New Taxes have Devastating Economic Impact on Architects

The legislature is still planning to raise B&O taxes on AIA/WA members. There are 37 hours left in the 2010 Legislative Session. Lawmakers must be told about the impact the proposed tax increases will have on your firms.

Contact your legislator today and tell them to oppose new taxes on architects.

Unemployment Rates Soar for Architects
Architects have been hit hard by the current recession. Engineering News Record reports unemployment rates for design and construction were up to 25% in January. Washington State has lost over 4,400 design jobs since 2008, according to the US Bureau of Labor Statistics.

Revenues - Lowest Since 2006
Quarterly architecture and engineering (A&E) firm revenue has fallen by $434 million, and has not been this low since 2006. And, revenues are continuing to fall.

In the Architecture Billings Index any number under 50 means declining revenues. The latest number is 42.5 and falling. National data shows “...architecture firms have lost almost 51,000 positions.”

New Taxes on Firms that are Barely Surviving?
The state is facing difficult decisions but architecture firms have made harder decisions – to let many people go. Recently an AIA/WA member’s firm, one with originally more than 100 employees and 2 offices, closed its doors. They stated that projects simply ran out.

The state should take steps similar to what private sector businesses have done to keep their budgets balanced in these difficult economic times.

This proposed B&O tax increase will not come out of profits. There are no profits right now for Washington architecture firms. This tax will be paid by more people being laid off, by salaries being cut and by benefits being reduced.

Contact your legislator today and tell them to oppose these new taxes on architects.

Two Bills that Tax Architects Introduced Yesterday

At noon yesterday, two bills were introduced that would cause severe difficulties for the profession. Parts of these bills make it expensive for firms to operate and pay their bills; while they also make firm employees personally liable for taxes if the firm fails! Then, without any public hearing or opportunity for public input, legislators rushed the bills through committee.

The first bill, Substitute House Bill 3191 (SHB 3191, part 12) will make it difficult for Washington firms to recruit and retain qualified employees by making firm officers and employees liable for unpaid taxes “regardless of fault or whether the individual was or should have been aware of the unpaid tax liability.”

Part 20 of this House bill increases the Business & Occupation (B&O) tax rate to 2.0% for environmental consulting services. Architects act as the prime consultant on design projects by bringing together different disciplines under a single contract to provide a complete set of services. It’s nearly impossible to separate out environmental consulting services from the other services provided in the contract.

The second bill, Substitute Senate Bill 6143 (SSB 6143, part 7) also creates new personal liability for corporate officers and key employees for unpaid taxes. Under current law, the state may go after business owners for unremitted sales tax but cannot go after employees who did not know or could not have known about the tax liabilities. This law changes that.

Part 20 of this Senate bill directly increases the B&O Tax rate for architecture firms to 1.75%. Architectural firms already pay the highest B&O tax rate of 1.5%. Increasing the tax burden on the service sector may bring unfortunate yet predictable results – architectural firms relocating out of state. This part also unfairly targets small firms as large multi-state firms already have the option to outsource projects; small and medium firms do not.

The AIA/WA is currently working to get harmful parts of these bills removed and to have legislators vote against them if they are not removed. You can find your legislator here, and let them know your concerns with SHB 3191 and SSB 6143.

Sales Tax to be Applied to Online Services

Beginning July 26, 2009, you will need to start paying closer attention to the services you use online. With the passage of Engrossed Substitute House Bill (ESHB) 2075, sales or use tax will be due on digital products ranging from downloaded music to streaming video.

The bill clarifies how taxes apply to products that exist only as computer bits and bytes. Specifically, it:

• Defines digital products as goods and services transferred electronically.
• Includes certain exemptions for businesses and end consumers.
• Requires sellers of digital products to electronically file their tax returns.
• Provides amnesty to those who didn’t collect or pay sales or use tax on digital products that were taxed before July 26, 2009.

What digital products are subject to tax?
While downloaded digital goods (music and movies, etc.) have always been subject to sales or use tax, ESHB 2075 applies sales or use tax to all digital products, regardless of how they are accessed (downloaded, streamed, subscription service, networking, etc.).Digital products subject to sales or use tax include:

• Downloaded digital goods (music and movies, etc.)
• Streamed and accessed digital goods
• Digital automated services (DAS)

The bill also covers remote access software (e.g. application service providers), which is now subject to sales and use tax too. It does not matter if the purchaser obtains a permanent or nonpermanent right of use. If you have questions about what this bill applies to, how it will be enforced, what is exempt and more you can visit the Washington State Department of Revenue’s question and answer webpage.

