Brief Description: Providing a business and occupation tax deduction for new businesses.

Sponsors: Representatives O'Brien, Miloscia, Kessler, Ericks and Chase.

Hearing Date: 2/15/05

Staff: Tracey Taylor (786-7196).

Background:

Washington's business and occupation (B&0) tax is the second largest tax source for the state. In Fiscal Year 2003, B&O tax collection totaled $1.923 billion which represented approximately 17 percent of state revenue sources within the state general fund. Almost all businesses located or doing business in the state of Washington are subject to the state B&O tax, including corporations, partnerships, sole proprietors and nonprofit organizations.

Washington's B&O tax is calculated on gross income from business activities in the state. There are no deductions from the B&O tax for labor, materials, taxes or other costs of doing business. However, some businesses may qualify for certain exemptions, deductions or credits. An exempted activity is not subject to the B&O tax and is not reported on the Combined Excise Tax Return (CETR). Exempted activities include raising and selling plantation Christmas trees at wholesale; sales for fund-raising of certain nonprofit organizations; international banking facilities; and growing, raising or producing agricultural products. Unlike exemptions, deductions must first be reported on a business' CETR as part of the business' gross income, then taken as a deduction. Allowable deductions include bad debts; freight and delivery costs incurred by a Washington manufacturer for out-of-state shipments; and sales made in Washington by an out-of-state seller without activities in Washington that establish, maintain, or facilitate a market for its products or services. Credits are amounts that have been paid to the DOR which are either not due or are granted by the Legislature for a specific purpose. Credits are subtracted from the B&O tax due on the CETR and include the multiple activities tax credit; the high technology B&O tax credit and the small business B&O tax credit.

Business and occupation tax rates and classifications vary according to the type of business activity. The major B&O tax classifications are retailing, wholesaling, manufacturing and service and other activities.

Summary of Bill:

A new business is exempt from the B&O tax during its first 36 months of operation.

An exemption is limited during any reporting period to an amount that does not exceed $8,333 multiplied by the number of months in the reporting period.

For the purposes of the act, a new business is defined as a business that obtained or was required to obtain a registration certificate for the first time during the calendar year for which the exemption is first claimed. It does not include a business that has been restructured, reorganized, or transferred, unless the majority of activities to be conducted after the restructuring, reorganization, or transferral are significantly different from the activities previously conducted. A business that is substantially similar to a business currently operated, or operated within the past five years, by the same principals is not considered a new business.

Appropriation: None.

Fiscal Note: Requested on February 10, 2005.

Effective Date: The bill takes effect on October 1, 2005.