Padden bill to suspend B&O tax for startups heard in key committee

Relief measure could benefit 90,000 businesses over the next four years

Mike PaddenWashington’s business and occupation (B&O) tax is widely regarded as one of the most onerous and punitive taxes that new and small businesses face. Spokane Valley Republican Sen. Mike Padden is now taking aim at this leading cause of business failures in Washington, proposing a one-year exemption from the state B&O tax for all new businesses and a two-year exemption for new businesses employing fewer than 25 people.

Padden’s bipartisan small-business relief measure, Senate Bill 6327, received a public hearing today in the Senate Economic Development, Trade & Innovation Committee.

“The Legislature must consider removing some of the job-strangling barriers to new businesses,” Padden said.

“Instead of putting new businesses in our state at a competitive disadvantage, this bill would provide all of the state’s newest, and many of its smallest, businesses with an opportunity to grow, spur innovation and create new jobs.

“Reducing the tax burden for small businesses also opens new opportunities for small-business owners in depressed areas that are desperate for new jobs, while encouraging out-of-state businesses to relocate to Washington.”

The B&O tax is levied on every business, regardless of size, and is based on its gross receipts, meaning there is no deduction for the costs of doing business. As a result, many startups, “mom and pop” shops, and even small businesses that fail to make any profit at all are forced to pay the same tax rate as profitable, well-established, larger businesses.

Padden’s small-business relief bill would provide a B&O tax exemption for:

  1.  All new businesses during the first year of operation;
  2.  Small businesses (less than 25 full-time employees) for the first two years of operation, plus a 50 percent exemption in the third year.

The bill defines “new business” as a business required to obtain a registration certificate for the first time during the calendar year for which the exemption is first claimed.  An application to the Department of Revenue (DOR) is required and must be filed within one year of the business’s operation.  The exemption time periods accrue following DOR’s approval of the application.

Businesses that are restructured, represent a new branch, or substantially similar to a business operated within the last five years by the same principals are deemed not to be new businesses under the bill.

In 2009, DOR estimated that as many as 90,000 businesses would be launched and receive the one-year exemption over the first four years after passage. Of those, the agency estimated that 40,000 would be small businesses eligible for the two-year waiver.

Padden called these businesses crucial to Washington’s economic recovery and said his bill could help reverse the stagnation in their growth.

“The U.S. Small Business Administration estimates that seventy percent of all new products and up to eighty percent of all new jobs are generated by small businesses. Our state ranks in the top three in the creation of these businesses – that’s the good news,” said Padden. “The bad news is that we rank number two in the number of failed businesses.

“This state is filled with hard-working entrepreneurs ready to risk it all to create new industries, new products, new services and new jobs. This bill sends a message to those entrepreneurs that this state will not be a barrier to the attainment of their aspirations, but will give them every opportunity to be successful.”

To advance this session Senate Bill 6327 must receive a “do pass” recommendation from the Economic Development, Trade and Innovation Committee by Friday, Feb. 3.