Background: Business and Occupation Taxes. Washington's major business tax is the business and occupation (B&O) tax. The B&O tax is imposed on the gross receipts of business activities conducted within the state, without any deduction for the costs of doing business. Businesses must pay the B&O tax even though they may not have any profits or may be operating at a loss. A business may have more than one B&O tax rate, depending on the types of activities conducted. Major tax rates are 0.471 percent for retailing; 0.484 percent for manufacturing, wholesaling, and extracting; and 1.5 percent for services and activities not classified elsewhere. Several lower rates also apply to specific business activities. A B&O tax credit is provided for businesses whose B&O tax liability is below a certain level. The credit varies depending on the amount of B&O tax due—the total of all classifications—after all other B&O tax credits have been taken. The amount of the small business B&O tax credit for service-related business is $840 per year, which completely exempts a service business with annual B&O income below $56,000 and provides a partial reduction in B&O tax liability for a service business with income at or below $112,000. For all other taxpayers, the amount of the small business B&O credit is $420 per year, which for taxpayers subject to the 0.484 percent B&O tax rate, completely exempts a business with an annual B&O income below $86,777 and provides a partial reduction in B&O tax liability for a business with an income below $173,554.

Workforce Education Investment Surcharge. In 2019, the Legislature passed EHB 2158, a three-tiered workforce education investment surcharge established as part of the B&O tax. The first tier of the surcharge is imposed on selected businesses based on their primary business activity. An activity is considered to be a primary activity if more than 50 percent of the business' cumulative gross income was generated from engaging in that activity in the entire current or preceding calendar year. Selected business activities include 43 categories of service-related activities, including, but not limited to, architecture and engineering services, legal services, insurance carriers, financial services, medical services, software publishing, scientific research, electronic shopping, telecommunications services, and others.

Under the first tier of the workforce education investment surcharge, if a business is primarily engaged in one or more of the activities described, the surcharge is 20 percent of the total amount of taxes payable by the business on activities taxed under the B&O tax rate for services.

The second tier of the surcharge is imposed on advanced computing businesses that have worldwide gross revenue of more than $25 billion, but less than $100 billion. The surcharge is 33.33 percent of the total amount of taxes payable by the business on activities taxed under the B&O tax rate for services.

The third tier of the surcharge is imposed on advanced computing businesses that have worldwide gross revenue more than $100 billion. The surcharge is 66.66 percent of the total amount of taxes payable by the business on activities taxed under the B&O tax rate for services.

The total amount of surcharge paid by an affiliated advanced computing group must be at least $4 million, but not more than $7 million per year.

An advanced computing business is one that designs or develops software or computer hardware, including modifications, or provides cloud computing services, operates an online marketplace, an online search engine, or an online social networking platform.

The 2019 legislation also created the Workforce Education Investment Account (WEIA). All revenues from the workforce education investment surcharges are deposited in WEIA. WEIA may be used only for higher education programs, higher education operations, higher education compensation, and state-funded student aid programs except for the 2019-21 biennium in which funds can be used for K-12 career connected learning. Expenditures from WEIA must be used to supplement, not supplant, other federal, state, and local funding for higher education.

Summary: Workforce Education Investment Surcharge. Except for certain advanced computing businesses, the workforce education investment surcharge is eliminated and replaced with an increase in the B&O service rate from 1.5 percent to 1.75 percent for businesses earning more than $1 million annually in the preceding calendar year. Businesses conducting service activities, but not meeting the $1 million threshold, continue to pay B&O tax at the 1.5 percent rate. Hospitals are excluded from the increase. For the purpose of determining whether a business has met the $1 million threshold, the income of any affiliates of the business is also included in the calculation. An affiliate is any business that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with another business.

Advanced computing businesses with a worldwide gross income in excess of $25 billion are subject to an additional 1.22 percent surcharge. These businesses would continue to pay B&O tax at the 1.5 percent rate as well. The maximum amount of surcharge an advanced computing business is subject to is $9 million per year.

The elimination of the surcharge is retroactive to January 1, 2020. The increase in the B&O service rate and the advanced computing surcharge take effect April 1, 2020.

Senate	28	21
House	52	45

Effective:	February 10, 2020
	April 1, 2020 (Sections 1, 2, 3)