Fiscal Note - SB 5901 Economic Development Tax Incentives for Targeted Counties, Department of Revenue (1/26/2022)
Summary
Individual State Agency Fiscal Note from the Department of Revenue (Agency: 140) on SB 5901, AN ACT Relating to economic development tax incentives for targeted counties, with an Agency Approval date of 1/26/2022. The narrative states that the bill creates a new sales and use tax deferral for qualified investment projects in counties with population less than 650,000, with total state and local sales and use tax for eligible deferrals limited to $400,000 per eligible investment project per person. It also says the bill limits the state sales and use tax remitted under the warehouse credit to a maximum $400,000. The Revenue Impact by Biennium table lists GF-State Retail Sales Tax of 1,090,000, 750,000 and 230,000 for the first, second and third biennium.
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“Fiscal Note - SB 5901 Economic Development Tax Incentives for Targeted Counties, Department of Revenue (1/26/2022).”
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Individual State Agency Fiscal Note
Bill Number: SB 5901 Bill Title: AN ACT Relating to economic Agency: 140
development tax incentives for targeted counties Department of Revenue
Part I: Estimates
[ ] No Fiscal Impact
Estimated Cash Receipts to:
Fund Fiscal Year 2022 Fiscal Year 2023 2021-2023 Total 2023-25 Biennium 2025-27 Biennium
GF-State Retail Sales Tax 1,090,000 1,090,000 750,000 230,000
Performance Audit Retail Sales
Tax
Total 1,090,000 1,090,000 750,000 230,000
Estimated Expenditures from:
Fiscal Year 2022 Fiscal Year 2023 2021-2023 Total 2023-25 Biennium 2025-27 Biennium
FTE Staff Years .1 .67 .39 .1 .1
Fund
GF-State 001 93,400 73,700 167,100 24,600 24,600
Total 93,400 73,700 167,100 24,600 24,600
The revenue and expenditures estimates on this page represent the most likely fiscal impact. Factors impacting the precision of
these estimates, and alternate ranges (if appropriate), are explained in Part II.
Check applicable boxes and follow corresponding instructions:
[X] If fiscal impact is greater than $50,000 per fiscal year in the current biennium or in subsequent
biennia, complete entire fiscal note form Parts I-V.
[ ] If fiscal impact is less than $50,000 per fiscal year in the current biennium or in subsequent biennia,
complete this page only (Part I).
[ ] Capital budget impact, complete Part IV.
[ ] Requires new rule making, complete Part V.
Legislative Contact: JEFF MITCHELL Phone: 360-786-7139 Date: 1/21/2022
Agency Preparation: Marianne McIntosh Phone: (360) 534-1505 Date: 1/25/2022
Agency Approval Valerie Torres Phone: (360) 534-1521 Date: 1/26/2022
OFM Review: Phone: Date:
OFM Form FN (10/95)
Fiscal Note # 5901-1
Bill # SB 5901
1
Part II: Narrative Explanation
II. A - Brief Description Of What The Measure Does That Has Fiscal Impact
CURRENT LAW:
DEFERRAL
There are no sales and use tax deferral programs specific to qualifying manufacturing projects in counties with less than
650,000 population.
WAREHOUSE REMITTANCE
Certain warehouses and grain elevators are eligible for an exemption in the form of a remittance of the state retail sales
and use tax paid on purchases of machinery and on materials and labor for construction of these facilities (RCW
82.08.820 and 82.12.820). The remittance does not include local sales and use taxes.
Warehouses more than 200,000 square feet in size receive an exemption equal to:
- 100% of the state retail sales and use taxes paid on construction, and
- 50% of the state retail sales and use taxes paid on equipment, including materials handling and racking equipment.
Grain elevators receive an exemption of state retail sales and use taxes paid based on capacity of the facility:
- 50% exemption with bushel capacity of 1 million, but less than 2 million, and
- 100% exemption with bushel capacity of 2 million or more.
