|The Preference Provides||Tax Type||Est. Beneficiary Savings in 2015-17 Biennium|
|An enhanced food fish tax exemption for farmers who grow or process food fish or shellfish raised from eggs, fry, or larvae, when the fish or shellfish are under the farmer’s physical control at all times until sold or harvested.||Enhanced Food Fish
|Public Policy Objective|
|The Legislature did not state a public policy objective for this preference. JLARC staff infer the enhanced food fish tax exemption has two possible policy objectives:
|Legislative Auditor’s Recommendation: Review and Clarify
Because the two inferred objectives lead to different conclusions.
Current law exempts food fish and shellfish farmers from the enhanced food fish tax. Without this exemption, these farmers would owe tax on the first commercial possession in the state of their food fish or shellfish. Food fish includes a broad array of fish that humans consume, including salmon and trout. Shellfish includes oysters and clams. The tax rate varies by fish or shellfish species.
The exemption applies to income from growing or processing food fish or shellfish that are raised from eggs, fry, or larvae. The fish or shellfish must at all times be under the farmer’s physical control until the product is sold or harvested.
Other Washington laws for different taxes expressly treat the taxation of food fish and shellfish growers (aquaculture) like other farmers. In addition, statute defines the food fish and shellfish these farmers grow as “agricultural products.”
For more information on Washington’s agricultural industry, please see JLARC’s Agricultural Overview.
Washington has historically required commercial fishers and processors of fish and shellfish to be licensed and pay various fees or taxes. This treatment began in 1854 for oysters, clams, and shellfish and in 1877 for salmon.
Washington has historically not required food fish or shellfish farmers to pay the fees or taxes applied to commercial fishers.
The Legislature repealed royalty and tonnage taxes on commercial fishers and processors of fish and shellfish originally enacted in 1915 and replaced these taxes with new privilege and catch fees. The legislation expressly exempted shellfish taken from licensed oyster or clam farms from the catch fee.
The Legislature created a new “Food Fish and Shellfish Code” that increased some privilege and catch fees, but kept the catch fee exemption for shellfish from licensed oyster or clam farms.
The Legislature established a salmon enhancement program that was funded from a variety of fishing-related fees and sales taxes. The legislation stated:
“The salmon enhancement program funded by commercial and recreational fishing fees and taxes shall be for the express benefit of all persons whose fishing activities fall under the management authority of the Washington department of fisheries. . .”
The bill included a fish sales tax on sales of food fish or shellfish, administered by the Department of Fisheries. The tax was imposed at differential rates for different fish species, with higher tax rates on sales of salmon than on sales of other food fish and shellfish. The Legislature expressly exempted farmed fish and shellfish from the new fish sales tax.
The Legislature replaced the 1977 fish sales tax with an “enhanced food fish tax” (fish tax) and transferred administration of the tax from the Department of Fisheries to the Department of Revenue (DOR). The new fish tax retained the policy of charging differential rates for different fish species, doubled the tax rates, and established a separate, lower tax rate for oysters.
The bill diverged from previous legislation by providing an exemption from the new tax for farmed food fish but not a similar exemption for farmed shellfish. The exemption was for the growing, processing, or dealing with food fish which are raised from eggs or fry and which are under the physical control of the grower at all times until sold or harvested.
In 1990 and 1991, the Board of Tax Appeals (BTA) ruled on two cases involving shellfish growers disputing assessment of fish tax through DOR audits.
The BTA concluded in each case that because the Legislature had included the word “shellfish” in conjunction with the word “food fish” in several portions of the fish tax law, but not in the exemption provided for commercially grown food fish, the Legislature had “clearly omitted” the term “shellfish” from the aquaculture exemption.
The Legislature expanded the fish tax exemption to include farmed shellfish. The legislation clarified that food fish or shellfish could be raised from larvae, as well as eggs or fry. The prime sponsor of the bill noted it was an oversight that commercial shellfish growers were not initially included in the exemption, and that commercial shellfish growers only sought equitable treatment with commercial fish growers.
The fish tax is measured by the value of the fish or shellfish upon the first commercial possession in the state of fish or shellfish, after the fish or shellfish are first landed. The fish and shellfish are “landed” when they are brought to land, including wharves or piers or when they are physically placed on a boat in Washington territorial waters. The tax is collected and administered by the Department of Revenue.
