Multiple Agency Fiscal Note Summary

Bill Number: 2539 HB Title: Tax/recreation services, etc Estimated Cash Receipts

Agency Name 2013-15 2015-17 2017-19 GF- State Total GF- State Total GF- State Total Department of Revenue (522,000) (523,000) (5,004,000) (5,014,000) (6,758,000) (6,771,000)

Total $ (522,000) (523,000) (5,004,000) (5,014,000) (6,758,000) (6,771,000)

Local Gov. Courts * Loc School dist-SPI Local Gov. Other ** (232,650) (2,227,500) (3,007,620) Local Gov. Total (232,650) (2,227,500) (3,007,620) Estimated Expenditures

Agency Name 2013-15 2015-17 2017-19 FTEs GF-State Total FTEs GF-State Total FTEs GF-State Total Department of Revenue .2 38,600 38,600 .0 0 0 .0 0 0

Total 0.2 $38,600 $38,600 0.0 $0 $0 0.0 $0 $0

Estimated Capital Budget Impact

NONE

Prepared by: Kathy Cody, OFM Phone: Date Published: (360) 902-9822 Final 1/23/2014

* See Office of the Administrator for the Courts judicial fiscal note ** See local government fiscal note FNPID: 36342 FNS029 Multi Agency rollup Department of Revenue Fiscal Note

Bill Number: 2539 HB Title: Tax/recreation services, etc Agency: 140-Department of Revenue

Part I: Estimates No Fiscal Impact

Estimated Cash Receipts to: Account FY 2014 FY 2015 2013-15 2015-17 2017-19 GF-STATE-State (620,000) (620,000) (5,946,000) (8,032,000) 01 - Taxes 01 - Retail Sales Tax GF-STATE-State 98,000 98,000 942,000 1,274,000 01 - Taxes 05 - Bus and Occup Tax Performance Audits of Government (1,000) (1,000) (10,000) (13,000) Account-State 01 - Taxes 01 - Retail Sales Tax Total $ (523,000) (523,000) (5,014,000) (6,771,000) Estimated Expenditures from:

FY 2014 FY 2015 2013-15 2015-17 2017-19 FTE Staff Years 0.3 0.2 Account GF-STATE-State 001-1 38,600 38,600 Total $ 38,600 38,600

Estimated Capital Budget Impact: NONE

The cash receipts and expenditure estimates on this page represent the most likely fiscal impact. Factors impacting the precision of these estimates, and alternate ranges (if appropriate), are explained in Part II.

Check applicable boxes and follow corresponding instructions: If fiscal impact is greater than $50,000 per fiscal year in the current biennium or in subsequent biennia, complete entire fiscal note X form Parts I-V. If fiscal impact is less than $50,000 per fiscal year in the current biennium or in subsequent biennia, complete this page only (Part I).

Capital budget impact, complete Part IV.

Requires new rule making, complete Part V.

Legislative Contact: Dominique Meyers Phone: 360-786-7150 Date: 01/20/2014 Agency Preparation: Erin Valz Phone: 360-534-1522 Date: 01/23/2014 Agency Approval: Don Gutmann Phone: 360-534-1510 Date: 01/23/2014 OFM Review: Kathy Cody Phone: (360) 902-9822 Date: 01/23/2014

Request # 2539-1-1 Form FN (Rev 1/00) 1 Bill # 2539 HB FNS062 Department of Revenue Fiscal Note Part II: Narrative Explanation II. A - Brief Description Of What The Measure Does That Has Fiscal Impact Briefly describe, by section number, the significant provisions of the bill, and any related workload or policy assumptions, that have revenue or expenditure impact on the responding agency. THIS LEGISLATION - Removes the undefined term “amusement and recreation services” from the definition of “retail sale” (RCW 82.04.050) for business and occupation (B&O) and retail sales tax purposes. The bill replaces “amusement and recreation services” with a specific list of retailing activities of an amusement and recreational nature. - Provides that charges to consumers for the specified retail amusement and recreational activities listed below, including, in most cases, instruction, would be subject to retail sales tax and retailing B&O tax. Unlike amusement and recreation services under current law, use tax would not apply to the specified retail amusement and recreational activities listed below. - Removes the term “physical fitness services” from the definition of “retail sale” and instead provides that the operation of an “athletic or fitness facility” is a retail sale. - Would take effect January 1, 2015.

