Washington State Passes Major Business Tax Increases

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By Natalya Belonozhko and Steve Horenstein

pile of one dollar bills
Photo by Sharon McCutcheon on Unsplash

May 21, 2019

The Washington Legislature’s 2019 session resulted in several state tax increases to raise approximately $2.1 billion over the next four years. Here’s a summary of the tax changes.

Business and Occupation (B&O) Services Tax (HB 2158).

Specified Persons

Currently all businesses subject to B&O tax under RCW 82.04.290(2) pay a B&O tax rate of 1.5% on gross income. Beginning on January 1, 2020, certain businesses classified as “specified persons” will be assessed a workforce education surcharge of 20% times the B&O tax paid at the 1.5% rate, effectively raising the B&O tax rate on gross income from 1.5% to 1.8%.

“Specified Persons” are business primarily engaged in over 40 specific types of business activities including:

  • administrative and office services (financial planning and billing)
  • advertising and public relations
  • architectural and engineering
  • business management, and environmental, scientific, and technical consulting services
  • business or professional associations, unions and political organizations
  • credit card processing companies
  • holding companies with financial interests in other firms
  • interior, graphics, industrial or other specialized design services
  • medical
  • dental
  • veterinary
  • legal
  • accounting audit services
  • online retail
  • licensing intellectual property, franchise agreements and collecting royalties
  • manufacturing aircraft, missile, space vehicles or aerospace equipment
  • market research and polling services
  • merchant wholesale distribution
  • publishing (magazine, periodicals, mailing lists)
  • computer software publishing and design
  • information technology systems management and support
  • satellite TV services
  • telecommunications services (cellular, paging, wireless internet and video)
  • data processing, transmission and web hosting
  • entertainment production and news media content services
  • online marketplace facilitators and agents or brokers for business-to-business sale of goods
  • banking and institutions extending credit
  • financial portfolio management
  • insurance sales or employee benefit-related services
  • property, life or accidental insurance and underwriting
  • securities agents and brokers
  • utilities, public administration and government services.

A complete list of the activities subject to the surcharge is provided in the new Section 74(2) of RCW 82.04.

Advanced Computing Businesses

A higher surcharge is imposed on certain “advanced computing businesses” — companies engaged designing or developing computer software or hardware, (directly or by contracting), including modifications to hardware or software, cloud computing or operating an online marketplace, an online search engine or online social networking platforms.

  • 2.0% B&O Tax. A 33.33% B&O surcharge on the existing B&O tax paid at the 1.5% rate will apply to advanced computing business with a worldwide revenue of more than $25 billion, but not more than $100 billion, raising the B&O tax rate on gross income for these businesses to 2.0%.
  • 2.5% B&O Tax. A 66.66% B&O surcharge on the existing B&O tax paid at the 1.5% rate will apply to advanced computing business with more than $100 billion worldwide gross revenue, raising the B&O tax rate on gross income for these businesses to 2.5%.

There is cap on the surcharge for affiliated group of businesses so that they pay at least $4 million but not more than $7 million annually in surcharge fees.

Payroll Tax Increase (House Bill 1087).

Beginning January 1, 2022, the Washington State Employment Security Department will assess on employed individuals a premium tax rate of .58% of wages which will be collected by employers and submitted to the Employment Security Department. The rate will be readjusted on January 1, 2024, however the readjustment rate will not be higher than .58%. The new payroll tax is intended to pay for a long-term care program providing assistance with daily living. Benefits however will not be received until January 1, 2025.

Tax on Financial Institutions/Banks (HB 2167).

Beginning January 1, 2020, specified financial institutions are taxed an additional 1.2% B&O tax (in addition to the 1.5% under RCW 82.04.290(2)) which increases the B&O tax rate for specified financial intuitions to 2.7%.

A “specified financial institution” is any financial institution that is a member of a consolidated financial institution group that reports on its consolidated financial statement for the prior calendar year an annual net income of at least $1 Billion, excluding income attributed to non-controlling interests. If financial institutions are no longer required to file consolidated financial statements, then “specified financing institution” means any person subject to the additional tax in at least 2 of the last 4 years.

