Featured Inquiry (02/22/10)

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Question:

Whether the city may provide in its B&O tax ordinance for a credit for new business start-ups?

Answer:

Yes, you have some leeway in crafting your own B&O tax credits. The statutes governing the state B&O tax do not apply to the city's B&O tax; the city's B&O tax authority derives from RCW 35.21.706 -.710, and is restricted by the provisions of the model B&O tax ordinance developed pursuant to the mandate in chapter 35.102 RCW. See the AWC web page on the Model B&O ordinance for more information on the model ordinance. The city is free to develop tax credits not addressed by the mandatory provisions of the model ordinance; RCW 35.102.040(3) states that “Except for the deduction required by RCW 35.102.160 and the system of credits developed to address multiple taxation under subsection (2)(a) of this section, a city may adopt its own provisions for tax exemptions, tax credits, and tax deductions.” (Emphasis added.)

The other potential limitation of the ability of the city to provide a tax credit is the state constitution. It could be argued that a tax credit for start-ups would be an unconstitutional gift of public funds, in violation of article 8, section 7 of the state constitution. But, we think it is a reasonable classification, the credit has a proper municipal purpose, and there is no “donative intent” here. So, yes, we think the city could develop a credit for a uniform class of employers that are start-ups, e.g., during their first three years of operation in the city.