Revenues with Extra Requirements: Accounting for Property Leases and Liquor Funds

As many of you reading this blog already know, MRSC provides four-day training sessions that we refer to as municipal finance bootcamps. One of the unanticipated benefits of these bootcamps has been that they have helped in identifying ideas for new blog topics from both the perspective of what some in our audience may not be aware of, and conversely, things we didn’t know.

With that said, the following is a topic that has come to light through the bootcamps.

Revenues with Extra Requirements

In the context of this blog, revenues with extra requirements are those that differ from “normal” revenues in that there is some additional process or requirement tied to them. While there are several, this blog will cover leases or, more specifically, leasehold excise taxes, liquor excise taxes, and liquor board profits.

One caveat with regards to leasehold taxes, this blog will be discussing only the accounting for these transactions, not whether a particular lease is subject to the tax or how much the leasehold tax should be. For that information, see the Washington State Department of Revenue’s Leasehold Excise Tax Questions & Answers.

Leases and Leasehold Excise Taxes

In most cases, when an entity owns real and/or personal property and leases all or a portion of that property out to a private entity (individual, business, etc.), that lease becomes subject to a leasehold excise tax of 12.84%.

Since governmental property is not subject to property taxes, when its property is put to use in a non-governmental manner, leasehold taxes essentially take the place of property taxes. In addition to the leasehold tax collected on behalf of the state, cities and counties can enact their own leasehold tax, which is a maximum of 6% for counties and 4% for cities (see RCW 82.29A.040).

(Note that these taxes are not in addition to the state’s 12.84%, but a diversion of some of those revenues.)

The structure of the lease matters

According to RCW 82.29A.050, leasehold tax:

must be stated separately from contract rent, and if not so separately stated for purposes of determining the tax due from the lessee to the lessor and from the lessor to the department, the contract rent does not include the tax imposed by this chapter.

MRSC understands this to mean that if the lease amount and leasehold tax are not each stated individually in the lease agreement, the leasehold tax is in addition to the rent amount stated in the lease and must be an additional sum collected from the lessee. See the example below:

• Incorrect: Lease = $1,128.40 (leasehold excise tax included in total)
• Correct: Lease = $1,000. Separate leasehold excise tax = $128.40.

Bootcamp correction

In previous finance bootcamps, my colleague and I presented a method for backing the leasehold excise tax out of the stated rent when the lease did not list the tax separately. During research for this blog, we determined that this approach is inconsistent with state law, as noted above. (Consider this a lesson in “Just because we’ve always done it this way, doesn’t make it right.” We have corrected our bootcamp materials and apologize for any confusion this may have caused.)

Accounting for leases and leasehold excise taxes

Transactions for receipting lease revenues and leasehold excise taxes can vary depending on the type of local government.

The accounting transactions that can occur for cash-basis entities related to lease revenues and leasehold excise taxes are listed below along with corresponding BARS numbers.

 When collecting the lease and leasehold excise tax payment, the agency will recognize the lease revenue and custodial collection of the state leasehold excise tax as follows

• Lease revenue: BARS# = 362.00
• Custodial collection: BARS# = 389.30

The entity will also record the remittance of the state leasehold excise tax to the state.

• Custodial remittance: BARS# = 589.30

If a city or county has imposed its own leasehold excise tax, the state will remit the local portion back to the city/county.

• Leasehold excise tax: BARS# = 317.20

Note that other entities (special purpose districts, for example) receiving a share of the state’s leasehold excise tax will use BARS# 337.00.

Liquor excise taxes/Liquor board profits

Liquor taxes and liquor board profits are distributed by the state on a population basis, with the exception of border areas, and there is no revenue sharing with cities, towns, or counties that do not allow the sale of liquor within their jurisdictions.

Both liquor excise taxes and liquor board profits have requirements that many recipients are not aware of but should be. For example, RCW 71.24.555 requires that recipients spend a minimum of 2% of the total amount received (from either revenue source) on substance abuse treatment programs.

Local governments that do not have their own facility or program may share in the use of another entity’s so long as they contribute a minimum of that same 2% to support the facility or program.

In addition, Initiative 1183 (2011), which privatized the sale of liquor, added $10 million dollars to the distribution of liquor profits for enhancing public safety programs. Percentage-wise, this means 20.23% of the distribution must be spent for programs that enhance public safety (RCW 66.24.065).

Accounting for Liquor Excise Taxes/Liquor Board Profits

To properly account for these requirements, a local government should receipt the full amount of revenue from each source first (Liquor excise BARS# is 336.06.94, liquor board profits BARS# is 336.06.95) and then calculate a minimum of 2% of that revenue to be expended for substance abuse treatment programs.

The BARS expenditure code will depend on where/how those funds are ultimately utilized. Recipients of such funds need to be sure they are meeting the minimum threshold of spending 20.23% on programs and activities that enhance public safety.

The Bottom Line

Not all revenues are as straightforward as they may first appear.

Leasehold excise taxes and liquor distributions are good examples of transactions where receiving the money is only the first step. Understanding the requirements attached to these revenues, from how amounts are collected and accounted for to how certain funds must be spent, cannot be overstated. As we have seen, those details matter.

Whether it is properly separating and accounting for leasehold excise tax or making sure liquor revenues meet required spending thresholds, the important takeaway is to look beyond simply receipting the revenue. When dealing with an unfamiliar or infrequent revenue source, it is worth asking: What strings might be attached?

If you would like additional information on the various revenues that cities, towns, and counties collect, please review our Revenue Guide for Washington Cities and Towns or the Revenue Guide for Washington Counties.