SB 6173, sponsored by Sen. Margarita Prentice, would change the resale certificate to a sellers permit. This measure will increase up-front costs by nearly 10% to contractors, an industry that is under substantial pressure due to the economy.
The state will incur additional administrative costs at a time when it is cutting programs. Penalties will increase under this measure to 100% of the tax value and sends a contrary message to the efforts of the Senate earlier this session to reduce paperwork violations for small employers.
The business, design and contracting groups believe the changes in this bill are unnecessary and efforts to raise revenues should be placed on job creation and business expansion instead of increasing penalties and the establishment of new programs.
The fiscal note indicates that the bill will increase construction costs by over $100 million in the next two years. Over 6 years, the bill will increase constructions costs by over $450 million. That is just for the state portion of the sales tax. The local government fiscal note has not been completed. We can expect that the local portion will be a huge hit as well.
SB 6173 purports to improve sales tax compliance but really targets construction contractors by eliminating the resale certificates and not allowing the state to issue the new seller’s permit to construction contractors. This may not be an official “tax increase,” but it is an added cost to construction contractors because the sales tax must be paid upfront for purchases of goods which then will be resold to the project owner and taxed.
Contractors will be forced to “float” revenue to the state, and will undoubtedly lose money due to the lag time experience on the credit exchanges. Tremendous cost increases and administrative difficulties will also result when trying to track and account for various transactions during the process of a project. All contractors will be penalized in the attempt to get at a few who are breaking the rules. There are better alternatives.
The construction industry is one of the few industries that will continue to play a significant role in the state’s economic recovery. It purchases goods, sells goods, employs skilled and unskilled workers, and is one of the largest contributors to the state’s tax coffers in the way of business taxes and payroll taxes.
This upfront tax payment will also add upfront costs to public project owners and the State. Many small contractors are working on a very slim profit margin, and the added upfront cost required in SB 6173 will be a real hardship, and it could result in more contractors laying off more workers and/or closing their doors, putting everyone in the firm out of work. In most cases, the sales tax for purchases during construction will be significant.
In a fragile economy, this is not the time to cripple the construction industry more by adding a cost that is unfairly targeted to only the construction industry.
In 7 days, SB 6173 was introduced, passed out of the Senate and now is out of the House Finance Committee on its way to the House floor. This is definitely a bill on the fast track. It is request legislation from Governor Chris Gregoire.
SB 6173 would be a massive tax increase on construction projects: more than $100 million over 4 years.
The committee hearing today was interesting. The only proponent for the bill was the WA Department of Revenue. Those testifying against the bill included the AIA|WA and groups representing engineers, contractors, retailers and union workers. In other words it the entire private sector is against the bill and only the agency responsible for collecting the money was for it.
While the bill passed out 7-3, on a party line vote, several Democrats spoke of significant concerns with the bill. Representatives Santos, Ericks and Springer all said that they are only voting to move the bill forward and are not committing to supporting the bill on the House floor. They called for a lot work to be done to improve the bill before it moves further.
The Republicans on the committee all voted against the bill, citing its massive impacts on the construction industry.
The bill now goes to the House Rules Committee, which determines which bills go to the floor.
Those paying close attention may note that this bill is moving after all of the normal legislative deadlines have passed. It has been deemed “necessary to implement the budget,” and thus, is exempt from the deadlines. Look for a more detailed review in another post.
Also, normally a tax increase requires a two-thirds vote of the legislature or a vote of the people. Because this is framed as a change in the way taxes are collected, it in not deemed to be a tax increase.