SPECIFIED RETAIL AMUSEMENT AND RECREATIONAL ACTIVITIES Charges to consumers for the following specified activities would be subject to retail sales tax: - Ballooning, hang gliding, indoor or outdoor sky diving, paragliding, parasailing, and similar activities. - Golf, including any variant in which either golf balls or golf clubs are used, such as miniature golf, hitting golf balls at a driving range, and golf simulators. This does not include competitive events (tournaments) except that amounts paid either by the participants or the event organizer to the owner or operator of the golfing facility are a retail sale if such amounts vary based on the number of event participants. - Air hockey, billiards, pool, foosball, darts, shuffleboard, ping pong, and similar games. - Access to amusement park, theme park, and water park facilities, including but not limited to charges for admission and locker or cabana rentals. An amusement park or theme park is a location that provides permanently affixed amusement park or theme park rides, games, and other entertainment. It does not include parks or zoos for which the primary purpose is the exhibition of wildlife. - Batting cage activities. - Bowling, but not including competitive events (tournaments), except amounts paid by the participants or the event organizer to the owner or operator of the bowling alley are retail sales if such amounts vary based on the number of event participants. - Climbing on artificial climbing structures, whether indoors or outdoors. - Day trips for sightseeing purposes. - Bungee jumping; zip lining; and riding inside a ball, whether inflatable or otherwise. - Horseback riding offered to the public, where the seller furnishes the horse to the buyer and providing instruction is not the primary focus of the activity, including guided rides. This does not include therapeutic horseback riding provided by an instructor certified by a nonprofit organization that offers national or international certification for therapeutic riding instructors. - Fishing, including providing access to private fishing areas and charter or guided fishing, but not including fishing license fees imposed by a government entity. - Guided hunting and hunting at game farms and shooting preserves, but not including hunting license fees imposed by a government entity. - Swimming, but only in respect to recreational or fitness swimming open to the public and pool parties for private events. Fees for swimming lessons, to participate in competitive events, or to join a swim team, club, or stand-alone aquatic facility are not retail sales. - Go-karting, bumper cars, and other motorized activities where the seller provides the vehicle and the premises where the buyer will operate the vehicle. - Indoor or outdoor playground activities, such as inflatable bounce structures and other inflatables; mazes; trampolines;

Request # 2539-1-1 Form FN (Rev 1/00) 2 Bill # 2539 HB FNS062 Department of Revenue Fiscal Note slides; ball pits; games of tag, including laser tag and soft-dart tag; and human gyroscope rides, regardless of whether such activities occur at the seller’s place of business. This does not include playground activities provided for children by a licensed child day care center or licensed family day care provider (as defined in RCW 43.215.010). - Shooting sports and activities, such as target shooting, skeet, trap, sporting clays, “5” stand, and archery, but only with respect to discrete charges to members of the public to engage in these activities. Fees to join a competitive event, join or renew a membership at a club, range, or other facility, or instruction that is entirely or predominately classroom based, are not retail sales. - Paintball and air soft activities. - Skating, including ice skating, roller skating, and inline skating, but only in respect to discrete charges to the public to engage in skating activities. The term “retail sale” does not include fees for skating lessons, to enter a competitive event, to engage in team activities, or to join or renew a membership at a skating facility, club, or other organization. - Non-motorized snow sports and activities, such as downhill and cross country skiing, snowboarding, ski jumping, sledding, snow tubing, snowshoeing, and similar snow sports and activities, whether engaged in outdoors or in an indoor facility with or without snow, but only in respect to discrete charges to the public for the use of land or facilities to engage in non-motorized snow sports and activities. - Scuba diving; snorkeling; river-rafting; surfing; kite boarding; fly boarding; water slides; inflatables, such as water pillows, water trampolines, and water rollers; and similar water sports and activities.

Specific exclusions are provided for: - Admission to fairs, carnivals, and festivals, including charges for rides and attractions. - Otherwise taxable activities provided by an educational institution to its students and staff. This exclusion does not apply to charges made to its alumni or other members of the public. - Diver training provided by a licensed vocational school. - Day camps provided by nonprofit organizations or state or local governmental entities for persons who are under 19 years of age or that are focused on persons who have a disability or mental illness.

ATHLETIC AND FITNESS FACILITIES With certain exceptions, this bill makes all charges for the use of an athletic or fitness facility a retail sale, including any associated services or amenities.

