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; 0.484 percent for manufacturing and wholesaling; and 1.5 percent (businesses with taxable income of less than $1 million) or 1.75 percent (businesses with taxable income of $1 million or more) for services and for activities not classified elsewhere.  There are many specialized B&O tax rates and preferential rates that apply to specific business activities.

In addition, a taxpayer may be eligible to utilize other tax preferences, including credits and deductions, to reduce their tax liability.  For example, a taxpayer engaging in activities subject to different B&O tax rates may be eligible for a multiple activities tax credit.  A taxpayer may also be eligible for a small business credit that will either eliminate or reduce their B&O tax liability.  The credit is $160 per month for taxpayers that report at least 50 percent or greater of their total B&O taxable amount under service and other activities, real estate brokers, and contests of chance and $55 per month for all other businesses, multiplied by the number of months in the reporting period.  The amount of the credit available phases out based on the business's gross receipts.

A business does not have to file an annual B&O tax return if the business does not owe other taxes or fees to the Department of Revenue (DOR) and has annual gross proceeds of sales, gross income, or value of products for all B&O tax classifications of less than $125,000 per year.

Credit Unions.

Credit unions doing business in Washington may be chartered by the state or federal government.  The Department of Financial Institutions (DFI) regulates state-chartered credit unions.  State law provides for the organization, regulation, and examination of state-chartered credit unions.  The Director of the DFI (Director) may, by rule, provide relief from certain state laws and rules to small credit unions, which are defined as credit unions with up to $10 million in total assets.  State-chartered credit unions have all of the powers and authorities held by federal credit unions on December 31, 1993, or a subsequent date not later than July 28, 2019.  State-chartered credit unions may have all of the powers and authorities held by federal credit unions after that date, if the Director finds that the exercise of the power and authority serves the convenience and advantage of credit union members and maintains the fairness of competition and parity between state-chartered credit unions and federal credit unions.  State-chartered credit unions also have all powers and authorities of out-of-state credit unions, except membership, subject to certain requirements.  Federal and state-charted credit unions are exempt from the B&O taxes.

Interest on Real Estate Loans Business and Occupation Tax Deduction. 

Banking, lending, security, and other financial businesses with locations in 10 states or fewer may deduct from the B&O tax interest income received on investments or loans primarily secured by first mortgages or trust deeds on nontransient residential properties.  Deductible interest amounts include the portion of fees charged to borrowers, including points and loan origination fees, recognized over the life of the loan as an adjustment in the business's accounting records according to generally accepted accounting principles.

International Services Business and Occupation Tax Credit. 

Businesses providing international services and located in an eligible geographical area may receive a B&O tax credit of up to $3,000 per year for each new job created.  An eligible geographical area is a community empowerment zone (CEZ), or a city, or a group of neighboring cities, with a population of at least 80,000 having the same characteristics as a CEZ.  Eligible international services include computer, legal, accounting and tax preparation, engineering, architectural, business consulting, business management, public relations and advertising, surveying, geological consulting, real estate appraisal, and financial services.

Rental of Real Estate—Individual Self-Service Storage Units.

The rental of individual self-service storage space at self-storage facilities is considered a rental of real property and is exempt from the B&O tax, when customers have direct access to individual storage units, and the space is rented for 30 days or longer.

Public Safety Standards and Testing.

Nonprofit corporations providing public safety services and information to Washington receive a B&O tax credit for these services.  The state must request the services.  Qualifying nonprofit corporations must not have any direct or indirect industry affiliation and must not charge the state for the provided services.

Public Utility Tax.

The gross income derived from the operation of publicly and privately owned utilities is subject to the public utility tax (PUT), unless otherwise exempt.  The tax is imposed in lieu of the B&O tax and is applied only on sales to consumers.  Other income of the utility, such as retail sale of tangible personal property, is subject to the B&O tax.  There are six different PUT rates, depending on the specific utility activity.  The rates are:

• 3.852 percent on telegraph companies, distribution of natural gas, and the collection of sewage;
• 3.8734 percent on the generation or distribution of electrical power;
• 0.642 percent on urban transportation and watercraft vessels under 65 feet in length;
• 1.926 percent on motor transportation, railroads, railroad car companies, and all other public service businesses;
• 5.029 percent on the distribution of water; and
• 1.3696 percent on log transportation.

A taxpayer who engages in one or more businesses subject to the PUT is fully exempt from the tax if their total gross income is $2,000 or less per a month.  Any taxpayer that has a total gross income greater than $2,000 per month does not receive an exemption or deduction under this provision.

A business does not have to file an excise tax return for the PUT if the business does not owe other taxes or fees to the DOR and has annual gross proceeds of less than $24,000.

Home Energy Assistance Public Utility Tax Credit. 

A light and power business or a gas distribution business may take a credit against the PUT for up to 50 percent of billing discounts provided to low-income households or qualified contributions to a low-income home energy assistance fund.  To qualify for the credit, the business must give billing discounts or qualifying contributions in excess of 125 percent of those given in fiscal year 2000—or the first year the business provided billing discounts or qualified contributions.  The total amount of credits available for all businesses is $2.5 million annually. 

Retail Sales and Use Tax.

Retail sales taxes are imposed on retail sales of most articles of tangible personal property, digital products, and some services.  A retail sale is a sale to the final consumer or end user of the property, digital product, or service.  If retail sales taxes are not collected when the user acquires the property, digital products, or services, then use tax applies to the value of property, digital product, or service when used in this state.  The state, all counties, and all cities levy retail sales and use taxes.  The state sales and use tax rate is 6.5 percent; local sales and use tax rates vary from 0.5 percent to 4.1 percent, depending on the location.

Coins and Precious Metal Bullion.

Generally, a person does not owe wholesaling B&O tax, retailing B&O tax, or retail sales tax on gross income from the sale of precious metal bullion and monetized bullion.  Precious metals include gold, silver, platinum, rhodium, and palladium.  Precious metal bullion is any processed, smelted, or refined precious metal valued on its content, not form.  Monetized bullion is a coin or other form of money made from metal and used as an exchange medium under the laws of a government.  Retailing B&O tax is owed, and the sales tax must be collected and reported, on sales of coins that cannot be used as money.  Sales of bullion that will be used to manufacture items such as jewelry or works of art are subject to wholesaling B&O tax if a reseller permit is provided.  Retailing B&O tax and retail sales tax applies to sales of such items to consumers.  If a person receives commissions from the sales of precious metal bullion and monetized bullion paper currency, the person must pay service and other activities B&O tax.

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, including a variety of sales and use tax exemptions.  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.

The amended bill:

• aligns the B&O tax rates on gross receipts derived from the rental of individual self-service storage units with the B&O service and other activities tax rates by placing the storage unit rates into the service and other activities Revised Code of Washington (RCW) section;
• clarifies that a sale of real estate does not include the gross proceeds derived from individual storage space rentals or individual storage space leases for 30 days or longer at a self-service storage facility as defined in RCW 19.150.010;
• restores the B&O preferential tax rate of 0.138 percent for warehousing and reselling prescription drugs;
• restores the preferential B&O tax rate of 0.484 percent for insurance agents and surplus line brokers;
• restores the dentistry prepayment insurance premium tax exemption;
• restores the international investment management services preferential B&O tax rate of 0.275 percent; and
• restores the international banking facilities B&O tax exemption.