Seattle enacts, then quickly repeals employee hours tax


Mary Cho
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Nisha Mathew
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Jamie C. Yesnowitz
Washington, DC
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Chuck Jones
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Lori Stolly
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Seattle Mayor Jenny Durkan signed unanimously passed legislation on May 16, 2018, adopting an employee hours tax for the privilege of engaging in business in the city.1 On June 12, 2018, however, the Seattle City Council reversed course and voted to repeal the tax with a 7–2 vote.2 The $275 per full-time employee tax would have applied to businesses having taxable gross income of more than $20 million and was intended to raise revenue to address the city’s homelessness and affordable housing issues.

Employee hours tax The employee hours tax, measured by the number of employee hours of work conducted within Seattle during each quarter of the calendar year, was to be levied upon every person for the act or privilege of engaging in business activities within the city from Jan. 1, 2019, through Dec. 31, 2023.3 Under the legislation, “employee” was defined to include any person who performed labor, or services for a business, was on the payroll of the business, and performed any part of his or her duties within the city of Seattle.4 “Payroll” was defined as the remuneration by a business to the employees who performed work, labor, services, or made other similar contributions for the business and included, but was not limited to, salaries, wages, tips, or other draws or distributions.5

The amount of tax due was computed based on the number of employee hours worked in the city during each quarter of the calendar year at the rate of $0.14323 per hour worked, excluding hours of vacation and sick leave.6 The tax applied to hours worked inside the city, regardless of whether the place of business was located within or outside the city.7 Exemptions from the tax were provided for businesses with taxable gross income of $20 million or less, businesses that were pre-empted from taxation by cities pursuant to federal or state law,8 non-profit organizations, hospitals, and businesses engaged primarily in the provision of comprehensive healthcare services that provided at least 25 percent of their services to certain patients.9

There were two methods that could have been used to determine the total employee hours tax. A business was required to pay a quarterly tax in the amount of the total employee hours worked within the city, multiplied by a $0.14323 per hour rate10 (resulting in a $275 per year tax for a full-time employee solely working in the city). As an alternative to this flat rate calculation, designed to provide administrative ease in determining the amount due, a business could choose to calculate its quarterly employee hours tax based on the number of its full-time employees. Specifically, the number of full-time employees for a business in each quarter was calculated to equal the full-time employees of the business for the quarter, plus the sum of the hours worked by part-time employees in the quarter, divided by 480 hours.11 Any fractional remainder was rounded up to the nearest whole number, and the number of full-time employees was multiplied by $68.75 to determine the quarterly hours tax for a business using this method.12 Businesses with more than one place of business were required to use the same method of calculation for all locations.13
Taxpayers would have been required to file and pay their employee hours tax with the same frequency as they currently filed and paid their business license tax on forms prescribed by the Director (on either a quarterly or annual basis).14 The Director was tasked with adopting, publishing, and enforcing applicable rules and regulations, including rules to determine employee hours worked within the city.15 The tax would have been imposed in addition to other license fees and taxes, and would have constituted part of the operating overhead or cost of doing business.16

Commentary Seattle adopted the employee hours tax as a precursor to a business payroll tax, based on a recommendation from its Progressive Revenue Task Force to address the city’s homelessness and affordable housing issues.17 The original ordinance was unanimously approved by the City Council and the language contained within that ordinance reflected a broader trend of some legislatures expressly stating their intent in enacting policies designed to cure specific societal problems. Consideration of the employee hours tax quickly generated considerable negative publicity as large Seattle-based employers reacted to its initial proposal, resulting in the lowering of the tax rate in an attempt to prevent these employers from challenging the tax on constitutional grounds, and to ensure that these employers would not retrench their economic footprint in the city.18 Its repeal roughly a month later, after a contentious 7–2 vote, was in direct response to an outcry by Seattle’s resident companies, which had threatened a referendum on the bill in the fall.19

