Washington legislature passes significant tax increases

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The governor signed Engrossed Substitute House Bill ("ESHB") 2081.  This legislation is projected to increase tax revenue in Washington by approximately $5.6 billion over the next four years.  This legislation increases the B&O tax rate on multiple classifications, including three of the most common classifications (manufacturing, wholesaling and retailing) to 0.5% beginning January 1, 2027.  This legislation also creates a tiered rate structure for the service and other tax classification and adds various surcharges.  For taxpayers with service receipts in the preceding year as indicated below, the rate is as follows:

• 1.5% for gross receipts less than $1 million.
• 1.75% for gross receipts between $1 million and $5 million.
• 2.1% for gross receipts over $5 million.

This legislation also clarifies the application of the investment income deduction at RCW 82.04.4281.  This deduction provides an exclusion from B&O tax for incidental (less than 5% of gross receipts) investment income.  The legislation is in response to the Washington Supreme Court decision in Antio v. Department of Revenue.  Importantly, the legislation makes clear that nonprofit organizations, retirement accounts, family investment vehicles and collective investment vehicles may still take the deduction regardless of whether the investments are incidental (i.e., less than 5%) to the main purpose of the person’s business with some exceptions for collective investment vehicles. Collective investment vehicles and family investment vehicles are newly defined, as is the term “investment”.  The legislation also directs the department to fashion a rule and provide examples making it clear the deduction is not intended to apply to personal investments because such income does not derive from engaging in business, so it is not otherwise taxable under RCW 82.04.4281.  The legislation contains multiple effective dates.

The governor signed Engrossed Substitute Senate Bill ("ESSB") 5814.  This legislation is projected to increase tax revenue in Washington by approximately $2.6 billion over the next four years.  The legislation extends Washington sales tax to the following activities: 

• Information technology related training services, technical support, and other services.
• Custom website development services.
• Investigation, security services, security monitoring, armored car services (not locksmiths).
• Temporary staffing, excluding temporary staff provided at hospitals.
• Advertising services, with the exception of services related to printing, publishing, and radio and television broadcasting.
• Live Presentation including, lectures, seminars, workshops, in-person courses or via the internet.

An exception to the application of sales tax to certain of the above services is permitted for sales between members of an affiliated group.

The legislation also modifies the application of tax on digital automated services ("DAS").  Washington has imposed tax on DAS since 2009.  This legislation also eliminates the DAS exclusion for "human effort", thereby expanding the scope of DAS taxation established in 2009.

The governor signed Substitute Senate Bill ("SSB") 5314.  This legislation was requested by the DOR and is projected to increase tax revenue in Washington by approximately $1.4 million over the next four years.  The legislation replaces the B&O tax credit with a capital gains tax credit.  It also imposes new limits on loss carryforwards, including disallowing a carryforward for loss carryovers from a sale or exchange that occurred before January 1, 2022.

The governor also signed Engrossed Substitute Senate Bill ("ESSB") 5813.  This legislation imposes a tiered rate structure for the capital gains tax.  Taxpayers with capital gains under $1 million are taxed at 7% and those with capital gain in excess of $1 million are taxed at 9.9% beginning January 1, 2025.

The governor signed House Bill ("HB") 2020.  This legislation is projected to increase tax revenue in Washington by approximately $1.1 million over the next four years.  Specifically, it increases the B&O tax rate for persons conducting payment card processing activities in Washington.  The new rate is 3.1% for payment card processing activities.  A B&O tax deduction from the payment card processor's B&O tax is allowed for interchange fees, network fees, and portions of fees retained by other processors.

The tax rate does not apply to activities where the processor also operates or is affiliated with the payment 

network and makes payments to an affiliated financial institution. The tax rate does not apply when 

the payment card processing company is also the issuer of the card. Activities that are excluded 

from the new rate are subject to the relevant services and other activities B&O tax rate,

with no deduction allowed.  This legislation takes effect on January 1, 2026.

In addition to the above laws, the legislature passed numerous other bills that impact tax obligations associated with activities conducted or performed in the state of Washington.  These bills eliminate certain tax preferences (SB 5794), impact electrical vehicle credits and luxury items, and increase tax rates on certain gambling activities among other changes.  A list of these bills is provided by the DOR on its site.