What is a use tax? Is it effective?

According to the Department of Revenue (DOR), a use tax is a tax on the use of goods or certain services in Washington when sales tax has not been paid. Also, goods used in this state are subject to either sales or use tax, but not both. So the use tax compensates when sales tax has not been paid.

There are a few instances when you owe a use tax over a sales tax. If you buy something in another state that does not have a sales tax or a state with a sales tax lower than Washington’s, then you owe a use tax.  For example, if you buy something in Oregon that is used in Washington then you’re subject to the use tax.  The third option is if you buy something from someone who isn’t authorized to collect sales tax.  This happens if you buy something through a newspaper classified ad. Lastly, if goods are purchased by out of state by subscription, through the Internet, or from a mail order catalog company and they don’t collect Washington’s sales tax, you owe the use tax.

The use tax was created by the Revenue Act of 1935 (read Justin's entry about it here) along with a majority of Washington’s tax structure.   As we’ve discussed in other posts, this system reflects an economy from 80 years ago that doesn’t adequately collect taxes in today’s Washington.  According to the Economic and Revenue Forecast Council and DOR, about half of all online sales to Washington residents go untaxed. Rather, the tax isn’t collected although its payment is legally required in the form of an equivalent use tax.

A use tax is required when sales tax isn’t collected for online sales but it’s up to citizens to know when and how to pay.  How is this enforced? As we move to buying more goods online this gap will only continue to grow when there isn’t a sales tax being collected.  There’s an incentive for businesses to be on top of this due to DOR’s ability to audit them, but it’s highly unlikely DOR would audit citizens for online purchases from sites such as Craigslist. This would be expensive, hard to implement, and hard to enforce.

As it’s currently configured, the use tax isn’t an effective method for ensuring compliance when the sales tax isn’t collected.  However, the online sale of goods and services has changed the economy in a way that states can’t adequately adapt to.  A key reason for this is federal legislation about Internet taxation; we’ll talk about that next time.

Washington State Property Tax 101: History

This overview of Washington State property taxes is the first in a multi-part series focused on shedding some light on our state’s property tax system.  It is intended to condense and simplify the myriad of information already available.  If you are interested in more detailed information, head over to the Department of Revenue’s (DOR) webpage.

The Organic Act of 1853 not only established the territorial government of Washington but also required that taxes assessed on property be administered uniformly and provide exemptions for benevolent institutions, federal property, and churches.  Thus began the first tax in Washington’s history.  When Washington gained statehood in 1889, the property tax laws remained largely the same.  Property taxes were the principle revenue source for Washington from the Organic Act of 1853 to the early Depression years. 

In the 1920s and 1930s, property tax rates began to rise.  According to DOR, rates of 2.5% - nearly three times what they typically are today – were not uncommon during this time period.  During the Depression Era, efforts were made to reduce burdensome property taxes because they were no longer an accurate predictor of wealth.  As society moved from largely agrarian production to industrialization, property ownership changed.  Reliability on property tax revenue was at an all-time low in a time when demand for government resources and services was at an all-time high.

An effort made to help alleviate the tax burden (which you’ve read about multiple times on this blog) was an attempt to pass a graduated income tax.  Initiative 69 was passed by voters with 70% approval in 1932, but the state supreme court ruled the law unconstitutional because of the graduated rate structure.  Taxpayers did get some relief in 1933 and 1935 when the state sales and business & occupation taxes were passed. 

On the same ballot as Initiative 69, was an initiative to limit property tax rates, which passed.  During the following decade, voters approved multiple limitations on property tax rates which severely reduced the property tax revenue.  Additionally, a few exemptions were put into place: certain intangibles, household goods, and motor vehicles.  In the 1970s, even more exemptions were adopted: senior citizen and open space program being the most notable. 

In 2001, Initiative 747 (an Eyman initiative) was approved by voters.  This initiative placed further restrictions on taxing districts in regards to how much revenues may grow from year to year.  Before the initiative, growth rates were tied to inflation and not to exceed 6%.  Under the new initiative, growth could not exceed 1% annually.  Even though the law was deemed unconstitutional in 2007, the Legislature enacted a similar statutory limit of 1% and is currently still in place. 

In 2009, legislation requiring that all property be assessed for value annually by 2014, as opposed to every four years which had been the law since 1955, was enacted.

Overall, it’s clear to see that Washington’s property tax history is complex and ever-changing.  Stay tuned for a breakout of detailed property tax issues and a roundup of property tax stories in the news.  For a timeline of significant events go here. 

Income tax initiative passes in Washington State!

