JLARC Preliminary Report: 2015 Tax Preference Performance Reviews

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.”

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.

1949

The Legislature repealed royalty and tonnage taxes on commercial fishers and processors of fish and shellfish originally enacted in 1915 and replaced these taxes with new privilege and catch fees.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.

1955

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.

1977

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.

1980

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.

1991

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.

1995

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.

Enhanced Food Fish Tax (“Fish Tax”)

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.

What are the public policy objectives that provide a justification for the tax preference? Is there any documentation on the purpose or intent of the tax preference?

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:

• To re-establish the historic tax treatment of imposing taxes or fees on fish and shellfish harvested from the wild, but not on fish and shellfish grown on farms
• The Legislature has exempted licensed farms that grow fish and shellfish from various fish and shellfish tax structures since at least 1949.  Legislation in 1980 removed this tax treatment for shellfish, but the Legislature returned to the policy of exempting both farmed fish and shellfish in 1995.
• To focus the enhanced food fish tax on activities that fall under the management authority of the (now) Department of Fish and Wildlife
• When it established the salmon enhancement program in 1977, the Legislature stated that the program would be for the benefit of all persons whose fishing activities fall under the authority of the (then) Department of Fisheries.  The Legislature then exempted both fish and shellfish farms from paying the new tax and contributing revenue to the program.  When the 1977 legislation was passed, commercial farms did not have fishing activities under the management authority of the Department of Fisheries.

What evidence exists to show that the tax preference has contributed to the achievement of any of these public policy objectives?

To re-establish historic tax treatment

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.

To focus the enhanced food fish tax on activities that fall under the management authority of the WDFW

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:

• All aquatic farmers must register with WDFW, and WDFW must maintain an electronic database of the registration information, updating it each year.  The farmers pay a $105 application fee to register.
• The Legislature directed WDFW to work with the Department of Agriculture to develop a program of disease inspection and control for aquatic farmers.  WDFW is tasked with administering this program.  The purpose of the program is to protect the aquaculture industry and wildstock fisheries from a loss of productivity due to aquatic diseases or maladies, including infestations of pest or parasites.

In addition to these responsibilities specific to fish and shellfish farming, the WDFW has general responsibilities that may benefit these farmers:

• WDFW has a key role in preventing and pursuing illegal harvests, poaching, and illegal sales of Washington food fish and shellfish, including toxic shellfish.
• WDFW is the lead agency in managing invasive species.

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 public policy objectives are not being fulfilled, what is the feasibility of modifying the tax preference for adjustment of the tax benefits?

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.

Who are the entities whose state tax liabilities are directly affected by the tax preference?

Beneficiaries of this preference are Washington commercial food fish and shellfish farmers.

• For the period 2012 through 2014, WDFW received reports indicating there were 296 commercial aquafarms with a total of 1,785 farm sites.  Of those, 150 aquafarms reported harvesting activity at 1,576 sites.
• The U.S. Department of Agriculture 2013 Census of Aquaculture noted there were 143 aquaculture farms (defined as farming fish, crustaceans, mollusks, and other aquaculture products) in Washington.

What are the past and future tax revenue and economic impacts of the tax preference to the taxpayer and to the government if it is continued?

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.

If the tax preference were to be terminated, what would be the negative effects on the taxpayers who currently benefit from the tax preference and the extent to which the resulting higher taxes would have an effect on employment and the economy?

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.

Do other states have a similar tax preference and what potential public policy benefits might be gained by incorporating a corresponding provision in Washington?

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.

• California, like Washington, imposes a landing tax on fish and shellfish with different rates for various types of fish and shellfish.  Commercially grown fish and shellfish are not subject to the tax.
• Texas has an oyster sales fee imposed on the first certified shellfish dealer who harvests, purchases, handles, stores, packs, etc., oysters taken from Texas waters.  Commercial growers who are the first to harvest, handle, store, etc., the oysters appear to be subject to the fee, which is $1 per 300 pound barrel.

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.

RCW 82.27.030(2)

Exemptions.

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.

• If the objective is to re-establish historic tax treatment that taxes fish and shellfish harvested in the wild but not fish and shellfish grown on farms, then the Legislature should affirm this purpose and continue the exemption; or
• If the Legislature wants those who have fishing activities that fall under the management authority of the Department of Fish and Wildlife to pay the tax, the Legislature may want to reconsider the existing full exemption for food fish and shellfish farmers.

Legislation Required: Yes.

Fiscal Impact: Depends on legislative action.

Available December 2015.

Available December 2015.

If applicable, will be available December 2015.