Washington State: Legislation revises B&O tax surcharge

February 12, 2020

The governor of Washington State on February 10, 2020, signed into law Senate Bill 6492—legislation that modifies and simplifies the Washington business and occupation (B&O) tax “workforce education” surcharge (that became effective January 1, 2020).


The Washington State B&O rate varies based on the taxpayer’s classification (i.e., its business activity).  There are roughly 40 B&O tax classifications, but the most common classifications and tax rates are:

  • Retailing (0.471%)
  • Wholesaling (0.484%)
  • Manufacturing (0.484%)
  • Service and other activities (1.5%)

A taxpayer that has income from multiple activities may pay B&O under multiple classifications.

Original surcharge – House Bill 2158

House Bill 2158 (signed into law in May 21, 2019) adopted a new B&O tax “workforce education investment” surcharge used to fund higher education. The first tier of the surcharge was imposed on specified persons taxable under the “services and other activities” B&O classification. The surcharge was 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%.

The current B&O rate for services and other activities is 1.5%; thus, with the surcharge, the rate would be increased to 1.8% for certain service businesses.

The second component of the workforce education surcharge was a two-tiered surcharge on select advanced computing businesses. An “advanced computing business” was defined as 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. A “select” advanced computing business generally was defined as an affiliated group that has: (1) at least one member engaging in the business of advanced computing; and (2) annual worldwide gross revenue in the immediately preceding calendar year of more than $25 billion. 

The first tier of the advanced computing surcharge was a 33.33% surcharge applied to affiliated groups with worldwide gross revenue of more than $25 billion, but not more than $100 billion. Advanced computing businesses and affiliated groups with worldwide gross revenues of more than $100 billion were to be subject to a 66.66% surcharge. The amount of the surcharge could not be less than $4 million nor more than $7 million annually for any affected worldwide group.

Revised surcharge – Senate Bill 6492

Since the passage of House Bill 2158, numerous bills were introduced to make changes to the surcharge provisions and to exempt certain businesses from the surcharge.  The Department of Revenue also announced that implementation of the surcharge would be delayed until further notice.

As signed into law in February 2020, effective for business activities beginning on or after April 1, 2020, Senate Bill 6492 increases the general “service and other activities: B&O tax rate for all taxpayers and revises the surcharge imposed on advanced computing businesses.  Specifically, Senate Bill 6492:

·       Repeals the first tier of the surcharge and increases the general “service and other activities” B&O tax rate from 1.5% to 1.75%.  This revision eliminates the need to determine whether a person is primarily engaged in one of the many enumerated service activities, while effectively broadening the rate increase to reach all service businesses.  Note that the previous 1.5% rate still applies to select advanced computing businesses (see below), persons with gross income of less than $1 million, and certain hospitals.

·       Consolidates the surcharge imposed on advanced computing businesses to adopt a single surcharge equal to an additional 1.22% B&O tax rate on gross income reported under the “service and other activities” classification.  This results in an effective “service and other activities” B&O tax rate of 2.72%, as advanced computing businesses are subject to the regular “service and other activities” B&O tax rate of 1.5%.

  • Removes the minimum surcharge of $4 million and increases the maximum surcharge to $9 million for advanced computing businesses.
  • Revises the definition of a “select advanced computing business” to exclude entities primarily engaged in business as a "financial institution" as defined in RCW §82.04.29004, as that section existed on January 1, 2020.
  • Revises how the receipts threshold of more than $25 billion is measured to look solely at the immediately preceding calendar year, rather than the preceding calendar year and the current calendar year.
  • Requires taxpayers to pay the surcharge on a quarterly basis.  The previous law did not provide specific reporting requirements and instead deferred to the Department of Revenue. Under Senate Bill 6492, returns and amounts are due by the last day of the month immediately following the end of the reporting period covered by the return.
  • Revises a provision of the law providing that if the Department establishes, by clear, cogent, and convincing evidence, that one or more members of an affiliated group intended to evade the surcharge, the Department must assess against that person, or those persons collectively, a penalty equal to 50% of the amount of the total surcharge payable by all members of that affiliated group. Previously, the penalty was that the $7 million cap on the surcharge was removed for such groups.
  • Eliminates the language providing that the Department of Revenue is presumed to be correct in determining whether a person is subject to the surcharge unless the person proves otherwise. 

KPMG observation

Although Senate Bill 6492 addresses many of the concerns taxpayers had with the surcharge, note that the definition of a “select advanced computing business” remains largely unchanged.  A single member engaging in the business of advanced computing can still subject the entire affiliated group to the surcharge, and there is still no requirement for such member to be primarily engaged in the business of advanced computing. 


For more information, contact a KPMG State and Local Tax professional:

Michele Baisler |+1 206 913-4117 | mbaisler@kpmg.com

Alex Low |+1 206 913-4154 | alexanderlow@kpmg.com


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