The taxes you pay: Businesses feel weight of taxes at every stage

By Drew DeSilver
Seattle Times business reporter

While legions of software developers crunch code in Seattle, the disks that eventually hold their programs are stamped out and sold elsewhere.

Biotech companies spend years developing a new drug, but the actual manufacturing is done in a plant across the country or halfway around the globe.

How should Information Age industries such as software and biotechnology be taxed under a system that dates back to when automatic transmissions were cutting edge?

It's a problem acknowledged by city officials and industry representatives alike as they try to resolve an intense but low-profile dispute between the city of Seattle and many of its technology companies.

Along with 36 other Washington cities, Seattle levies a local business-and-occupation (B&O) tax. The tax brings in more than $120 million a year: 10 percent of the money helps fund parks, while the rest goes into the city's general-purpose checking account.

Like the state B&O, Seattle's tax is on a business's gross receipts — measured, in the case of manufacturing companies, by the value of the money it gets for selling goods or services. This worked fine when Seattle's economy relied on building or processing tangible goods — fish, lumber, rail cars and airplanes.

But today, two of the city's most prominent industries, software and biotech, don't follow that model. The city asserts that development of new technology is part and parcel of the manufacturing process, and hence is subject to the city's B&O tax.

It also argues that companies that do research and development in Seattle but manufacture elsewhere still benefit from city services and should help pay for them.

Tech industries, not surprisingly, beg to differ.

"We sympathize with the city, which has to deal with an antiquated tax structure that doesn't come anywhere close to matching up with the needs of a knowledge-driven economy," said Eric Earling, chief lobbyist for the Washington Biotechnology and Biomedical Association. "But it's been really hard to find common ground."

The software and biotech industries say Seattle's position amounts to a tax on the creation of intellectual property and will discourage the growth of the kind of businesses Seattle should be encouraging.

"Eddie Vedder writing a song should not be considered manufacturing," said Lew McMurran, chief lobbyist for WSA, formerly the Washington Software Association.

Earling said applying the tax to biotech research and development is particularly inappropriate. Most drugs investigated in the lab never make it all the way to pharmacy shelves, and even for those that do, the testing and approval process can take many years.

When the city rewrote its B&O ordinance last year, it included a credit for high-tech research and development done within Seattle. That credit, said Finance Director Dwight Dively, reduced taxes for firms claiming it by 65 percent through the first half of 2002.

City officials and representatives of software and biotech firms have been meeting since midsummer trying to hash out a compromise. High-tech businesses could be taxed by how much office space they occupy or how many people they employ — systems already in place in Bellevue and Redmond, respectively.

But Earling said a square-footage tax would be unfair to biotechs, which tend to use more space per worker than most other companies.