An "athletic or fitness facility" is defined as an indoor or outdoor facility, or portion of a facility, that is predominantly used for exercise classes; strength and conditioning programs; personal training services; tennis, racquetball, handball, squash, or pickleball; yoga; boxing, kickboxing, wrestling, martial arts, or mixed martial arts training; or other activities requiring the use of exercise or strength training equipment, such as treadmills, elliptical machines, stair climbers, stationary cycles, rowing machines, Pilates equipment, balls, climbing ropes, jump ropes, and weightlifting equipment.

Specific exclusions are provided for: - Separately stated charges for the use of an athletic or fitness facility where such use is primarily for a purpose other than engaging in or receiving instruction in a physical fitness activity. - Separately stated charges for the use of a discrete portion of an athletic or fitness facility, other than a pool, where such portion of the facility does not meet the definition of an athletic or fitness facility. - Separately stated charges for services, such as advertising, massage, nutritional consulting, and body composition testing, that do not require the customer to engage in physical fitness activities to receive the service. This exclusion does not apply to personal training services and instruction in a physical fitness activity. - Separately stated charges for physical therapy provided by a physical therapist (as defined in RCW 18.74.010), or

Request # 2539-1-1 Form FN (Rev 1/00) 3 Bill # 2539 HB FNS062 Department of Revenue Fiscal Note occupational therapy provided by an occupational therapy practitioner (as defined in RCW 18.59.020). - Rent or association fees imposed by a landlord or residential association to a tenant or residential owner with access to an athletic or fitness facility maintained by the landlord or residential association. - Use of an athletic or fitness facility provided by an employer to its employees free of charge. - Use of an athletic or fitness facility provided by an educational institution to its students and staff. However, charges made to its alumni or other members of the public for the use of any of the educational institution’s athletic or fitness facilities are a retail sale. “Educational institution” has the same meaning as in RCW 82.04.170. - Yoga, tai chi, or chi gong classes held at a community center, park, gymnasium, college or university, hospital or other medical facility, private residence, or any facility that is not primarily used for physical fitness activities other than yoga, tai chi, or chi gong classes. II. B - Cash receipts Impact Briefly describe and quantify the cash receipts impact of the legislation on the responding agency, identifying the cash receipts provisions by section number and when appropriate the detail of the revenue sources. Briefly describe the factual basis of the assumptions and the method by which the cash receipts impact is derived. Explain how workload assumptions translate into estimates. Distinguish between one time and ongoing functions.

ASSUMPTIONS Growth rates are based on data from the Economic and Revenue Forecast Council's November 2013 forecast.

Compliance factors for each amusement and recreation industry are applied to the final estimates. However, very little audit data was available for many of the impacted industries. Due to complexity in tax application, and the average size and number of impacted taxpayers, it is believed that actual compliance could be lower than estimated resulting in minimal revenue impact.

There are some amusement and recreation industries that provide very small amounts, if any, of instructional lessons. In these cases, the revenue impact of making instructional lessons subject to retail sales tax instead of service business and occupation tax will be minimal. Some examples include arcade activities (billiards, air hockey, foosball, etc.), fishing and hunting, ballooning, hang gliding, bungee jumping, and paintball activities.

The following activities will be subject to service B&O tax instead of the retailing classification but, due to low taxpayer compliance or a low level of taxable activity being conducted, the revenue impact is estimated to be minimal: - Tournament and entry fees for amateur horse racing, barrel racing, and other similar equestrian events. - Tournament and entry fees for amateur automobile, boat, and motorcycle races and other competitions. - Tournament and entry fees for dog shows. - Tournament and entry fees for food eating contests. - Tournament and entry fees for amateur skateboarding competitions, and also admission to these facilities. - Tournament and entry fees for amateur water skiing competitions. - Association fees imposed by a landlord or residential association to a tenant or residential owner with access to an athletic or fitness facility maintained by the landlord or residential association. - Amusement and recreation activities provided by an educational institution to its students and staff. - Day camps provided by nonprofit organizations or state or local governmental entities for persons who are under 19 years of age or who have a disability or mental illness. - Use of an athletic or fitness facility provided by an employer to its employees free of charge. - Use of an athletic or fitness facility provided by an educational institution to its students and staff.

Currently, there is a sales tax exemption on charges for the opportunity to dance. This exemption is set to expire July 1, 2017. This proposal effectively makes this exemption permanent, which impacts revenue collections starting in Fiscal Year 2018.