There are five differential fish tax rates for different species of enhanced food fish or shellfish, as noted in Exhibit 1, below.
|Enhanced Food Fish Type||Tax Rate|
|Chinook, coho, chum salmon or eggs, anadromous game fish (e.g., steelhead or cutthroat trout)||5.62%|
|Pink and sockeye salmon fish or eggs||3.37%|
|Other food fish or eggs; shellfish||2.25%|
|Sea urchins and sea cucumbers||2.25%|
The Legislature did not state a public policy objective when it exempted food fish and shellfish farms from the enhanced food fish tax.
JLARC staff infer from the historic record that there may be two possible public policy objectives for the preference:
The preference achieves the inferred public policy of re-establishing historic tax treatment for commercial food fish and shellfish farmers. While there was a divergence from this policy for shellfish farms for 15 years, the Legislature returned to this tax treatment in 1995.
While food fish and shellfish farmers were not under the management authority of the Department of Fisheries when the enhanced food fish tax was passed, subsequent legislative changes since that time have changed some of the current management authority. The complete exemption from taxation may no longer be meeting this inferred public policy objective because food fish and shellfish farms now fall under some management authority of the Department of Fish and Wildlife (WDFW).
In 1985, the Legislature established a management role for WDFW specific to fish and shellfish farming:
In addition to these responsibilities specific to fish and shellfish farming, the WDFW has general responsibilities that may benefit these farmers:
The Legislature may want to consider if the mechanism for taxing at differential fish tax rates might be applied to aquaculture to recognize that food fish and shellfish farmers now receive regulatory and management services from WDFW.
If the Legislature determines that food fish and shellfish farmers are benefiting from WDFW efforts funded in part by the fish tax, the Legislature may want to consider applying the fish tax to these activities.
Beneficiaries of this preference are Washington commercial food fish and shellfish farmers.
There is no specific accountability reporting required for commercial food fish and shellfish farmers using this preference.
JLARC staff estimated the beneficiary savings using USDA 2013 Census of Aquaculture and 2012 Census of Agriculture data and then applying the appropriate differential fish tax rate, based on the type of food fish or shellfish.
JLARC staff estimate beneficiaries of the preference for fish and shellfish farms saved $5.5 million in Fiscal Year 2014 and will save $11.5 million in the 2015-17 Biennium. See Exhibit 2, below.
|Fiscal Year||Estimated Beneficiary Savings|
If the tax preference were terminated, Washington food fish and shellfish farmers would pay enhanced food fish tax on the fish and shellfish they grow and produce. If the Legislature chose to terminate the exemption, it would need to determine what rate or differential rates it would apply to food fish and shellfish grown on commercial farms.
The effect of termination on employment and the economy would depend on the extent to which the food fish and shellfish farmers could absorb the increased costs or pass them along to their customers.
California has a similar fish tax structure and a similar exemption for farmed fish and shellfish.
JLARC staff first reviewed the top 10 states in aquaculture sales (see Exhibit 3, below) to determine if these states imposed an enhanced food fish tax, fish landing tax, or similar tax on commercial fish harvesters or wholesalers. For the two states that had a similar tax, JLARC staff checked for an exemption for farmed fish or shellfish.
According to the 2013 USDA Census of Aquaculture, Washington ranks number one of all states for the value of aquaculture sales. Washington ranked first in the mollusks category, which includes oysters, clams, geoduck, and mussels, and third in food fish, which includes Atlantic salmon and trout.
|Rank||State||Specific Fish Tax?||Aquaculture Exempt?|
The tax imposed by RCW 82.27.020 shall not apply to: (1) Enhanced food fish originating outside the state which enters the state as (a) frozen enhanced food fish or (b) enhanced food fish packaged for retail sales; (2) the growing, processing, or dealing with food fish or shellfish which are raised from eggs, fry, or larvae and which are under the physical control of the grower at all times until being sold or harvested; and (3) food fish, shellfish, anadromous game fish, and by-products or parts of food fish shipped from outside the state which enter the state, except as provided in RCW 82.27.010, provided the taxpayer must have documentation showing shipping origination of fish exempt under this subsection to qualify for exemption. Such documentation includes, but is not limited to fish tickets, bills of lading, invoices, or other documentation required to be kept by governmental agencies.
[1995 2nd sp.s. c 7 § 1; 1985 c 413 § 3; 1980 c 98 § 3.]
Legislative Auditor Recommendation: Review and Clarify
The Legislature should review and clarify what the public policy objective is for the exemption from enhanced food fish tax for food fish and shellfish farmers because the two inferred objectives lead to different conclusions.
Legislation Required: Yes.
Fiscal Impact: Depends on legislative action.
The Commission endorses the Legislative Auditor’s recommendation without comment.