PROPOSALS:
DEFERRAL
The bill creates a new sales and use tax deferral for qualified investment projects located in counties with population less
than 650,000. The Department of Revenue (Department) must publish a list of qualifying counties by July 1, 2022, and
update the list every even-numbered year thereafter.
The total state and local sales and use tax for eligible deferrals is limited to $400,000 per eligible investment project per
person.
The applicant must apply to the Department prior to initiating the construction of the eligible project. The application
must be made to the Department and include information regarding the location of the investment project, applicant's
average employment in the state for prior year, estimated or actual new employment and wages related to the project,
estimated or actual costs, time schedule for completion and operation, and other information required by the Department.
The Department must rule on the application within 60 days and issue a sales and use tax deferral certificate for state and
local taxes for each eligible project. The Department may not accept applications for the deferral after June 30, 2032.
The Department must keep a running total of all deferrals granted for each fiscal biennium.
The deferral certificate recipient must begin meaningful construction on an eligible investment project within two years of
receiving a deferral certificate unless construction is delayed due to circumstances beyond the recipient’s control. Lack of
funding is not considered beyond the recipient’s control. If the recipient does not begin meaningful construction within
one year, the issued deferral certificate is invalid, and taxes deferred are due immediately. Meaningful construction means
an active construction site, where excavation of a building site, laying of a structure foundation, or other tangible signs of
construction are taking place and that clearly show a progression in the construction process at the location designated by
the taxpayer in the application for deferral.
OFM Form FN (10/95)
Fiscal Note # 5901-1
Bill # SB 5901
2
The taxes deferred need not be repaid if the recipient utilizes the qualified project for qualified manufacturing or research
and development operation for the seven years following project completion date. If project is not operationally complete
within five years or not utilized for qualifying purposes for the seven years immediately following the project certified as
operationally complete, then the deferred taxes are due immediately based on the following schedule:
Year in which qualifying activities cease Percent of deferred tax due
1 100.0%
2 87.5%
3 75.0%
4 62.5%
5 50.0%
6 37.5%
7 25.0%
8 12.5%
The Department must assess interest at the rate provided for delinquent taxes, but not penalties, retroactively to the date
the investment project was no longer eligible for tax deferral.
Persons receiving the benefit of the deferral are required to file an annual tax performance report beginning the year
following the year in which the project is operationally complete and continue filing for the next seven years.
WAREHOUSE REMITTANCE
The bill limits the state sales and use tax remitted under the warehouse credit to a maximum $400,000 for the construction
or expansion of a warehouse or grain elevator.
For warehouses built in a qualifying county, the warehouse must be at least 100,000 square feet. Existing warehouses
located in a qualifying county need to add at least 100,000 square feet additional space when expanding to qualify for the
warehouse credit. Qualifying county is defined as a county with less than 650,000 population.
Persons receiving the benefit of the warehouse remittance are required to file an annual tax performance report beginning
the first calendar year following the year the warehouse or distribution center is operationally complete and continue filing
for the next two years.
The warehouse remittance expires July 1, 2032.
EFFECTIVE DATE:
This bill takes effect on July 1, 2022.
II. B - Revenue Impact
ASSUMPTIONS:
- Eligible deferrals are limited to $400,000 total state and local sales and use tax per eligible investment project per
person. A person is only allowed to defer up to $400,000 in total state and local sales and use tax.
- Projects are operationally complete within in one year of when the Department received the application.
- This estimate uses national level investment in fixed assets data that has been adjusted to reflect Washington State
investment levels.
- To estimate the local government impacts, this estimate uses the statewide average local tax rate for the qualifying
counties for Fiscal Year 2021 of 2.094%.
- The growth for qualifying project costs mirrors the annual growth for non-residential investment in R&D and private
investment in industrial facilities for the United States as reflected in the November 2021 IHS Markit forecast.
OFM Form FN (10/95)
Fiscal Note # 5901-1
Bill # SB 5901
3
- Based on Office of Financial Management's April 2021 population data, 36 of the 39 counties qualify for the new
deferral program.