Believe it or not, Washington voters once approved a people’s initiative to introduce a graduated income tax.  Not only did the initiative pass, but it won by a landslide, with over 70% approval.  However, it went on to be struck down by the courts and has been followed by 4 consecutive failed attempts to bring an income tax to Washington through the ballot. The People’s Initiative 69 was successful because of the blurring of the urban rural divide, dire economic realities, and a shifting domestic marketplace.  It was accompanied on the ballot by another tax reform initiative, People’s Initiative 64.  Initiative 69 was the first and only income tax initiative to pass in Washington State and set the stage for dramatic tax reform that culminated in the passage of the Revenue Act of 1935 (you can read more about the Revenue Act here), which remains as the blueprint for our current tax code.

Initiative 69 was placed on the ballot on November 8, 1932 and read as follows:

An Act relating to and requiring the payment of a graduated tax on the incomes of persons, firms, corporations, associations, joint stock companies and common law trusts, the proceeds there from to be placed in the state current school fund and other state funds, as a means of reducing or eliminating the annual tax on general property which now provides revenues for such funds; providing penalties for violation; and making an appropriation from the general fund of the state treasury for paying expenses of administration of the act.

There were a total of 5 initiatives on the ballot in 1932.   They represented a wide spread of populist interest addressing (in addition to tax reform) elections, campaigns, and alcohol consumption.

Initiative 69 sprang out of an anti-property tax sentiment that was spearheaded by advocates in the Washington Grange Association, including Charles Hodde, who worked diligently to gather the necessary signatures for placement on the ballot.  As its ballot description states, Initiative 69 was the direct result of an understanding that property tax alone was not going to fairly and adequately fund vital public programs - education being at the top of the list.  An overdependence on one revenue stream left rural Washingtonians feeling jilted as they saw their property tax bills continually raise. 

Supported by labor, agriculture, and education; initiative 69 earned 322,919 votes and won by a margin of almost 3:1! The success of this initiative is a key lesson in the importance of coalition building and working towards common interest.  Perhaps a glimpse backwards will give the bearing necessary to move forwards? 

Voter + I-64=40 Mills

The People’s Initiative 64 joined Initiative 69 on the 1932 ballot and was part of an initiative-driven-tax-reform effort that looked to diversify revenues and alleviate the burden of rising property taxes.  Initiative 64 introduced strict limits on property taxes in Washington and was the beginning of the eventual ballooning of the sales and B&O tax.

Derived from a palpable distaste for skyrocketing property tax bills, Initiative 64 placed limits on the amount of tax that could be levied by the state and local municipalities against an assessed property value.  Initiative 64 was a sister initiative to Initiative 69, serving as an important point of coalition between urban and rural income tax supporters.  By introducing a property tax limit, reform advocates were able to intercept concerns that the introduction of a new tax in Washington would not provide sure and certain relief in property tax burdens.
Initiative 64 introduced a 40-mill limit on property tax in Washington eliminating any non-market based growth in property tax collections.  As a result, the sales and use tax has increased 9 times since its introduction through The Revenue Act of 1935.  Having been on the ballot twice prior, Initiative 64 passed by a smaller margin then its counterpart, Initiative 69, getting 303,384 or 61% of the ballots cast.

By limiting the amount that could be levied in property taxes and the court’s ruling against the income tax portion of Initiative 69, Washington has come to rely heavily on its retail sales tax to fund critical services.  Of the three types of major taxation (property, excise, and income), only two are present in Washington, and one is subject to a cap, leaving the retail sales tax the only collection system that is open for growth.  As a result, we have seen a dramatic increase in sales tax in Washington since it was first introduced in 1935.  The state portion of the retail sales tax was introduced at 2% and has since increased to 6.5%. 

An over dependence on sales tax has resulted in Washington having one of the most regressive tax systems in the nation.  It places the largest tax burden, as a percentage of income, on those least able to pay.  Sales tax is driven by consumers, an over dependence on sales tax compounds economic downturns when consumer confidence is at its lowest.  Further, our economy has become more complex, it is growing increasingly difficult to effectively track and collect sales tax for online or digital purchases.  Washington is struggling with sales tax erosion that is the result of many factors.  If we are to thrive, we must address these factors to ensure that the quality of life remains high in Washington State. 

Dirt farmer and tax reform advocate

A self-proclaimed dirt farmer, Charles Hodde was an influential player in the development of Washington’s tax code.  He was dedicated to the public process and progressed from a grassroots organizer (working on tax reform and public power in initiatives), to state representative, to gubernatorial candidate, to agency director, and eventually, federal appointee.  A man of many hats, Hodde’s finger prints can be found all over the history of Washington’s tax code.


