Legislation has recently been presented to Washington Governor Jay Inslee that, if signed, would adopt tax increases for certain businesses. Specifically, House Bill 2158 imposes a new Business and Occupation (B&O) Tax workforce education investment surcharge on specified persons that are taxable under RCW 11 82.04.290(2), the services and other activities B&O classification. The surcharge, which applies to business activities occurring on or after January 1, 2020, is equal to the total amount of tax payable by the person on business activities taxed under RCW 14 82.04.290(2) before application of any tax credits, multiplied by 20 percent. The current B&O rate for services and other activities is 1.5 percent. The surcharge is imposed on “specified persons” who are “primarily engaged” in over 40 specifically enumerated types of business activities including, but not limited to, various types of financial, medical, legal, and administrative, and telecommunications services . A person is primarily engaged in any combination of the specifically enumerated activities if more than fifty percent of the person's cumulative gross amount reportable during the entire current or immediately preceding calendar year is generated from engaging in any one or more of the outlined activities.
House Bill 2158 also imposes higher surcharges imposed on certain advanced computing businesses. Specifically, a 33 1/3 percent B&O surcharge applies to the income from service and other activities of “advanced computing businesses” with worldwide revenue of more than $25 billion, but not more than $100 billion. A 66 2/3 percent B&O surcharge applies to the income from service and other activities of advanced computing businesses with more than $100 billion in worldwide gross revenue. In no case will the combined surcharge on advanced computing businesses paid by all members of an affiliated group be less than $4 million or more than $7 million annually. For persons subject to the advanced computing business surcharge that report under one or more B&O classifications, the surcharge applies only to the activities taxed under RCW 82.04.290(2). An advanced computing business is generally a business that designs or develops software or computer hardware, including modifications thereto, or provides cloud computing services, operates an online marketplace, an online search engine, or an online social networking platform. Revenues from the surcharges must be deposited directly into the workforce education investment account and may be used only for funding various higher education initiatives.
House Bill 2167, if signed, would impose an additional tax on specified financial institutions beginning January 1, 2020. The additional tax is equal to the gross income of the business taxable under RCW 82.04.290(2) multiplied by the rate of 1.2 percent. A “specified financial institution" means a financial institution that is a member of a consolidated financial institution group that reported annual net income of at least $1 billion, not including net income attributable to non-controlling interests, on its consolidated financial statement for the previous calendar year, as the terms "net income" and "non-controlling interest" are used in the consolidated financial statement. Revenues from the additional tax will be deposited in general fund. Two other bills sitting on the Governor’s deck (Senate Bill 6016 and Senate Bill 6004) adopt B&O tax increases on certain international investment managers and travel agents and tour operators.
Finally, Senate Bill 5998, if enacted, would repeal the state’s current flat 1.28 percent Real Estate Excise Tax (REET) imposed on the selling price of real property without any deductions for mortgages, liens or other debts. In addition to sales of real property, the REET also applies to certain transfers of controlling interests (generally fifty percent or more) in entities that own property in Washington State. In lieu of the flat rate tax, beginning January 1, 2020, the REET would be imposed at graduated rates as follows:
· 1.1 percent if the selling price is equal to or less than $500,000;
· 1.28 percent on the portion of the selling price that is greater than $500,000 but equal to or less than $1,500,000;
· 2.75 percent on the portion of the selling price that is greater than $1,500,000 but equal to or less than $3,000,000; and
· 3.0 percent on the portion of the selling price that is greater than $3,000,000.
Under Senate Bill 5998, a REET imposed at the 1.28 percent rate is imposed on the sale of undeveloped land, timberland, agricultural land, and water or mineral rights, regardless of selling price. Beginning on January 1, 2022, and every fourth year thereafter, the selling price thresholds will be adjusted to reflect the lesser of the growth in the Consumer Price Index for Shelter over the past four years or 5.0 percent. Senate Bill 5598 also broadens the definition of a “sale” for purposes of determining which transfers of controlling interests are subject to REET. As revised, the term "sale” is modified so the REET applies to the transfer or acquisition of a controlling interest in any entity with an interest in real property in Washington State within any 36-month period (rather than the 12-month period in current law). Senate Bill 5998 also authorizes the Department of Revenue to disregard the form of a transaction or series of transactions and to determine the proper REET tax treatment based on the substance of the transaction or transactions. Examples of this authority include, but are not limited to, treating a series of sales as a single sale. Please contact Michele Baisler at (206) 913-4117 with questions on these bills.