News

City rights a wrong on utility tax

Federal Way residents will experience meager cash savings as a result of the City Council's Oct. 2 decision to reconstruct the city's utility tax code.

The city has been over-taxing residents since the code was enacted in 1996. The issue came to light after Proposition 1 was enacted, which increased Federal Way residents' utility tax from 6 percent to 7.75 percent beginning in 2007, said management services director Iwen Wang.

The amendment is an effort to let residents know the city wants to treat them fairly, City Manager Neal Beets said at a Sept. 18 City Council meeting, where the council first reviewed the amendment.

The change will cause the city's annual revenue to decrease, Wang said.

A state tax is applied to the services a utility company provides to customers. For example, in Washington, this tax is 3.873 percent for electric services and 3.852 percent for natural gas services, said Dorothy Bracken, Puget Sound Energy spokeswoman.

The original city utility tax code allows the city to collect 7.75 percent of the company's total revenue — the sum of the revenue generated from the company's service charges, plus the amount the utility company collects to cover utility tax obligations.

Essentially, the city is collecting on the revenue generated through the state's taxation process, Wang said. The "tax on a tax" is being passed on to customers, who are feeling its effects through higher utility bills.

The city has received a handful of questions from residents who are confused as to why Federal Way is applying a 7.75 percent tax to its total utility charges, rather than just service charges, Wang said. The issue became more apparent after Proposition One was passed, she said.

With the utility tax code amendment, the city's 7.75 percent utility tax will be applied to services only, Wang said. Electricity, natural gas, garbage, cellular phone, cable television and surface water services are all public utilities.

By city law, the ordinance will go into effect Oct. 7, but customers may not begin to see changes to their utility bills until late this year or early next year, Wang said.

State law gives utility companies a 60-day period in which to make their customers aware of the rate change, she said.

Once effective, each household may see a 40-cent-per-month decrease in the amount it pays for utilities, Wang said. Annually, savings would be about $4.50, she said. This amount was determined by calculating the amount of revenue the city expects to pass up annually, due to the amendment, divided by the number of Federal Way households using public utilities, Wang said.

This is an estimated savings, and the actual amount each customer will keep depends on how many and what types of utilities the customer employs, Wang said. The utility companies do not have to pass the savings on to their customers, she said.

Utility companies are governed by the state, not the City of Federal Way, so they will not be required to apply the city's new utility code. Ultimately, utility companies will determine if they will continue to apply the city's 7.75 percent tax to their total revenue or only the revenue generated by service charges, Wang said.

Some utility companies, including most cellular phone companies, already operate according to the city's amended utility tax code, Wang said.

The city expects the amendment will ultimately result in a loss of approximately $300,000 per year, Wang said.

However, the extra revenue that the original utility tax code resulted in was not planned into the city's budget. The money was not anticipated, so its absence is not expected to significantly affect the city's spending habits, Wang said.

Contact Jacinda Howard: jhoward@fedwaymirror.com or (253) 925-5565.

Example:

The charge for services is an example of the average amount of a Federal Way resident's electric bill. The number is based on a yearly use of 1,000 kilowatts per month service, Bracken said.

original utility tax code:

$91.34 (charge for services)

x .03852 (3.852 percent state tax)

---------

= $ 3.52 (state tax)

+ $91.34 (original charge for services)

---------

= $94.86 (charge for services, plus state tax)

x .0775 (7.75 percent City utility tax)

---------

= $ 7.35 (City tax)

+ $94.86 (amount the utility company charges for services and taxes)

---------

= $102.21 (amount customer pays the utility company)

amended utility tax code:

$91.34 (charge for services)

x .0775 (7.75 percent City utility tax)

---------

= $ 7.08 (City tax)

$91.34 (charge for services)

x .03852 (3.852 percent state tax)

---------

= $ 3.52 (state tax)

+ $91.34 (original charge for services)

---------

$94.86 (amount the utility company charges for services and state tax)

+ $ 7.08 (City tax)

---------

$101.94 (amount customer pays the utility company)

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