The passage and repeal of the tax marks Seattle’s third attempt to address an identified social problem by raising tax revenue in recent years, with the others being a city income tax and a sweetened beverage tax. Seattle’s income tax legislation, intended to promote a progressive tax system to meet the city’s fiscal needs and further stimulate growth, was enacted in anticipation of a decrease in state funding from the federal government.20 Upon enactment, several residents filed lawsuits challenging the validity of the tax, which was ultimately declared unconstitutional.21 Seattle’s decision to impose a sweetened beverage tax beginning in 2018 was driven, in part, by a desire to address the health epidemic caused by sugary foods22 and revenue generated by the tax will be used to support public benefit programs that expand access to healthy and affordable food programs.23 Now that the employee hours tax has been repealed, Seattle is left to find revenue from other sources to address the social issues that continue to face the city.

1 Ordinance 125578, § 1, enacting SEATTLE, WA., CODE § 5.37.
2 Ordinance 125592, repealing Ordinance 125578. Seattle Mayor Jenny Durkan signed the ordinance on June 13, 2018.
3 SEATTLE, WA., CODE § 5.37.030(A),(G). The tax was intended to be replaced by a business payroll tax following the initial five-year period of the employee hours tax, but because of uncertainty in the timeline due to administrative processes, if the imposition of the business payroll tax was delayed then the employee hours tax would have remained in effect.
4 SEATTLE, WA., CODE § 5.37.020. For purposes of the employee hours tax, the term also included all full-time, part-time, and temporary employees or workers on the payroll of the business.
5 Id. Payroll also included the payroll of related-party paymaster companies. Members of limited liability companies, professional limited liability companies, and partners would have been considered employees. Id.
6 SEATTLE, WA., CODE § 5.37.030(B). If an employee worked both within and outside the city, the business had the responsibility to compute and report the number of hours worked within the city.
7 SEATTLE, WA., CODE § 5.37.030(E).
8 SEATTLE, WA., CODE § 5.37.050(A)(2). These businesses included, but were not limited to, insurance businesses and their agents; businesses that only sold, manufactured, or distributed motor vehicle fuel; businesses that only distributed or sold liquor; and federal and state government agencies and subdivisions.
9 SEATTLE, WA., CODE § 5.37.050(A).
10 SEATTLE, WA., CODE § 5.37.050(B).
11 SEATTLE, WA., CODE § 5.37.030(C). A full-time employee was defined as an employee who worked at least 480 hours in a quarter of a calendar year. A part-time employee was defined as an employee who worked fewer hours. SEATTLE, WA., CODE § 5.37.020.
12 Id.
13 SEATTLE, WA., CODE § 5.37.030(D).
14 SEATTLE, WA., CODE § 5.37.040. Taxpayers discontinuing their business were required to file and pay the employee hours tax at the same time that their final business license tax return was due.
15 SEATTLE, WA., CODE § 5.37.080.
16 SEATTLE, WA., CODE §§ 5.37.060; 5.37.070.
17 Ordinance 125578, preamble. The Task Force recommended that the city seek to collect $75 million from a new employee hours tax, a new payroll tax, or both.
18 For example, see What Seattle Businesses Are Saying About the Proposed ‘Head Tax’ and Why the Tax Will Go Forward, Seattle Business (Apr. 19, 2018).
19 Seattle City Council Repeals ‘Head Tax” Weeks after Enactment, Reuters Business News, June 12, 2018.
20 Ordinance 125339, § 1, enacting SEATTLE, WA., CODE § 5.65. See GT SALT Alert: City of Seattle Approves New Personal Income and Sweetened Beverage Taxes.
21 See GT SALT Alert: County Court Invalidates Seattle Personal Income Tax.
22 Ordinance 125324, preamble.
23 SEATTLE, WA., CODE § 5.53.080. The revenue also would have been used to promote public awareness campaigns highlighting the dangers associated with a high-sugar diet, along with administrative costs associated with implementing the programs.

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