A change to a little-known tax provision has been floated that could bring in more revenue and help lawmakers break a stalemate over the state’s supplemental operating budget.
The proposal, which would lower the share of national advertising income that out-of-state broadcasters should pay taxes on, appeared recently as part of the Republican state Senate’s latest budget plan.
It also includes a provision allowing network providers to pay taxes they owe dating back to 2010 without facing a penalty. The current and back taxes could bring about $81 million through the 2019 budget year — which lawmakers could use in their negotiations to reach a budget agreement.
“We’re offering this as a way to get done here,” said Deputy Senate Republican Leader John Braun of Centralia, who is sponsoring the proposal, Senate Bill 6665.
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Officials with the state Department of Revenue (DOR) say SB 6665 could reduce the risk of a lawsuit against the state from companies unhappy over the current tax situation. Because of the dispute, many companies haven’t paid the tax in Washington, according to a legislative analysis of the bill.
But some lawmakers aren’t ready to embrace the proposal.
“Maybe it’s a good deal, maybe it’s a sweetheart deal,” said Sen. Reuven Carlyle, D-Seattle. “Maybe it’s a sweet deal for the companies and the taxpayers. Until we vet it properly, we don’t know.”
The disagreement with the network providers — which include most network TV stations — stems from a change made by the state in 2010 to adopt what is known as an economic nexus.
Before 2010, the companies weren’t paying a tax on their national advertising income. But under economic nexus, an out-of-state business that gets more than $250,000 income from within Washington from sources such as advertising or royalties is subject to the state’s business and occupation tax.
One measure to assess how much national businesses should pay under economic nexus is to calculate the percentage of the state’s population of the country — which in Washington’s case is 2.2 percent.
That means that 2.2 percent of the networks’ national advertising income would be subject to the state’s B&O tax.
Out-of-state network providers don’t believe that their national advertising should be taxed like that and say it is more onerous than what regional networks must pay.
As a result, most national networks have not been reporting that income and thus not paying the tax, according to a legislative analysis of the bill.
Enter SB 6665, which would cut the economic nexus rate in half to 1.1 percent, according to the bill.
That means out-of-state networks would pay a 1.5 percent tax on 1.1 percent of their national advertising income, rather than on the larger, 2.2 percent share.
And if network providers pay by Oct. 1 the taxes they owe on the 1.1 percent share going back to June 2010, the state would waive any penalties.
Rhonda Weaver, a lobbyist representing NBC Universal and its parent company, Comcast, told lawmakers Friday that the bill was “a reasonable compromise.”
“Some members of our industry would still prefer to litigate,” said Weaver, who testified in favor of the bill in a public hearing before the Senate Ways and Means Committee. But, she added later: “We’re supporting this bill, though, to provide certainty for both the industry and the state moving forward.”
Weaver said the industry has “been grappling with this issue across the country” and that “this is being negotiated in quite a few places.”
With the new proposal, “We believe that any litigation risk that there is would be substantially reduced,” Drew Shirk of the DOR told lawmakers at the hearing.
Kim Schmanke, communications director for DOR, said the agency has been involved in conversations to make sure the bill can work, but didn’t come up with the policy change on the how much advertising income is subject to the tax.
DOR believes taxes should be collected based on the economic-nexus standard, Schmanke said, “and so this legislation would get … an agreement in place.”
But the bill wasn’t requested by DOR, according to Schmanke, and the agency hasn’t taken a position on the bill’s tax rate.
Sen. Andy Hill, R-Redmond and chair of the Senate Ways and Means Committee, said that without such an agreement, “The broadcasters could sue, and if they prevail there could be zero [dollars] coming into the state.”
Hill and Schmanke note that a proposal was introduced in the Legislature last year to solve the disagreement, but it went nowhere.
Carlyle, who as a representative used to chair the House Finance Committee, which deals with tax policy, said he believes lawmakers should go more slowly.
Carlyle questioned the idea of changing a tax rate because of the threat of a lawsuit. He also said “the policy of having national broadcasters pay the money they owe, in exchange for a 50 percent discount on their taxes, is debatable.”
“I’m not making a total judgment that a win-win can’t be found,” Carlyle added. “This is a major structural change, and the public has an absolute right to have it fully vetted.”
The Motion Picture Association of America — which represents companies in the movie and television industry — is neutral on the bill, according to a statement by Vans Stevenson, a senior vice president with the organization.
The proposal comes as lawmakers continue to negotiate over a supplemental operating budget, which is used to make adjustments to the state’s two-year budget.