An examination of tax reform history in Washington without talking about Charles Hodde would be like putting together a puzzle with half the pieces missing.  Hodde was a part of the tax reform effort on nearly every front.  He started as an organizer for the Washington State Grange Association in which he contributed heavily to the filings of People’s Initiative 69 and People’s Initiative 64.  By walking and talking his way through Seattle, Hodde was able to promote the sister reform initiatives well enough to carry a victory throughout the whole area. 
Hodde’s influence on reform initiatives continued, and he went on to become a lobbyist for the Grange Association, which was one of the key backers in the income tax reform effort.  He was elected to the House of Representatives in 1937, and was elected to Speaker of the House in 1948.  This accomplishment earned him a hero’s welcome and parade in his home district.  Hodde speaks of the event:

[T]here’d never been a Speaker from a little cowtown. Well, that isn’t quite true, we had one from down in Garfield County way back in the twenties ... but when I took the bus from Spokane back to Colville, you never saw a more astonished little kid than I was when the bus was met by a band and a convertible. The citizens there loaded me on this convertible with my wife and my daughter, Dorothy was playing in the high school band and she marched along front. John [their son] rode with us, and I got a parade clear through Colville, a hometown hero (Hodde, 1986, p. 132).

Hodde held firmly to the need for reform to Washington’s tax code.  Many of the reasons that led him to champion reform still apply today.  Hodde understood that an adequate tax code must be applied fairly across income brackets, should not be too heavily dependent on any one form of revenue, and that each person should pay his/her share according to his/her means. Hodde built a near 60-year career in public service on these principles.  Contemporary reform advocates would do well to know their roots.

Tobacco excise tax now applies to roll-your-own cigarettes

If you don’t smoke, you might not be aware of the taxes placed on cigarettes sold in this state. And if you don’t smoke, you’ve probably been out of the loop on recent discussions pertaining to taxing loose/pipe tobacco. Pipe tobacco is sold by tobacco shops for tobacco pipe users, but it is also sold in shops that offer roll-you-own packs and cartons of cigarettes. The roll-your-own cigarettes are taxed at an extremely discounted rate, thus gaining appeal with the consumer that wants to spend less on their tobacco.

A pack of 20 cigarettes is taxed $3.025 in Washington State. The tax rate previously was $2.025 but went up a dollar in 2010. We rank 5^th in the country for the amount we tax cigarettes. In addition to the state tax, cigarettes are taxed an additional $1/pack by the federal government. New York taxes the most at $4.35/pack while the least taxed cigarettes can be found in Missouri at only 17¢/pack.

This tax is paid as soon as the cigarettes are brought into Washington State. The cigarette tax is not paid directly by the consumer; rather the seller of the cigarettes has to pay the tax on each pack of cigarettes before they are sold to the consumer. That being said, the increase in cigarette taxes certainly increases the price the consumer pays for cigarettes. 

The monies collected from the state’s cigarette tax go into the state’s general fund, except for 14% that is deposited into the Education Legacy Trust Account. This account is created in the State Treasury and goes towards expanding access to higher education.

Cigarettes aren’t just subject to the state cigarette tax; they also charged sales tax (for more information check out the Department of Revenue). Depending on where you are located, the sales tax differs. If you make a purchase in Olympia, you’re going to be paying .087¢ for every dollar. See how your county compares with others.

In 2009, Congress raised taxes on roll-you-own tobacco, but some companies were able to skirt this tax by changing the way they labeled their tobacco calling it pipe tobacco instead of roll-you-own tobacco. This loophole made it so that the roll-you-own stores could continue to sell the cheaper cigarettes without having to pay the new tax. Even in 1933, state legislators contemplated a large increase in tobacco tax as a way to raise revenue. Just like present day, store owners in 1933 didn’t think this was the best way to go about raising revenue.

During the 2012 Legislative Session, Representative Kirby from Lakewood sponsored House Bill 2565, Concerning persons who operate roll-your-own cigarette machines at retail establishments. The bill would make roll-you-own cigarettes taxable at the cigarette tax rate. Those testifying to legislative committees in opposition to the bill stated it would cost the state jobs and small businesses operating roll-you-own machines would have to shut down. Proponents on the other hand felt that competition should be fair and both manufactured cigarettes and roll-your-own cigarettes should be taxed the same.

House Bill 2565 passed the legislature, and Governor Gregoire is scheduled to sign the bill into law on May 2, 2012. We’ll just have to stay tuned to see if any part of it gets vetoed!   

Why Washington doesn’t tax the food you buy at the grocery store.

