A legal battle could result in additional taxes on rental property statewide, a possibility that alarms members of the Building Owners & Managers Association (BOMA) chapter here.


If, as proposed, a current ruling is overturned and rental property income becomes subject to the states business and occupation (B&O) tax, rental property owners statewide would be hit with about $125 million in additional taxes annually, representatives of BOMA say. Those taxes likely would be passed on to tenants and are unfair, they say.


However, an assistant attorney general who represents the Washington state Department of Revenue says that the current B&O exemption for rental property income is a legal anomaly and should be corrected by the courts. Then, says Cameron Comfort, the Olympia, Wash.-based assistant attorney general, the Legislature could decide that a B&O exemption for rental property is appropriate and legislate that change.


The question of whether the B&O tax should be levied on rental property income surfaced last month when the Department of Revenue asked the Washington state Supreme Court to overturn a 1960 court ruling that protects rental income from that kind of tax. The department broached the subject in a brief in a related Supreme Court case in which a Western Washington property owner called into question a city of Mukilteo fee on residential rentals.


If the state Supreme Court decides to overrule the 1960 ruling, the Department of Revenue administratively would begin levying a 1.5 percent tax on rental property income. Most landlords would pass on that expense to tenants, says Gordon Hester, senior property manager at Kiemle & Hagood Co., of Spokane.


Kiemle & Hagood, for example, leases about 10,000 square feet of space in the Washington Mutual Building downtown. If the tax were passed down to the company, K&H would pay an additional $186 in rent each month, Hester says. K&H also would have to collect that taxabout $423,000 annuallyfrom tenants who lease the numerous properties it manages.


For a typical two-bedroom apartment here, rent would increase by about $10 per month, or $120 a year.


Most companies already pay a B&O tax of between 1.5 percent and 3 percent on their gross revenues, depending on the type of business they conduct.


The Department of Revenues position, Comfort says, simply is that rental property income should be taxed just as other business income is taxed. If the Supreme Court overrules the 1960 case that exempted rental income from the B&O tax, Comfort says, property owners could seek legislative action to create a similar exemption.


Raymond G. Dodge, an attorney at Workland & Witherspoon PLLC, of Spokane, opposes the Department of Revenues stance because of its possible implications for an unrelated case in which hes involved. Dodge is representing five corporations that own nursing homes that are suing the Department of Revenue for a refund of B&O taxes that was collected on the homes rental income. If the state Supreme Court throws out the 1960 ruling, the Department of Revenue could use that to bolster its argument against Dodges clients.


While building operators say they would seek legislative action if the Supreme Court ruled for the state, such action might be in vain, Dodge says.


Maybe this is cynical, but once (the legislators) get the money, theyre not going to let go, he says.