- The qualifying counties are as follows:
Adams Ferry Klickitat Skamania
Asotin Franklin Lewis Spokane
Benton Garfield Lincoln Stevens
Chelan Grant Mason Thurston
Clallam Grays Harbor Okanogan Wahkiakum
Clark Island Pacific Walla Walla
Columbia Jefferson Pend Oreille Whatcom
Cowlitz Kitsap San Juan Whitman
Douglas Kittitas Skagit Yakima
- The qualifying counties remain eligible until the deferral expires.
- The Department begins accepting applications July 1, 2022, and has 60 days to review. This results in nine months of
impacted collections in Fiscal Year 2023. The Department may not accept deferral applications after June 30, 2032.
- The maximum amount of state sales and use tax remittance allowed for the construction or expansion of a warehouse or
grain elevator is $400,000.
- The bill allows new construction or expansions of warehouses 100,000 square feet or larger in qualifying counties.
- Based on the current warehouse remittance program and smaller warehouses becoming eligible under the proposal, the
Department estimates eight newly constructed or expanded warehouses per fiscal year.
- Materials and handling costs continue to qualify for the warehouse remittance program.
- This estimate assumes the Department is able to implement this proposal by July 1, 2022.
DATA SOURCES:
- Department of Revenue, warehouse remittance and deferral data
- Office of Financial Management, April 2021 population data
- IHS Market, Non-residential investment in R&D and private investment in industrial facilities forecast, November 2021
- Bureau of Labor Statistics, employment data
- Bureau of Economic Analysis, fixed asset data
POTENTIAL LITIGATION:
Legislation creating new exemptions and deferrals for construction projects presents a risk that the federal government or
federal contractors will seek to re-litigate Washington v. United States. This risk increases with each additional exemption
or deferral that the state enacts.
The Department’s legal counsel at the Attorney General’s Office has opined that the federal contractor risk applies to all
exemptions and deferrals of construction activity, not just construction projects of the type that the federal government is
likely to engage in. It also applies even if the exemption or deferral applies to federal construction projects as well as non-
federal construction projects.
Sales/use tax exemptions pose the greatest legal risk because they plainly treat the beneficiaries of the exemption more
favorably than federal contractors are treated. Sales/use tax deferrals also pose a significant legal risk. Each such
exemption or deferral increases the likelihood that the federal government or federal contractors will seek to re-litigate
Washington v. United States in which they would claim that Washington now discriminates against federal contractors.
If a legal challenge to a deferral or exemption were successful, in addition to lost future revenues, refunds potentially
would be owed under the statutory period (current year plus four previous years). Each year approximately $90 million is
collected on federal government contracting. If refunds were included as part of a potential court decision, the revenue
impact could reach nearly $500 million.
OFM Form FN (10/95)
Fiscal Note # 5901-1
Bill # SB 5901
4
REVENUE ESTIMATES:
This bill increases state revenues by an estimated $1.1 million in the nine months of impacted collections in Fiscal Year
2023, and by $430,000 in Fiscal Year 2024, the first full year of impacted collections.
This bill also decreases local revenues by an estimated $520,000 in the nine months of impacted collections in Fiscal Year
2023, and by $730,000 in Fiscal Year 2024, the first full year of impacted collections.
TOTAL REVENUE IMPACT:
State Government (cash basis, $000):
FY 2022 - $ 0
FY 2023 - $ 1,090
FY 2024 - $ 430
FY 2025 - $ 320
FY 2026 - $ 200
FY 2027 - $ 30
Local Government, if applicable (cash basis, $000):
FY 2022 - $ 0
FY 2023 - ($ 520)
FY 2024 - ($ 730)
FY 2025 - ($ 770)
FY 2026 - ($ 810)
FY 2027 - ($ 860)
II. C - Expenditure Impact
ASSUMPTIONS:
- This legislation will affect 25 taxpayers applying for the warehouse remittance and will affect 20 taxpayers with new
deferral applications each year.
- Persons receiving the benefit of the deferral or warehouse remittance are required to file an annual tax performance
report.
