect to retail sales of
such persons (see attached listing of all non-profit organization types)
[1]. Currently, only 501(c)(3) organizations are exempt.
2. Make no changes to KCC 3.28.100 Deductions. Expansion of
exemptions will address most of the optional deductions not currently
established in the KCC.
Exhibits:
• Listing of 501(c) Organization Types and Corresponding Descriptions
• Guidelines for Model Ordinance - Sections .090 (Exemptions) and .100
(Deductions)
Overview•
1. Exemptions and deductions both result in a decrease in taxable B&O
gross receipts; however, companies are not required to report
exemptions. Further, companies wholly exempt or wholly engaged in
exempt activities are not required to file B&O tax returns.
2. The Model Ordinance establishes significant number of mandatory and
optional exemptions and deductions. In addition, with certain
limitations, cities are authorized to establish exemptions and
deductions excluded from the Model Ordinance. For example, the City
of Kent allows an exemption for research and development under
federal contracts.
3. Exemptions and deductions can be established based on the type of
organization (e.g. non-profit) and/or the nature of the activity (e.g.
day care activities). Seattle does not exempt not for profit
organizations; however, establishes exemptions and deductions based
on the type of activity. Bellevue establishes exemptions and
deductions based largely through exempting all 501(c)(3), (4) and (7)
organizations.
Page 1 of 6
Exemptions Deductions Recommendations.docx
4. In a number of instances the same activity treated as an exemption
for one city is treated as a deduction for another organization.
5. Exemptions are not reportable and cannot effectively be estimated.
Deductions are reportable; however, the City of Kent does not have
any historical financial information. Further, the cities of Bellevue,
Seattle and Tacoma did not have historical financial information by
specific type of deduction. Further, even if such information were
available it would be difficult to apply to the City of Kent because of
the significant number of variables in play.
Available B&O Tax Deductions Not Recommended for Adoption:
1. Sales at wholesale or retail of precious metal bullion and monetized
bullion [141
Definition (RCW 82.04.062):
• "Precious metal bullion" means any precious metal which has
been put through a process of smelting or refining, including,
but not limited to, gold, silver, platinum, rhodium, and
palladium, and which is in such state or condition that its value
depends upon its contents and not upon its form. Examples:
Processed nuggets, bars, sticks, dust, and other processed
forms of precious metal. For example, sales of gold or silver in
raw, refined forms to dentists, laboratories, jewelers, and other
persons, for their own consumption or for resale
• "Monetized bullion" means coins or other forms of money
manufactured from gold, silver, or other metals and heretofore,
now, or hereafter used as a medium of exchange under the laws
of this state, the United States, or any foreign nation, but does
not include coins or money sold to be manufactured into jewelry
or works of art. Examples: Sales of metal money, in coined or
other form, which is recognized as a medium of exchange in the
financial marketplace
Discussion:
This state exemption was a state policy decision whereby this activity
was excluded from the definitions of"wholesale sale", "sale at retail",
ANretail sale", and "sale at retail". This is an optional deduction for
cities.
2. Rental of real estate for boarding homes [151
Definition (KCC 15.02.055):
Page 2 of 6
Exemptions Deductions Recommendations.docx
"Boarding or lodging home" means a dwelling or part thereof, other
than a motel or hotel, where lodging, with or without meals, is
provided, for compensation, for not more than three (3) persons.
Discussion:
Rental receipts for a continuous period 30 days or longer are already
exempt from B&O tax (KCC over 3.28.090). Further, the state and
cities have differing definitions of"boarding homes" which may add
lack of clarity for taxability determination. Finally, the City has a
$62,500 per quarter gross receipts exemption.
3. Advertising agency fees for national, regional, and network radio and
television broadcasting f 161 *
Definition (Model Ordinance):
(a) Advertising agency fees when such fees or allowances are shown
as a discount or price reduction in the billing or that the billing is on a
net basis, i.e. less the discount; (b) Actual gross receipts from national
network, and regional advertising or a "standard deduction" as
provided for in RCW 82.04.280; and (c) local advertising revenue that
represent advertising which is intended to reach potential customers or
the advertiser who are located outside of the State of Washington.