Food for thought—Ever wonder why you do not have to pay taxes on most food you buy at the grocery store? Most food purchased for your family to eat is not taxed. This exemption comes from a 1977 initiative to the people which passed with a vote of 54%. The thought behind a tax exemption on unprepared food, like the majority of food you find at the grocery store, is that it eases the financial burden for families. It is an attempt to make Washington’s tax structure less regressive and make it easier for families to buy food for meals. The only time the tax exemption on food was lifted since 1977 was for a little over a year in 1982.

While the intent is to lessen the burden on grocery costs for families, food taxes make up a large portion of the tax base for states. By offering food tax exemptions, states take in less money, suffer large losses, and are less stable during any fluctuating economic cycles.

Washington, along with 27 other states, offers tax exemptions on groceries. Washington’s exemption does not cover every item you could potential buy at the grocery store, a general rule to follow is that it applies to unprepared foods. The exemption does not include carbonated beverages, dietary supplements, and food that is prepared by vendors (think delis, pizza, subs sandwiches etc.).
During the 2010 Legislative Session, state lawmakers passed 2ESSB 6143, sponsored by Senator Prentice who represents the 11^th District which includes parts of Renton and Tukwila. 2ESSB 6143 included multiple tax modifications, a few of which related to food and beverages. As a part of the bill, candy and gum would now be charged the state’s sales tax rate. Carbonated beverages would be temporarily taxed an additional 2 cents for every 12 ounces. This temporary tax would be in place for three years—starting in June of 2010 and going until July of 2013. A condition of this bill allowed the first $10 million in sales of carbonated beverages to be exempt from the tax. Currently, soda is charged the state’s sales tax rate.

On May 19, 2010, an initiative was filed with the Secretary of State’s Office that would repeal the candy, gum, and soda tax that became law with 2ESSB 6143. Initiative 1107 became one of the most funded initiatives in Washington State history.

According to the Public Disclosure Commission, Stop the Food & Beverage Tax Hike, the group supporting the initiative, raised and spent $16,042,628.67. This money was put towards television commercials, flyers, radio ads, etc. to urge citizens to vote for the initiative and repeal the candy, gum, and soda taxes. Out of the over $16 million that was raised, over $15 million of it was donated from the American Beverage Association. The group against the initiative, Citizens to Protect our Economic Future, raised and spent $426,828.81 which went into urging citizens to vote down the initiative. Initiative 1107 was adopted on November 2, 2010, and took effect on December 2, 2010.
Something to keep in mind is that food stamps are not charged sales tax in any state.

Have you ever thought about how your grocery shopping would change if you were charged taxes on certain items?

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The Revenue act of 1935

The Revenue Act of 1935 is the origin of our contemporary tax code.  Passed by the legislature and signed into law by then Governor Clarence Daniel Martin, the act introduced dramatic tax reform.  With concerns about the stability of the previous revenue system, proponents of reform looked to develop a tax code that was in pace with the changing economy. The legislature at that time, had to wrestle with a dramatic economic downturn, a highly engaged citizenry, and a number of difficult state supreme court decisions. 

Governor Clarence Daniel Martin

Prior to the Revenue Act of 1935, Washington funded its core functions through property tax collections. Being that Washington was a predominately agricultural state, this provided the most reliable and consistent form of revenue.  However, this was proving inadequate, inequitable, and economically unsound as manufacturing increased and agriculture declined.

The notion of dysfunction in the state’s tax code carried far and wide and had largely populous support.  The reform discussion sprung from the successful passage of People’s Initiative 69 on November 8, 1932.  This initiative brought in sweeping revenue reform in Washington State, including a graduated income tax.  However, the initiative was challenged in court resulting in the removal of the income tax section.  As the economic situation continued to worsen, the legislature capitalized on the populous sentiment and put forth many of Initiative 69’s reforms in the legislative process.

The 1935 legislature introduced HB 237 with 17 titles and nearly 200 sections!  Within those titles were provisions for a B&O tax, a cigarette tax, a radio tax (that was vetoed at signing), a highly controversial sales tax, and much more.  In addition, the 1935 legislature introduced a second bill that instituted a graduated income tax with a 3% tax on all income over $4,000 and up to a 4% surtax on additional amounts. Reform proved to be difficult, creating more obvious divides between urban and rural communities. This divide played out in the legislature and discussions were difficult and controversial.

al. 

The income tax portion of the sweeping reform went on to be struck down by the Washington State Supreme Court because of its lack of uniformity (it wasn’t a flat tax), but other reform components still remain today. Only through intense and informed discussion was the Revenue Act of 1935 passed by the legislature.  Despite the difficulty of the discussion, the legislature and the people of Washington State pressed forward towards the changes that had to take place.

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