DATA SOURCES - Department of Revenue tax returns - Department of Revenue audit data

Request # 2539-1-1 Form FN (Rev 1/00) 4 Bill # 2539 HB FNS062 Department of Revenue Fiscal Note REVENUE ESTIMATES There are 11 months of cash collections for the first year, and 12 months of cash collections for all years thereafter. This bill decreases state revenues by an estimated $523,000 in Fiscal Year 2015, and by $2.1 million in Fiscal Year 2016. This bill also decreases local revenues by an estimated $235,000 in Fiscal Year 2015, and by $927,000 in Fiscal Year 2016.

TOTAL REVENUE IMPACT

State Government (cash basis, $000): FY 2014 - $ 0 FY 2015 - ($ 523) FY 2016 - ($ 2,066) FY 2017 - ($ 2,948) FY 2018 - ($ 3,296) FY 2019 - ($ 3,475)

Local Government, if applicable (cash basis, $000): FY 2014 - $ 0 FY 2015 - ($ 235) FY 2016 - ($ 927) FY 2017 - ($ 1,323) FY 2018 - ($ 1,479) FY 2019 - ($ 1,559) II. C - Expenditures Briefly describe the agency expenditures necessary to implement this legislation (or savings resulting from this legislation), identifying by section number the provisions of the legislation that result in the expenditures (or savings). Briefly describe the factual basis of the assumptions and the method by which the expenditure impact is derived. Explain how workload assumptions translate into cost estimates. Distinguish between one time and ongoing functions. ASSUMPTIONS Expenditures assume 6,100 taxpayers will be affected by this proposal.

FIRST YEAR COSTS The Department of Revenue (Department) will incur total costs of $38,600 in Fiscal Year 2014. These costs include: Labor Costs – Time and effort equates to 0.3 FTEs - Programming and testing system changes - Amendment of five advisories and three administrative rules

Object Costs - $3,900 - Printing and postage of a Special Notice

ONGOING COSTS The Department will not incur any additional costs.

Request # 2539-1-1 Form FN (Rev 1/00) 5 Bill # 2539 HB FNS062 Department of Revenue Fiscal Note Part III: Expenditure Detail III. A - Expenditures by Object Or Purpose FY 2014 FY 2015 2013-15 2015-17 2017-19 FTE Staff Years 0.3 0.2 A-Salaries and Wages 21,400 21,400 B-Employee Benefits 6,400 6,400 E-Goods and Other Services 8,700 8,700 J-Capital Outlays 2,100 2,100 Total $ $38,600 $38,600

III. B - Detail: List FTEs by classification and corresponding annual compensation. Totals need to agree with total FTEs in Part I and Part IIIA Job Classification Salary FY 2014 FY 2015 2013-15 2015-17 2017-19 HEARINGS SCHEDULER 32,688 0.0 0.0 IT SPEC 5 69,756 0.1 0.1 TAX POLICY SP 2 61,628 0.0 0.0 TAX POLICY SP 3 69,756 0.1 0.1 WMS BAND 3 88,546 0.0 0.0 Total FTE's 322,374 0.3 0.2 Part IV: Capital Budget Impact Identify acquisition and construction costs not reflected elsewhere on the fiscal note and dexcribe potential financing methods NONE None. Part V: New Rule Making Required

Identify provisions of the measure that require the agency to adopt new administrative rules or repeal/revise existing rules. Should this legislation become law, the Department will use the expedited process to amend WAC 458-20-167, titled: "Educational institutions, school districts, student organizations, and private schools." Persons affected by this rule-making would include taxpayers with ties to educational institutions, school districts, student organizations and/or private schools. The Department will additionally use the expedited process to amend WAC 458-20-189, titled: "Sales to and by the state of Washington, counties, cities, towns, school districts, and fire districts." Persons affected by this rule-making would include governmental agencies providing amusement and recreation services. The Department will use the standard process to amend WAC 458-20-183, titled: "Amusement, recreation and physical fitness." Persons affected by this rule-making would include taxpayers in the business of amusement, recreation and physical fitness.