Discussion:
It does not appear this deduction is relevant for the City of Kent.
Providers of cable television services are subject to the City cable
utility tax and; therefore, would not be subject to the B&O tax. There
are no other known taxpayers in Kent that would benefit from this
deduction.
4. For profit day care homes in private residences [26] ***
Definition:
• Seattle (SMC 5.45.100 [E]. Deduction allowed for nursery
schools, child care providers and privately operated
kindergartens if less than 24 hours for children under eight
years of age and not enrolled in or above the first grade.)
• Bellevue (BCC 4.09.090(I) & 4.09.030(W). Exemption allowed
for child and adult day care facilities in residences otherwise
occupied as private homes.
Discussion:
Seattle and Bellevue do not distinguish between for-profit and non-
profit with respect to this activity except that Bellevue exempts all
501(c)(3), (4) and (7) organizations. Kent currently exempts all
Page 3 of 6
Exemptions Deductions Recommendations.docx
501(c) (3) organizations engaged in this activity. Further, the City has
a $62,500 per quarter gross receipts exemption.
5. Investment management services [351 **
Definition:
Investment management services are the professional asset
management of various securities and other assets in order to meet
specified investment goals for the benefit of the investors. Investors
may be institutions or private investors.
Discussion:
Examples include brokers, financial institutions providing such
services, etc.
* Allowed by cities of Bellevue, Seattle and Tacoma
** Allowed by cities of Bellevue and Tacoma
*** Allowed by cities of Bellevue and Seattle
Approach:
See also Summary Matrix exhibits. Documented each exemption and
deduction provided in the Model Ordinance and compared this to the cities of
Kent, Bellevue, Seattle and Tacoma. Also documented exemptions and
deductions provided by those cities that were not included in the Model
Ordinance. This memo reflects exemptions and deductions not provided by
the City of Kent, but provided by at least two of the other cities.
B&O Tax Exemptions and Deductions Summary Analysis:
Exemption from B&O Tax
-Description Ref #] Kent State Bellevue Seattle Tacoma
Non-profit Yes No Yes No No
organizations [1] 501(c)(3) 501(c)(3)
Only 501(c)(4)
501(c)(7)
Only
Adult Family Homes No Yes Yes Yes No
1a
Child care resource and Yes Yes Yes Yes Yes
referral services by 501(c)(3) 501(c)(3) Only
nonprofit organizations Only
1c
Page 4 of 6
Exemptions Deductions Recommendations.docx
Exemption from B&O Tax - Continued
Non-profit Yes Yes Yes Yes Yes 501(c)(3)
organizations that are 501(c)(3) 501(c)(3) Only
guarantee agencies, Only 501(c)(4)
issue debt, or provide 501(c)(7)
guarantees for student Only
loans 1d
Credit and debt Yes Yes Yes Yes Yes 501(c)(3)
services provided by 501(c)(3) 501(c)(3) Only
non-profit Only 501(c)(4)
organizations [1e] 501(c)(7)
Only
Certain fraternal and Yes Yes Yes Yes Yes
beneficiary 501(c)(3) 501(c)(3)
organizations [1 f] Only 501(c)(4)
501(c)(7)
Only
Day care homes in No No Yes Yes No
residences [26] deduction
Deductions from B&O Tax Gross Receipts
-Description Ref # Kent State Bellevue Seattle Tacoma
Membership fees and Yes Yes Yes Yes Yes
certain service fees by 501(c)(3) (exemption) 501(c)(3) Only
non-profit youth Only
-organizations 1]
Fees, dues and charges Yes Yes Yes Yes Yes
by non-profit 501(c)(3) (exemption) 501(c)(3) Only
organizations 2 Only
Income from business Yes Yes Yes Yes Yes
activities of non-profit 501(c)(3) (exemption) 501(c )(3)
artistic and cultural Only Only
organizations 3
Value of articles for use Yes No Yes Yes Yes
in displaying art objects 501(c)(3) (exemption) 501(c )(3)
or presenting artistic or Only Only
cultural exhibitions,