- Expenditures include the cost to implement the new tax preference.
FIRST YEAR COSTS:
The Department will incur total costs of $93,400 in Fiscal Year 2022. These costs include:
Labor Costs – Time and effort equates to 0.1 FTEs.
- Set up, program, and test computer system changes.
Object Costs - $79,200.
- Computer system changes including contract programming.
SECOND YEAR COSTS:
The Department will incur total costs of $73,700 in Fiscal Year 2023. These costs include:
Labor Costs – Time and effort equates to 0.67 FTEs.
- Amend one administrative rule.
- Provide revenue impact data for fiscal notes for tax-related initiatives.
- Test and verify computer systems for new deferral.
OFM Form FN (10/95)
Fiscal Note # 5901-1
Bill # SB 5901
5
- Annual review of tax performance report.
- Create a Special Notice and identify publication and information that need to be created or updated on the
Department's website.
- Respond to tax ruling requests, email inquiries, and more difficult call backs from the telephone information center.
ONGOING COSTS:
Ongoing costs for the 2023-2025 Biennium equal $24,600 and include similar activities described in the second-year
costs. Time and effort equate to 0.1 FTE.
Part III: Expenditure Detail
III. A - Expenditures by Object or Purpose:
Fiscal Year 2022 Fiscal Year 2023 2021-2023 Total 2023-25 Biennium 2025-27 Biennium
Salaries and Wages 9,000 45,200 54,200 16,400 16,400
Benefits 3,200 16,200 19,400 6,000 6,000
Personal Service Contracts 79,200 79,200
Supplies & Material 1,300 7,900 9,200 2,000 2,000
Office Equipment 700 4,400 5,100 200 200
Total 93,400 73,700 167,100 24,600 24,600
III. B - FTE Detail:
Job Classification Salary FY 2022 FTEs FY 2023 FTEs 2021 - 2023 Total 2023 - 2025 2025 - 2027
EMS BAND 4 122,633 .01 .01
IT SYS ADM-JOURNEY 89,916 .1 .05
MGMT ANALYST4 70,956 .11 .06
TAX INFO SPEC 4 64,332 .3 .15
TAX POLICY SP 2 72,756 .01 .01
TAX POLICY SP 3 82,344 .22 .11 .1 .1
TAX POLICY SP 4 88,644 .01 .01
WMS BAND 3 104,295 .01 .01
Total .1 .67 .41 .1 .1
III. C - Expenditures by Program (optional):
Fiscal Year 2022 Fiscal Year 2023 2021-2023 Total 2023-25 Biennium 2025-27 Biennium
Total
Part IV: Capital Budget Impact
None.
Part V: New Rule Making Required
Should this legislation become law, the Department will use the expedited process to amend WAC 458-20-182 Rule,
titled: "Warehouse businesses". Persons affected by this rule-making would include manufacturers in certain counties.
OFM Form FN (10/95)
Fiscal Note # 5901-1
Bill # SB 5901
6
OFM Form FN (10/95)
Fiscal Note # 5901-1
Bill # SB 5901
7
Revenue Impact Detail
First Biennium Second Biennium Third Biennium
FUND SOURCE CODE 1st YEAR 2nd YEAR 3rd YEAR 4th YEAR 5th YEAR 6th YEAR
GF-State Retail Sales Tax 0101 1,090,000 430,000 320,000 200,000 30,000
Total 1,090,000 430,000 320,000 200,000 30,000
OTHER
Performance Audit Retail Sales Tax 0101
Total
Net 1,090,000 430,000 320,000 200,000 30,000
Revenue Impact - by Biennium
FUND SOURCE CODE 1st Biennium 2nd Biennium 3rd Biennium
GF-State Retail Sales Tax 0101 1,090,000 750,000 230,000
Total 1,090,000 750,000 230,000
OTHER
Performance Audit Retail Sales Tax 0101
Total
Net 1,090,000 750,000 230,000
OFM Form FN (10/95)
Fiscal Note # 5901-1
Bill # SB 5901
8
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