Model Toxics Control Act (MTCA) (SB 5993).

Also passed is an increased tax on the possession of hazardous substances. Currently a tax of $.07 wholesale value rate on hazardous substances is assessed.  Beginning July 1, 2019, the tax rate will be a volumetric rate of $1.09 per barrel. Beginning July 1, 2019 and every July 1st after then, the tax rate will be adjusted to reflect the percentage change in the implicit price deflator for nonresidential structures as published by the united Stated Department of Commerce, Bureau of Economic Analysis for the most recent 12-month period ending December 31st of the prior year.

Tax on International Investment Management Services (SB6016).

Certain international investment management businesses currently pay B&O tax at the rate of .275%. Beginning on July 1, 2019, the B&O tax for most international investment management businesses will increase to 1.8%. A “qualifying international investment company” can retain the .275% rate, however if the qualifying international investment company fails to maintain more than 25% of its employees in Washington, the company loses the preferential tax rate.

B& O Tax Increase for Travel Agents and Tour Operators (SB 6004).

Travel agents and tour operators are currently assessed a B&O tax at the rate of .275%. Beginning July 1, 2019, the rate will increase to .9% for businesses with annual taxable income over $250,000. If gross income is attributed to services provided in Washington state and out of state, the gross income will be attributable in accordance with the apportionment methods per RCW 82.04.460.

The new legislation also produced several tax increases in areas of real estate transfers and local property taxes and changed the structure of the non-resident sales tax exemption. Below is an overview of the tax increases.

Graduated Real Estate Excise Tax (REET) (SB 5998).

Until December 31, 2019, the rate of tax imposed on real estate transfers will remain at 1.28%. Beginning on January 1, 2020 the rate will be set at graduated rates:

  • 1.1% if the selling price is $500,000 or less
  • 1.28% on the portion of the selling price that is more than $500,000 but equal to or less than $1,500,000
  • 2.75% on the portion of the selling price that is more than $1,500,000 but equal to or less than $3,000,000, and
  • 3% on the portion of the selling price that is greater than $3,000,000.

Sale of property classified as timberland and agricultural land will continue to be taxed at the current rate of 1.28% regardless of the selling price.

Beginning on July 1, 2022 and every fourth year there after, the selling price thresholds will be adjusted to reflect the lesser of the (a) growth of the Consumer Price Index for Shelter over the past 5 years or (b) 5%.

Also changed is the definition of the term “sale” to include a transfer or acquisition of a controlling interest in any entity with an interest in real property in the state of Washington within any 36-month period (rather than the 12-month period under current law).

Local Property Tax Increase/School Levy (SB 5313).

Current law sets the maximum local levy that school districts can collect as the lesser of (a) $1.50 per $1,000 of assessed value or (b) $2,500 per student. Beginning January 1, 2020, the maximum levy schools can collect as property will be the lesser of (a) $2.50 per $1,000 of assessed value or (b) $2,500 per student for school districts with less than 40,000 full-time students. For districts with 40,000 full-time students or more, the maximum levy will be the lesser of (a) $2.50 per $1,000 of assessed value or (b) $3,000 per student. This increase will enable public schools to raise more money from local property taxes.

Non-Resident Sales and Use Tax Exemption (SB 5997).

Currently retail sales tax does not apply to purchases of goods made by nonresidents for use outside of Washington state. Beginning 90 days from the adjournment of the 2019 legislative session, the non-resident tax exemption will convert to a remittance program in which non-residents must pay Washington state sales tax at the time of purchase and can later request a refund from the state. The request for refund must be made for the immediately preceding calendar year and can be made only once per calendar year.

This blog article is intended only as a summary of the passed legislation. For additional details on the legislation or if you have questions on how the legislation may affect you, please contact Natalya at natalya@horensteinlawgroup.com or Steve at steve@horensteinlawgroup.com.

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