Utility Taxes

Overview

Any city or town in Washington may impose a utility business and occupation (B&O) tax – also known as a utility tax – upon the income of public and private utilities providing services within the boundaries of that city. The city/town may also levy taxes on revenues generated by the city’s own utility services provided both inside and outside the city boundaries.

Legal Authority

The authority of cities and towns to impose a utility tax derives from their general authority to impose excise taxes on businesses operating within their boundaries, with some statutes and court decisions providing additional authority and clarification.

Statutes

• RCW 35A.82.020 – Code cities
• RCW 35.22.195 and RCW 35.22.280(32) – First class cities
• RCW 35.23.440(8) – Second class cities
• RCW 35.27.370(9) – Towns
• RCW 35.21.870 – Establishes 6% maximum utility tax rate for electricity, natural gas, steam, and telephone utilities, unless higher rate is approved by voters
• RCW 54.28.070 – Cities and towns may tax public utility districts (PUDs) that operate works, plants, or facilities within the city/town for the sale of electricity
• RCW 82.14.230 – Brokered natural gas use tax

Court Decisions

• Burba v. Vancouver (1989) – Court upheld utility tax imposed by city on its water and sewer utility where the measure of the tax was gross revenues derived by the utility from providing service to both resident and nonresident customers.
• Burns v. City of Seattle (2007) – States that the cities "could have generated revenue for their general funds through the imposition of a utility tax on their own municipal utilities"
• Lakehaven Water & Sewer District et al. v. City of Federal Way (2020) – Affirms lower court case City of Wenatchee v. Chelan Pub. Util. Dist. (2014) that code cities may impose taxes on other municipalities providing utility services within their boundaries on revenues derived from their proprietary activities. This reasoning should apply equally to other classes of cities and towns.
• TracFone Wireless v. City of Renton (2024) – A prepaid wireless service is considered a telephone business under RCW 82.16.010 and is subject to the city utility tax.

Maximum Utility Tax Rates

RCW 35.21.870 imposes a maximum tax utility tax rate for certain utilities of 6% of the utility's income (as defined by local ordinance) but allows cities to exceed that rate with voter approval (simple majority). To see recent attempts at voted utility tax increases above 6%, see the “Examples” section at the end of this page or refer to our Local Ballot Measure Database.

In addition, federal law prohibits local governments from taxing Internet or broadcast satellite TV services and places limitations on local cable television taxes. Other utilities have no limits set by state or federal law.

Below is a summary of the maximum allowable tax rates.

Use of Revenues

Utility tax revenues are unrestricted and may be used for any lawful governmental purpose.

However, if the city is submitting a utility tax increase to voters on one of the specific utilities in RCW 35.21.870, specifying a purpose might make voters more likely to approve it. If the city does specify a purpose in the ballot measure, the extra revenues resulting from the utility tax increase would be considered restricted and must be spent in accordance with the purpose stated in the ballot measure.

Administering the Utility Tax

Utility taxes, like other business & occupation taxes, are imposed upon the utility business itself, and not upon the individual utility customers.

There are two common ways to administer a city utility tax:

1. Embed the tax in the utility rates

Embedding the tax in utility rates is the most technically correct way to administer the tax. A gross receipts tax percentage is applied to the total revenue including revenue used to pay the tax itself. For this reason, utility rates should be set to a level that generates enough income to cover operating costs plus the tax charged by the city or town.

2. Itemize the tax on the utility bill

Alternatively, a utility tax may be separately itemized on the utility bill, which makes base rates appear lower. In this case, a city or town will apply the gross receipts rate as a markup.

This approach, however, can create confusion about who is being taxed. If both the percentage and the dollar amount are shown on the bill, then customers might make the erroneous assumption that the tax is calculated as a markup percentage using the rate shown on the bill. For example, if there is a line in a bill showing $100 in utility services and another line stating “10% city utility tax” and the amount of the tax is $11.11, some customers may complain that $11.11 is not 10% of $100.

Itemizing can also cause cities and towns to miscalculate the utility tax if the adopted utility rates do not generate enough money to pay the gross receipts tax. A gross receipts tax percentage is applied to the total revenue, including revenue used to pay the tax itself.

Correctly Calculating the Utility Tax When Itemizing It

With gross receipts taxes, for every stated rate there is an equivalent markup percentage that can be applied to customer bills as though it were an indirect sales tax, while still ending up with the right amount of revenue for the utility. The calculation is:

Stated rate ÷ (1-stated rate) = equivalent markup percentage

If a utility chooses to separately itemize the tax on the customer bill, then the equivalent markup percentage should be used to yield the correct amount of tax. The following table shows a variety of gross receipts tax rates and their equivalent markup percentage. (Note that the gap between the stated gross receipts rate and the equivalent markup percentage widens as the stated rate gets higher.)

