As a Kirkland citizen and business owner, I hear many comments about Kirkland business taxes, some of which are correct but many of which are myths. With our recent annexation and many businesses being subject to Kirkland taxes for the first time, let’s expose some of those myths.
Kirkland is the only city that taxes its local businesses – False!
Most cities charge fees and/or taxes on businesses. For comparison purposes:
Business & Occupation (B&O) taxes – Most major cities in Washington have a B&O tax similar to the State’s system. Businesses pay a percentage of their gross revenue to the city without any deductions for overhead and with only a select few items exempt from tax. Usually paid quarterly, B&O taxes can be very complex for companies which do business in more than one city. Typically this is the most expensive type of city tax. As examples, Bellevue, Issaquah and Seattle have B&O taxes. Kirkland does not charge a B&O tax (except on utility companies).
Employee (FTE) fees – also known as “head taxes” these are fees charged based on the number of Full-Time Equivalent (FTE) employees. Typically paid annually, these fees are simpler than B&O taxes to compute and to administer. Kirkland uses this method, as does Redmond and Renton. In addition, Bothell’s annual license fee has an FTE component.
Square footage fees – some cities base their license fees on the square footage that a business occupies. This is one of the components in Bothell’s annual license fee. Bellevue and Seattle charge square footage fees in addition to B&O taxes in certain circumstances.
License fees – most Washington cities, if they don’t have one of the other taxes or fees, charge an annual license fee. Some cities charge license fees in addition to the other taxes.
Income taxes – there are no cities in Washington requiring businesses to pay a tax on their net profit (i.e. after expenses). However there are cities elsewhere in the US – as close to us as Portland - which assess taxes on the net income of businesses.
Kirkland’s business taxes are higher than in other cities – False!
As noted above, the FTE fees are typically less expensive for businesses than B&O taxes. They also produce less revenue for the city than a B&O tax on gross revenues would yield.
The City of Kirkland has assembled a summary comparing business taxes levied by several cities. Generally, the costs in Kirkland are slightly more than in Redmond, but significantly less than in Bellevue or Seattle.
A temporary summer employee automatically costs an additional $100 for Kirkland FTE fees – Not necessarily!
Kirkland‘s FTE fee is based on the number of full-time equivalent employees. Generally, the company will total up the hours worked by its employees over the past year, divide by 1920 (the standard number of annual hours for an FTE set by Labor & Industries), round up or down to the nearest whole number and multiply by $100. Adding an employee for the summer would add approximately 0.3 to the number of employees – the result of the formula would round down and there would not be an extra $100 fee.
Similarly, when adding a year-round part-time employee - depending on the number of hours they work the addition may or may not cause an additional $100 fee for that business.
Kirkland has a minimum annual fee of $200 for all businesses – False!
While Kirkland does have a $100 base and a minimum FTE count of one person, there are exceptions for smaller businesses. If a business has annual gross receipts of less than $12,000 or if the business is only in Kirkland temporarily (35 days or less), then the annual fee is limited to $50. There are also full exemptions for many nonprofit organizations and vendors which participate in a permitted special event or a city parks event.
Kirkland’s “Head Tax” began in 2008 – False!
Kirkland’s use of this method actually began in 2003 and was revised in 2008, effective January 1, 2009. At the time of the revision, the annual fees of many smaller businesses decreased under the new 2008 formula. However, for most large businesses the fees increased, most notably for businesses with over 100 employees.
Businesses in Juanita, Finn Hill and Kingsgate now have increased total costs of $100 per employee – Not necessarily!
It is true that the annual FTE fee is a new expense for businesses in the area recently annexed to Kirkland. However, property taxes will decrease in these areas in 2012 and some of those decreases will be significant. The typical business lease includes a portion for costs (known as CAM, pass-through, triple-net, etc.) and depending on the terms of the lease, many businesses will see a decrease in the property tax component of their monthly CAM which could – depending on the business – be substantial, even as much as the cost of the FTE fee. These properties are also now subject to the city’s utility tax which will add some costs to CAM. The actual net change in costs will vary by business and location.
The $100 per person head tax prevents Kirkland businesses from hiring new employees and growing their businesses - False!
Adding employees is a business decision, based on its needs, its overall strategy and the revenue opportunities for the company. Each new employee brings additional costs including wages, payroll taxes, benefits, technology, training, etc. With all of those costs, if the addition of a $100 fee is the make-or-break factor that prevents the hiring of the employee, then the decision did not pencil out to begin with. Put another way, if a business has an opportunity to improve its profits by increasing its workforce, this fee should not impact that decision.
If the head tax is repealed, the City can easily make up the lost revenue with new sales tax revenues – False!
The City of Kirkland raised approximately $2.5 million in 2010 from the FTE fees (including the base fee) and estimates about $2.9 million annually in 2011 and 2012. The projected increase comes primarily from the addition of the annexed areas to the city. It’s possible that some retail businesses might choose Kirkland over Redmond or Bellevue if our FTE fee was repealed; however we’d have to add new and/or increased retail business bringing in over $341 million per year in new retail sales in order for sales tax revenue to replace the lost revenue from the FTE and base fees. If we repealed just the FTE portion, that would still require $282 million in new retail sales in order to replace the lost revenue. Most of the sales tax that we pay is allocated to the state and the county, with less than 1% coming back to the City of Kirkland. Of course, business growth in the retail, wholesale, manufacturing and service sectors bring more employees into the city which then yields expanded activity for existing businesses and other positive economic factors for the City. However, the lost revenue from a repeal of the FTE fee would take time to be replaced and in the interim, the City would have to find ways to make up the shortfall.
I hope this has been helpful and will allow citizens and businesses to know more about the facts. If you have questions, please refer to the City’s website or contact the City’s Finance department at: 425-587-3140.
Bea Nahon, CPA, practices in Kirkland, where her firm’s city taxes are now less than 50% of what they were when the practice was in Bellevue. She is a past president of the Washington Society of CPAs.
With appreciation to the staff at the City of Kirkland for their assistance in gathering data for this article.