Revenue Forecast Predicts Another Decrease

A press release published yesterday, June 18, by the State of Washington Economic and Revenue Forecast Council (ERFC), states that it “appears that we are finally approaching the end of this Great Recession.” This prediction regarding the end of the financial is based on “claims for unemployment insurance” peaking and “monthly job losses are diminishing.”

However, the release states that the bottom is still lower than predicted in March. The forecast goes on to state that “job losses will likely continue through the end of this year.” And, according to the EFRC, when the economy does rebound the improvement is likely to be gradual.

The predication also stated that the General Fund forecast for the biennium is “$27.2 billion” which is $185 million less than projected. Many newspapers have noted that Governor Gregoire intends to make even deeper budget cuts, payroll cuts, and to cap hiring because of the decrease.

Summary of New Tax Legislation Available Now

The Department of Revenue issued a summary today detailing new tax legislation enacted during the 2009 legislative session.

The Department generates the tax summaries annually to help make businesses aware of changes to the state tax system. The 2009 summary covers 43 bills and their projected fiscal impact over the next four years. You can read it here.

Additional information on specific legislation that replaces resale certificates with sellers’ permits, clarifies the taxation of digital products, and requires monthly taxpayers to file and pay their taxes electronically, is available at http://dor.wa.gov/.

3 Days Left Until the Legislature Adjourns

The major tax increase bills are having a tough time getting the votes to pass. Senate Majority Leader Lisa Brown said today that the income tax bill is dead for this year. The News Tribune is reporting that there are not enough votes in the House to pass any tax referendum this year. Since they are referenda, they only need a simple majority to get through the legislature. But, there are not enough Democrats supporting them to send the taxes to the voters.

That leaves SB 6173, to change the way contractors collect and remit sales tax. The fiscal note was revised yesterday from $40 million the first two years to $100 million, $450 million over the next 6 years. The AIA|WA, contractors and retailers worked today with the House to significantly improves the bill. All direct impacts on architecture firms were removed. The process was improved for contractors and retailers. Much work will need to be done on the rulemaking. But, it is a dramatically better bill. The House passed it with bipartisan support.

On the budget, the House and Senate Democrats reached an agreement last night on the operating budget. The House Democrats announced today that the operating budget will be voted on Friday and the Capital Budget on Saturday. No word on the timing of the final vote on the transportation budget; likely it will be Saturday or Sunday. They have not released any public documents on any of the three major budgets – possibly late tonight. So, we don’t know what’s in and out of them. We are especially interested to know if the design projects are back in the capital budget. House Chair Hans Dunshee has been fighting for more design projects. The question is whether the Senate Chair Margarita Prentice or the lead on the capital side, Senator Karen Fraser, will agree to restore the design projects.

The House late last night passed the bill to fund the deep bore replacement tunnel for Alaskan Way in Seattle. Since the bill was amended it will go back to the Senate for final passage, which is expected to concur. There were some anti-Seattle amendments attached, namely requiring Seattle taxpayers to fund any cost overruns on the project (even the state-funded portions). But, that was the only way it could get out of the House. Interestingly, Chopp was the lead proponent of that little amendment. After it passed, he voted against the bill, anyway.

Rep. Mike Armstrong (R-Wenatchee) was hospitalized last night after suffering a mild heart attack. He had surgery today to put in a stint. The word is that he is doing well. Please keep him in your prayers.

$100 Million Construction Tax Increase Analyzed

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.

Massive Construction Tax Increase Moving in Legislature

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.

New Tax Bills Introduced

Although the legislative season is quickly coming to a close, new tax bills have been introduced.

The bill that is getting the most attention, HB 2377, would impose a 2 year increase in the sales tax rate of 0.3 cents per dollar. This money would be dedicated to education spending.

Another bill, HB 2354, would impose a property tax on “intangible property.”

While the official fiscal note is not available, the intent section of the bill claims that it would raise $4 billion a biennium. Please take a moment to review the bill and send your thoughts to me.

There are questions of whether certain parts of the bill would enforce firms to move from cash to accrual accounting, make Owner/Architect Agreements taxable as soon as they are executed, and tax stocks/bonds.

These tax bills would dedicate the increase to education and health care. The AIA is monitoring their progress and will keep you updated.