Tax Rate Disclosure Requirement

Any city or town that imposes a utility tax on the gross revenues of its own municipal water, sewer/wastewater, or stormwater utility must disclose the tax rate to its utility customers (RCW 35.92.460).

The disclosure must include a statement, as applicable, that “The amount billed includes a fee or tax up to [dollar amount or percentage] calculated on the gross revenue of the [water/sewer/wastewater/stormwater] utility.”

The city or town must provide the disclosure through one or more of the following methods:

• On customers’ regular billing statements;
• On the city/town website, if the city/town provides written notice to customers or taxpayers that such information is available on the website; or
• Through a billing insert, mailer, or other written or electronic communication provided to customers or taxpayers on either an annual basis or within 30 days of the effective date of any subsequent tax rate change.

This requirement does not apply to other city/town utilities (such as solid waste or electricity), nor does it apply to other public or private utilities operating within the city (such as water-sewer districts or cable TV providers).

Tax Rate Changes

A city that imposes a utility tax for the first time or that increases a tax rate may be required to include a referendum clause in the ordinance. RCW 35.21.706 requires a referendum clause for a gross receipts business and occupation tax, but from its placement in the text, it is unclear whether this statute also applies to utility taxes. A court decision or legislative amendment would be needed to clarify this matter, but MRSC recommends a cautious approach of including referendum language in any increase.

Any tax changes for electric, telephone, and gas utilities cannot take effect until the end of 60 days after the enactment of the ordinance (RCW 35.21.865). If the utilities are private, they need this time to apply to the Washington Utilities and Transportation Commission for a rate adjustment to reflect the tax change.

Brokered Natural Gas Use Tax

RCW 82.14.230 allows the cities that tax natural gas to (optionally) impose an equivalent “use tax” on brokered natural gas sales that are not otherwise subject to the utility tax. This use tax is imposed by the legislative body, may be used for any lawful governmental purpose, and does not require voter approval.

The use tax rate must be equal to the city’s utility tax rate on natural gas, and the use tax must be paid by the consumer. However, the use tax does not apply to the use of natural gas, compressed natural gas, or liquefied natural gas if the consumer uses the gas for transportation fuel as defined in RCW 82.16.310.

Examples of Utility Tax Ordinances

General Ordinances and Code Provisions

• Bellevue Municipal Code Ch. 4.10 – Applies to "gross proceeds of sales" of electricity, cable TV (with credit for cable franchise fees paid), natural gas (including brokered natural gas use tax), sewer, solid waste, telephone and cell phone (including allocation of cell phone income), and water (including city water utility)
• Stanwood Municipal Code Ch. 3.11 – Applies to "gross revenue" of cable TV, drainage, electric, garbage, natural gas, sewer, telephone, and water utilities
• Battle Ground Municipal Code:
  • Ch. 3.12 – Tax on "gross revenues" of private and municipal electric utilities, including public utility districts
  • Ch. 3.32 – Tax on "total gross revenues" of drainage, sewer, and water utilities
• Ilwaco Municipal Code Ch. 3.19 – Utilities tax
• Tukwila:
  • Ordinance No. 2250 (2009) – Imposes 6% tax on solid waste collection services, with revenues to be used for the general fund
  • Ordinance No. 2258 (2009) – Imposes temporary 10-15% utility tax on city's own water, sewer, and surface water funds due to projected general fund shortfall

Voted Utility Taxes Above 6%

• Cheney Resolution No. E-040 (2012) – Proposition to renew existing 4% utility tax for 14 years to fund street and sidewalk improvements. Tax applies to electricity and natural gas, maintaining total 14.75% rate. (Voters previously approved an additional 4.75% utility tax for parks and recreation.)
• Des Moines:
  • Resolution No. 1169 (2011) – Proposition to increase utility tax by 3%, with 1% for historic building capital projects (expiring after 20 years or when bonds are repaid), 0.5% for historic building maintenance and operations (no expiration), and 1.5% for pavement improvements (no expiration). Measure failed.
  • Resolution No. 1215 (2013) – Scaled-back proposition to increase utility tax by 2% for 20 years for pavement improvements. Measure performed significantly better but narrowly failed.
• Orting Resolution No. 2015-10 (2015) – Proposition to increase utility tax by 3.4% to enhance and maintain police services. Tax applies to electricity, natural gas, phones, and cable TV services; measure narrowly failed.
• Tacoma Resolution No. 39236 (2015) – Proposition to fund transportation projects with a 10-year, 1.5% utility tax increase and a temporary, 10-year levy lid lift of $0.20. Utility tax applies to natural gas, electricity, and phones; measure barely passed following an earlier failure in 2013.