Guinevere Seaward Shore
Metro DC - Arlington
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Metro DC - Arlington
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Jamie C. Yesnowitz
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On July 30, 2018, the District of Columbia enacted the Fiscal Year 2019 Budget Support Emergency Act of 2018, with an effective date of Oct. 1, 2018, unless otherwise provided.1
A significant goal of the Act from a local tax perspective was to provide a stable, annual source of funding for the Washington Metropolitan Area Transit Authority (WMATA), which was previously funded by annual contributions from member jurisdictions and federal grants. Accordingly, the enacted legislation raises taxes on entities that benefit from the WMATA rail and bus system, visitors that benefit from the use of public transportation, and commercial property owners in close proximity to a WMATA station. The Act also provides for a general sales and use tax rate increase for all taxable transactions, and some benefits for small businesses.
Efforts supporting the WMATA
In a report issued by the Committee of the Whole,2
the Council of the District of Columbia clearly noted that those deriving benefit from the WMATA should also be equitably subject to the tax burden that will now provide the WMATA’s financing. The report emphasized the need to secure a dedicated funding stream, citing the District’s financial success towards a “well-functioning and comprehensive public transportation network.” 3
The Act is intended to achieve this goal through several different provisions. First, the Act imposes an increase in the general sales and use tax rate from 5.75% to 6%.4
This reverses a 2013 reduction in the sales tax rate from 6% to 5.75%.
Second, the Council, citing studies concluding that private ride hailing services both detract from public transportation as well as add to congestion and the accelerated deterioration of the District’s roads, 5
passed legislation increasing the ride hailing tax from 1% to 6%.6
Concurrently, the vehicle rental tax rate will rise from 9% to 9.25%. 7
The Council also determined that tourists that benefit from using the public transportation during their stay should also be subject to supporting it.8
Therefore, the Act raises the sales tax rate for transient accommodations or lodgings from 10.05% to 10.2%.9
Tax rates on receipts of theaters and entertainment venues with 10,000 or more seats will increase from 5.75% to 6%. 10
In addition, the Act targets “sin taxes” as a method to raise additional revenue. Taxes for the sale of spirituous alcoholic beverages sold for the consumption off the premises will rise from 10% to 10.25%.11
The tax on cigarettes (including e-cigarettes) will increase dramatically, from 12.25 cents a cigarette to 22.25 cents a cigarette. 12
Finally, the Council concluded that close proximity to a public transportation hub amplifies the value of commercial property, citing a study that estimated commercial properties within a quarter mile of a metro station were usually valued 16.4% higher than properties that were further away.13
Accordingly, in its report, the Council determined that owners of commercial property should assist with the burden of funding the WMATA.
The enacted legislation applies the burden to all owners of Class 2 property by revising the property tax rate structure in the following manner:
- Property with an assessed value of up to $5 million: $1.65 for each $100 of assessed value;
- Property with an assessed value of more than $5 million, and up to $10 million: $1.77 for each $100 of assessed value; and
- Property with an assessed value of more than $10 million: $1.89 for each $100 of assessed value.14
Prior to amendment, Class 2 property with an assessed value of up to $3 million was assessed at $1.65 for each $100 of assessed value.15
Property with an assessed value of more than $3 million was assessed at $1.85 for each $100 of assessed value.
Efforts supporting small businesses
In addition to highlighting the importance of providing funding for the WMATA, the Council also recognized the value that small retailers provide to the District. The Council realized there is a need to assist such retailers with the relatively high operational costs of doing business in the District, specifically with respect to rental spaces. 16
Therefore, for taxable years beginning after Dec. 31, 2017, the Act provides qualified businesses a refundable credit against corporate franchise tax or unincorporated business franchise tax.17
The credit will provide a benefit regardless of whether the business has net income or is experiencing a loss. The credit is equal to either: (i) 10% of the total rent paid by the business for a qualified retail rental location18
during the tax year (up to $5,000); or (ii) the total Class 2 real property taxes paid by the entity for the qualified retail owned location19
during the tax year (up to $5,000).20
The credit does not apply if either the entity or its property is exempt, or if the entity already receives any tax credits towards its real property tax.21
Retailers considered as qualified corporations or unincorporated businesses are those that are engaged in making sales at retail, with less than $2.5 million in federal gross receipts and that currently are filing sales tax returns reflecting these sales.22
Retailers will qualify for this credit regardless of their status as the property’s actual owners, renters, or whether they are parties to a triple-net lease.
Federal conformity provisions
The District has rolling conformity and adopts the Internal Revenue Code (IRC) as currently amended. However, it was one of the first jurisdictions that attempted to decouple from federal law23
upon the enactment of H.R. 1, more commonly known as the Tax Cuts and Jobs Act (TCJA).24
While legislation that would generally decouple from federal tax law has not passed the Council to date, the Act formally decouples from one of the TCJA’s income tax provisions, IRC Sec. 199A, which allows a “pass-through deduction” of 20 percent of a non-corporate taxpayer's qualified business income (QBI) from a partnership, S corporation, or sole proprietorship.25
The TCJA’s provision defines QBI as the net amount of qualifying items of income, gain, deduction, and loss with respect to the trade or business.26
The Act specifically decouples from this provision retroactively, stating that for District purposes, beginning January 1, 2018, in the case of any individual, estate, or trust, no deduction will be allowed under IRC Sec. 199A. 27
Overall, the Council adopted this legislation as a means to equitably distribute the burden of financing the WMATA, which serves as an economic engine connecting the District, along with the nearby Maryland and Virginia suburbs. While the bulk of taxable transactions will be taxed at a 6 percent rate, the 0.25% increase will be spread across a broad swath of industries, with relatively common effect on businesses that sell taxable property and/or services. Therefore, the industries likely to experience the most significant financial impact from the Act are ride hailing services and the cigarette industry.
For ride hailing services, a $20 ride that currently charges $0.20 in taxes will now charge $1.20 in taxes. Although this seems like a drastic change, the Act is taxing this type of service at the same rate applicable to other taxable services. In terms of the increased taxes on cigarette sales, this alteration follows the trend of numerous states imposing very significant tax rates to curb smoking. The District’s provision will make the District the jurisdiction with the highest cigarette tax rate in the country. Given that Maryland and Virginia are just a few WMATA stops away, this could serve to raise sales tax revenues in those jurisdictions at the District’s expense.
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