Kent city officials are trying to find ways to track down businesses that apparently are not paying the city’s business and occupation (B&O) tax even though they are required to pay.
City staff revealed at a City Council workshop on Tuesday that nearly 5,000 businesses are licensed in town. But only 2,800 have set up B&O accounts. Of those, 1,600 are paying the tax while 1,200 are not required to pay because of gross revenues lower than the $250,000 exemption or other waivers.
Mayor Suzette Cooke proposed in her preliminary 2015-16 budget last month an increase in the B&O tax to bring in more revenue to the general fund as well as hiring four more employees to help get more businesses to pay. The tax became effective in January 2013 and brought in $5.2 million in 2013 (dedicated to street maintenance) with $300,000 spent on two auditors.
Cooke proposed raising the B&O rate and lowering the business exemption from $250,000 of gross revenues per year to $150,000. She said those changes would bring in an estimated $3.4 million more per year to help pay for general government services and pay off city debt.
The council will decide over the next several weeks whether to go along with Cooke’s proposal or come up with a plan of its own.
“To date we have not done a single audit,” City Finance Director Aaron BeMiller told the council. “It has been voluntary by businesses to pay their B&O taxes. We don’t have the staffing or the means at this point to go out and verify whether a business should be paying or not paying. The audit work that we’ve done is by looking at the returns of those voluntary compliance and collecting or reimbursing based on those payments.”
BeMiller said the two-person staff spends a lot of time on taxpayer account maintenance from handling refunds to penalty assessments.
“It’s a lot of work and we are just barely scratching the surface,” he said. “It’s a labor intensive body of work (to process returns). With the small staff that we have, we are able to process only the voluntary compliance.”
The two city B&O auditors collected an extra $278,000 based on reviewing returns, said Barbara Lopez, city financial planning manager. Audits determined one company had paid in the first and second quarters but not the third and fourth quarters. Another business thought it owed no tax but a city review showed it owed money.
Councilman Bill Boyce asked city staff if it could reach out to the 2,200 businesses that haven’t set up B&O accounts.
“So the 2,200 we know who they are,” Boyce said. “Could we send a letter to those 2,200 saying according to our records you should be filing?”
Lopez said it is possible to compare the business license list with the B&O account list.
Councilman Dennis Higgins said he definitely would like to see that step taken.
“If you can get from 50 percent compliance to 80 percent that’s 30 percent you don’t have to go out and hunt down and then you can focus on the (remaining) 20 percent,” said Higgins, concerned about staff reluctance to take on the task.
Lopez responded that staff already is overwhelmed.
“We are having a hard time doing any compliance work at all,” she said. “We’re trying to bring up the annual online forms and are working with the 2,800 taxpayer accounts we have out there. My reluctance is more about hours in the day.”
Boyce suggested maybe hiring a contractor to compare the records. Councilman Jim Berrios added that there must be a way to flag businesses that renew licenses each year and whether they have filed to pay the B&O tax.
BeMiller said staff will look into that possibility and report back to the council next week during the Finance Department’s report for its 2015-16 budget.
Boyce said he regrets council and staff didn’t do a better job of setting up the B&O program initially.
“I was here when we started the B&O tax,” Boyce said. “You can’t turn the clock back but when you build a house you have to have the foundation set up. As a councilmember you probably have to ask more questions up front. There’s a lot of things we have learned that if I could turn the clock back I would.
“Because in my opinion we rushed to get a lot of money but the infrastructure is clearly not in place for us to be successful and we missed out on a lot of opportunities. For me as a councilmember it’s a lesson learned and I will do better next time.”
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