performances, or
programs by non-profit
organizations 4
Day care activities Yes No Yes Yes Yes
provided by non-profit 501(c)(3) (exemption) 501(c )(3)
organizations [51 Only Only
Page 5 of 6
Exemptions Deductions Recommendations.docx
Deductions from B&O Tax Gross Receipts Tax - Continued
Description Ref # Kent State Bellevue Seattle Tacoma
Repair, maintenance, No Yes Yes Yes No
replacement, etc. of
residential structures and
commonly held property
by eligible organizations
13
Sales of precious metal No No Yes Yes Yes
bullion and monetized
bullion 14
Rental of real estate for No No Yes Yes Yes
-boarding homes 15
Advertising agency fees No Yes Yes Yes Yes
for national, regional,
and network radio and
television broadcasting
[16]
Initiation Fees 20 No Yes Yes Yes Yes
Dues [21] No Yes Yes Yes Yes
Contributions 22 No Yes Yes Yes Yes
Donations [23] No Yes Yes Yes Yes
Tuition fees [24] No Yes Yes Yes Yes
Attendance charges for No Yes Yes Yes Yes
trade shows, 501(c)(3)
conventions, or 501(c)(4)
educational seminars 501(c)(7)
sponsored by nonprofit Only
trade or professional
-organizations 25
Fees, dues and charges No Yes Yes Yes Yes
for privately operated
-kindergartens [26]
Fees, dues and charges No Yes Yes Yes Yes
for endowment funds
27
Cost of merchandise for No No Exemption Yes No
distribution affiliate or
cooperative [28]
Research and No No No Yes No
development for life
sciences by non-profit
-organizations 33
Investment management No No Yes No Yes
services 35] exem tion
Page 6 of 6
According to the IRS Publication.557`r, in the Organization Reference Chart section, the
following is an exact list of 501(c) organization types and their corresponding
descriptions.
501(c)(1)— Corporations Organized Under Act.of Congress (including Federal Credit
Unions)
• 501(c)(2)—Title Holding Corporation for Exempt Organization
• 501 c 3 —Religious, Educational, Charitable, Scientific, Literary, Testing for Public
Safety, to Foster National or International Amateur Sports Competition, or Prevention of
Cruelty to Children or Animals Organizations
• 501 c 4 — Civic Leagues, Social Welfare Organizations, and Local Associations of
Employees
• 501 c 5 —Labor, Agricultural and Horticultural Organizations
501 c 6 —Business Leagues, Chambers of Commerce, Real Estate Boards, etc.
501(c)(7)—Social and Recreational Clubs
• 501(c)(8)—Fraternal Beneficiary Societies and Associations
• 501(c)(9)—Voluntary Employee Beneficiary Associations
• 501(c)(10)— Domestic Fraternal Societies and Associations
• 501(c)(11)—Teachers' Retirement Fund Associations
• 501(c)(12)— Benevolent Life Insurance Associations, Mutual Ditch or Irrigation
Companies, Mutual or Cooperative Telephone Companies, etc.
501(c)(13)—Cemete Companies
501(c)(14)—State-Chartered Credit Unions, Mutual Reserve Funds
• 501(c)(15)—Mutual Insurance Companies or Associations
• 501(c)(16)—Cooperative Organizations to Finance Crop Operations
• 501(c)(17)—Supplemental Unemployment Benefit Trusts
• 501(c)(18)— Employee Funded Pension Trust (created before June 25, 1959).
• 501(c)(19)—Post or Organization of Past or Present Members of the Armed Forces
• 501(c)(20)— Group Legal Services Plan Organizations
• 501(c)(21)—Black lung Benefit Trusts
• 501(c)(22) —Withdrawal Liability Payment Fund
• 501(c)(23) —Veterans Organization.(created before 1880)
• 501(c)(24)—Section 4049 ERISA Trusts
• 501(c)(25)—Title Holding Corporations or Trusts with Multiple Parents
501(c)(26)-State-Sponsored Organization Providing Health Coverage for High-Risk
Individuals .
• 501(c)(27) —State-Sponsored Workers' Compensation Reinsurance Organization
501(c)(28)— National Railroad Retirement Investment Trust
501(c)(29)—Qualified Nonprofit Health Insurance Issuers (Created in section -
1322(h)(1) of the Affordable Care Act)L