Utility Taxes: Are You Assessing Them Correctly?

Any city or town may impose a business and occupation (B&O) tax on the income (as defined by local ordinance) of public and private utilities providing services within its boundaries. A city or town may also apply a tax on the revenue generated by utilities that it owns and operates (known as a utility tax)

In both cases, these are typically “gross receipts” taxes, or percentages applied to a utility’s total revenues. Cities and towns may calculate these taxes incorrectly, so it is important to assess if your agency is doing it as authorized under your local code.

This blog will look at how some jurisdictions across the state are calculating these taxes.

Are You Assessing Utility Taxes As Authorized?

One method a city or town may use for determining if utility taxes are being correctly calculated would be by comparing the revenue that is actually being taxed to what is authorized to be taxed by the local government’s own code. In other words,

• Is the tax being calculated on the revenues that are authorized in the local code?
• Is the tax rate of the calculation the same as that in the code?

To start this type of review, your entity needs to know what types of revenues are being receipted into your enterprise (utility) funds. There are generally only a handful to consider, the most common being:

• User charges/charges for services
• Late fees
• Turn on/off and property transfer (name change) fees
• Connection fees (for GFC, hook-up, system development)
• Investment interest 

Depending on how your utility tax levy is written, your entity may assess taxes on one or more of these revenues. A review of your code then needs to include the language of the assessment itself, any exemptions, any deductions, and what the tax rate is. Other reviews may include definitions, such as “gross proceeds of sales,” "gross income of the business," and "value proceeding or accruing," if those terms are used in the assessment of the tax.

If you have never reviewed the utility tax section of your code, it is typically found either in Title 3-Revenue and Finance or Title 5- Business Taxes, Licenses and Regulations, and there are several types of utilities listed. For purposes of this review, only those that are internally taxed are relevant.

How Are Cities and Towns Calculating Utility Tax?

The following are examples of language taken from existing utility tax levies from cities and towns across the state. For simplicity, only language providing for taxes on water revenues has been included.

Airway Heights (no special deductions)

There is levied a tax on the sale of water and for the privilege of carrying on said business, such tax to be equal to 19 percent of gross operating revenues from such sales. Notwithstanding any other provision herein, and whether or not the City shall provide the water, this tax shall apply and may be collected by the provider and from each person, firm and corporation paying for water at the time of payment.

Algona (no special deductions)

There is levied a tax on the sale and distribution of water for residential, commercial, or industrial consumption and for the privilege of carrying on the business, such tax to be equal to six percent of gross income from such business in the city; provided, however, that there shall be no tax levied for the installation charges or turn-on fees of water services.

Ephrata (includes installation fees in its definition of ‘gross operating income’)

Upon every person engaged in or carrying on the business of selling or furnishing water for domestic or industrial consumption within the city, there shall be levied a tax equal to twenty percent of the total gross operating income; (Ord. 05-21, 2005; Ord. 09-14, 2009) 

Sultan

There shall be levied upon the city of Sultan a tax equal to six percent of the gross revenue derived from each customer's monthly service charge for water service within or without the city but provided by the city.

Yelm

Upon the sale, delivery, distribution or furnishing of water for domestic, business, or industrial consumption, a tax equal to six percent of the total gross income from such sales; provided that there shall not be a tax levied upon installation charges for individual consumer water service lines and meters.

As you have seen, each of these levies is slightly different. One city wrote their exemption directly into the levy while another wrote their exemption in their income definition. Although not shown here, there were also examples of exemptions for the tax on investment interest and recycling fees (for sanitation services).

(To find out how a specific city or town calculates their utility tax, see our webpage on Washington City & Town Codes, which offers links to any municipal codes and city charters that have been published online.)

Finalizing the Review

Once you have completed your review, you will compare what is in your local code to whatever was used to calculate the tax, whether that be your software system or a spreadsheet. As you are performing your review, ask yourself the following questions:

• Do the tax rates match?
• Are you taxing what is authorized in the code and nothing more or less?
• If there is a certain distribution of the taxes in the code (80% to general fund, 18% to streets, 2% to capital, for example), are those the distribution rates that are actually being used?
• If the tax is listed separately on the utility bill, what is it being calculated on (i.e., sales; sales and fees; all revenue), and does that match the code?

My hope is that 100% of the people who read this and performed the review were able to answer “yes”, “yes”, “yes”, and “all the right things” to the questions above.

Conclusion

Municipalities that rely on gross receipts–based utility taxes must take special care to ensure the tax is administered in a way that matches what their code authorizes. For more information, see the following MRSC resources:

• Utility Taxes
• Revenue Guide for Washington Cities and Towns (see Utility Taxes)

Good luck in reviewing your agency’s calculations, and if you need assistance, we are here to help—just Ask MRSC.