Business and Occupation Tax.

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 taxpayer may have more than one B&O tax rate, depending on the types of activities conducted.  Major B&O tax rates are 0.471 percent for retailing and 0.484 percent for manufacturing and wholesaling.  For services and activities not classified elsewhere, the tax rates are 1.5 percent for businesses with taxable income of less than $1 million or 1.75 percent for businesses with taxable income of $1 million or more.  A portion of the revenue generated from the 1.75 percent B&O tax rate is deposited into the Workforce Education Investment Account (WEIA) to support higher education programs, state-funded student aid, and workforce development.

Advanced Computing Business and Occupation Tax Surcharge.

In addition to the applicable B&O tax rates, advanced computing businesses with worldwide gross annual revenues in excess of $25 billion are subject to an additional 1.22 percent surcharge (ACS) applied to the gross income subject to the B&O tax under the service and other activities classification.  The amount of the ACS that an advanced computing business owes is caped at $9 million per year.  All receipts from the ACS are deposited into the WEIA.

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

Business and Occupation Surcharge on Financial Institutions.

In addition to the applicable B&O tax rates, a surcharge is imposed on financial institutions with an annual net income of $1 billion or more.  The surcharge is 1.2 percent and applies to the business's income subject to the B&O tax under the service and other activities tax classification.  All receipts from the surcharge are deposited into the State General Fund.

Tax Preferences.

Tax preferences confer reduced tax liability upon a designated class of taxpayers.  These include tax exclusions, deductions, exemptions, preferential tax rates, deferrals, and credits.  There are over 700 tax preferences.  Legislation that establishes or expands a tax preference must include a tax preference performance statement that identifies the public policy objective of the preference, as well as specific metrics that the Joint Legislative Audit and Review Committee can use to evaluate the effectiveness of the preference.  All new tax preferences automatically expire after 10 years unless an alternative expiration date is provided.

Business and Occupation Tax Rate for Payment Card Processing.

A B&O tax rate of 3.1 percent is established for payment card processing activities.  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.

Where applicable the B&O surcharge on financial institutions and the advanced computing surcharge may apply to payment card processing activities taxable under the new 3 percent rate.  

Payment card processing activities means services related to acquiring, processing, or routing electronic transactions for issuers, acquirers, payment networks, or merchants.  It does not include:  the issuing and authorization of the use of payment cards; the authorization, clearance, and settlement of electronic transactions by a payment network; nor the retail services or retail sale of hardware or software.

Business and Occupation Deduction for Payment Card Processors.

A B&O tax deduction from the payment card processor B&O tax is allowed for interchange fees, network fees, and portions of fees retained by other processors.

Interchange fee means amounts received by a person that authorizes use of a card to perform an electronic transaction.  Network fee means amounts received by payment networks associated with the processing of a transaction.

The B&O tax deduction is permanent and not subject to a tax preference performance review.

(In support) Taxes on fees when they hold the fees for a matter of seconds is unfair.  The state is on the losing side of a lawsuit, and this bill will hopefully iron that out.  The deduction for the fees is in exchange for the new rate paid.  Payment processors sign up businesses to accept electronic cards for payment.  There are three components to the fees that businesses pay, including the processing fee, network fees that go to the card providers, and interchange fees that go to banks.  This bill clarifies that the processor, which receives only the processing fee, only pays tax on that fee.  This issue has been worked on with the Department of Revenue (DOR) for quite some time, and the teamwork has been helpful.  There is a small fiscal impact which may feel high given the current situation.  Direct negotiations with the DOR have been ongoing, and we believe that the settlement that is under discussion will zero out the fiscal impacts in the short and long term.

(Opposed) None.

(In support) There will be an amendment that will make the revenue impact of this bill net neutral.  The amendment that will be offered in this committee is welcomed.  This bill will settle a decade long dispute with the DOR by clarifying that processors will pay the B&O tax only on the processing fees.  In turn, processors have agreed to pay double what the fee is currently.

(Opposed) None.

Representative April Berg, prime sponsor; Kimberly Ford, Fiserv; and Denny Eliason, Fiserv.

Kimberly Ford, Fiserv; and Denny Eliason, Fiserv.