Request # 2539-1-1 Form FN (Rev 1/00) 6 Bill # 2539 HB FNS062 Department of Revenue Fiscal Note LOCAL GOVERNMENT FISCAL NOTE Department of Community, Trade and Economic Development

Bill Number: 2539 HB Title: Tax/recreation services, etc

Part I: Jurisdiction-Location, type or status of political subdivision defines range of fiscal impacts. Legislation Impacts: X Cities: Loss of sales tax revenue; local option costs for the 39 cities that levy B&O tax X Counties: Loss of sales tax revenue X Special Districts: Loss of sales tax revenue Specific jurisdictions only: Variance occurs due to: Part II: Estimates

No fiscal impacts. Expenditures represent one-time costs: X Legislation provides local option: Cities may amend their B&O ordinances to reflect the changes to the state statute. Key variables cannot be estimated with certainty at this time:

Estimated revenue impacts to: Jurisdiction FY 2014 FY 2015 2013-15 2015-17 2017-19 City (77,310) (77,310) (740,199) (999,432) County (78,705) (78,705) (753,563) (1,017,478) Special District (76,635) (76,635) (733,738) (990,710) TOTAL $ (232,650) (232,650) (2,227,500) (3,007,620) GRAND TOTAL $ (5,467,770)

Estimated expenditure impacts to: None

Part III: Preparation and Approval

Fiscal Note Analyst: Alicia LeDuc Phone: 360/725-5040 Date: 01/23/2014 Leg. Committee Contact: Dominique Meyers Phone: 360-786-7150 Date: 01/20/2014 Agency Approval: Steve Salmi Phone: (360) 725 5034 Date: 01/23/2014 OFM Review: Kathy Cody Phone: (360) 902-9822 Date: 01/23/2014 Page 1 of 2 Bill Number: 2539 HB FNS060 Local Government Fiscal Note Part IV: Analysis A. SUMMARY OF BILL Provide a clear, succinct description of the bill with an emphasis on how it impacts local government. The proposed legislation would: -- Remove the undefined term “amusement and recreation services” from the definition of “retail sale” (RCW 82.04.050) for business and occupation (B&O) and retail sales tax purposes. The bill replaces “amusement and recreation services” with a list of specific activities. -- Make charges to consumers for the specified retail amusement and recreational activities and instruction subject to retail sales tax and retailing B&O tax. Unlike amusement and recreation services under current law, use tax would not apply to the specified retail amusement and recreational activities listed below. -- Remove the term “physical fitness services” from the definition of “retail sale” and instead provide that the operation of an “athletic or fitness facility” is a retail sale. -- Take effect January 1, 2015. B. SUMMARY OF EXPENDITURE IMPACTS Briefly describe and quantify the expenditure impacts of the legislation on local governments, identifying the expenditure provisions by section number, and when appropriate, the detail of expenditures. Delineate between city, county and special district impacts. The proposed legislation would not result in expenditure impacts to local governments as sales taxes are administered at the state and taxpayer levels.

This bill does not directly impact local B&O tax collection activities by cities. However, according to the Association of Washington Cities (AWC), local jurisdictions would likely amend local B&O ordinances to reflect the changes to the state statute outlined in the bill. These changes would be a local option. C. SUMMARY OF REVENUE IMPACTS Briefly describe and quantify the revenue impacts of the legislation on local governments, identifying the revenue provisions by section number, and when appropriate, the detail of revenue sources. Delineate between city, county and special district impacts. The proposed legislation would result in a loss of retail sales tax to local jurisdictions.

This bill does not directly impact local B&O tax revenue collected by cities. However, according to AWC, local jurisdictions would likely amend local B&O ordinances to follow the changes to the state statute outlined in the bill. Such changes would be a local option.

METHODOLOGY: The distributions in this note for cities, counties, and special districts are based on Department of Revenue (DOR data) for local sales tax distributions from Calendar Year 2011. Mitigation payments and distributions to hospital benefit zones are not factored into this distribution. This results in a distribution of 33.83 percent to counties, 33.23 percent to cities and 32.94 percent to special districts. The one percent DOR administrative fee has also been deducted.

SOURCES: Department of Revenue Fiscal Note Department of Revenue Local Tax Distributions Tax Reference Manual 2010 Local Government Fiscal Note for Z-0511.1 (2013) including: Association of Washington Cities City of Bellevue Local Government Fiscal Note Program (LGFN) unit cost data DOR "Business and Occupation Tax" info sheet, 2011, http://facweb.northseattle.edu/djovanovich/acct257/WAtax/WA%20B&O%20Tax.pdf

Page 2 of 2 Bill Number: 2539 HB FNS060 Local Government Fiscal Note