Federal Individual Income Taxes.
Federal individual income taxes are based on a taxpayer's adjusted gross income (AGI), which represents total income from all taxable sources minus certain allowable adjustments, such as retirement or health savings account contributions or student loan interest paid on certain higher education loans. From the AGI taxpayers subtract either the standard deduction or itemized deductions to arrive at taxable income. The United States (US) uses a graduated tax rate structure where taxable income is divided into brackets, with each bracket taxed at a higher marginal rate as income rises; taxpayers do not pay their top rate on all income, only on the portion that falls within that bracket. The federal individual income tax has seven tax rates ranging from 10 percent to 37 percent.
State Individual Income Taxes.
Approximately 41 states impose an individual income tax. The policies and approaches of these individual income tax programs vary from state to state. Nine states have a flat-rate income tax system, which means that all income levels are taxed at the same rate while other states use a graduated rate structure. A state's relationship to the federal tax system varies with a majority of state income tax systems using the federal AGI as the starting point for calculating state taxes. Some states use federal taxable income as the starting point, and a small number of states establish their base income without relying on the federal AGI or taxable income.
Allocation and Apportionment.
Under the US Constitution, state taxes are required to be fairly apportioned, connected to activity within the state, and not unduly burdensome or discriminatory against interstate commerce. States have various methodologies to assign income to the state for nonresident individuals and businesses conducting activity in multiple states.
Pass-through Entities.
For federal income tax purposes, partnerships, limited liability companies, and certain corporations, referred to as S corporations, are considered disregarded entities. These entities are not taxed at the entity level and the various items of income, gains, losses, and expenses are passed through to the individual owners.
Capital Construction Fund.
A capital construction fund (CCF) is a special account authorized under federal law that allows eligible vessel owners or operators to defer federal income taxes on money deposited into the fund. Those deposits must later be used to construct, reconstruct, or, under limited circumstances, acquire fishing vessels with before-tax dollars. A contribution to a CCF reduces federal taxable income, not the federal AGI.
Initiative 2111.
In 2024 an initiative to the Legislature was passed by the Legislature without change. Initiative 2111 prohibits the state, counties, cities, and other local jurisdictions from imposing a tax on any form of an individual's personal income. Income has the same meaning as gross income as provided in the federal tax code.
Working Families Tax Credit.
The Working Families Tax Credit (WFTC) is a state program for low- to moderate-income families that offers a partial credit against sales and use taxes paid in the form of a refund. To be eligible for credit payments, a person must:
There is no minimum or maximum age requirement for a person with a qualifying child.
The amount of the WFTC payment varies depending on the number of qualifying children in the household and the filer's income level. The minimum credit amount for all eligible persons that apply is $50. The maximum credit amount is as follows:
Credit amounts are adjusted for inflation based on changes in the consumer price index.
Qualifying income levels are based around the maximum adjusted gross income for the federal EITC, which changes annually. The maximum credit amount for the WFTC is reduced by varying percentages, depending on income levels. The Department of Revenue (DOR) adjusts the rate of credit reductions annually to maintain the minimum credit being received at the maximum qualifying income level. The rates of credit reduction also vary based on the number of qualifying children.
To receive a credit, eligible persons must apply to the DOR. The DOR has authority to adopt rules necessary to implement and administer the program.
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 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), 1.75 percent (businesses with taxable income of $1 million to $5 million), and 2.1 percent (businesses with taxable income over $5 million) for services and for activities not classified elsewhere. There are many specialized B&O tax rates and preferential tax rates that apply to specific business activities.
An additional B&O tax is imposed on businesses in Washington with at least $250 million in Washington taxable income. The tax is 0.5 percent of the business's annual Washington taxable income in excess of $250 million and is in addition to the other B&O taxes imposed on the income. This surcharge expires December 31, 2029.
Beginning January 1, 2027, the B&O tax rate for the following business activities increases to 0.5 percent:
In addition, the B&O tax rate for contests of chance is increased to 1.8 percent.
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 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.
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 product, or service, 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, depending on the location.
Retail Services.
Businesses that sell intangible products to customers are generally subject to the B&O tax under the services and other classification. Customers do not pay retail sales and use tax on most services. A select number of services are subject to retail sales and use tax, including construction services, personal training at athletic and fitness facilities, extended warranties and maintenance agreements, alarm monitoring services, and vehicle towing. If the service is taxable as a retail sale, then the business activity is subject to the retailing B&O tax.
Information technology products and services sold as a nonitemized package are generally subject to retail sales and use tax. When the products and services are separately stated on a sales invoice or contract, charges for computer hardware and prewritten computer software are subject to retail sales and use tax. Separately stated charges for custom software and customization of prewritten software are not subject to retail sales and use tax.
Digital Products.
Retail sales and use taxes apply to all digital products, regardless of how they are accessed. Digital products are digital goods and digital automated services. A digital automated service is any service transferred electronically that uses one or more software applications. A digital good is a sound, image, data, fact, or information, or any combination thereof, transferred or accessed electronically.
Newly Enacted Retail Services.
Pursuant to Engrossed Substitute Senate Bill (ESSB) 5814 beginning October 1, 2025, the following select services are classified as retail services and subject to the retail sales tax and the retailing B&O tax:
The following digital automated services are also classified as retail services and subject to the retail sales tax and the retailing B&O tax:
The sale of services between members of an affiliated group are not considered a retail service for purposes of the retail sales tax and the retailing 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. Legislation that establishes or expands a tax preference must include a tax preference performance statement (TPPS) that identifies the public policy objective of the preference, as well as specific metrics that the Joint Legislative Audit and Review Committee (JLARC) 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.
Beginning January 1, 2028, a 9.90 percent tax is imposed on the receipt of Washington taxable income. Only individuals are subject to payment of the tax. The first tax payments and returns are due in calendar year 2029.
Washington Base Income.
The determination of Washington taxable income starts with a taxpayer's federal AGI and incorporates the following modifications to arrive at the taxpayer's Washington base income:
After making these modifications, a nonresident individual will allocate income attributable to sources or activity in Washington to arrive at the taxpayer's Washington base income.
Income excluded from the taxpayer's federal AGI, including tribal treaty income, is also exempt from the state tax calculation unless a specific provision in state law requires otherwise.
Washington Taxable Income.
From the taxpayer's Washington base income, three deductions and one income increase are applied to arrive at the taxpayer's Washington taxable income.
First, a taxpayer may deduct from their Washington base income a standard deduction of $1 million per individual, or in the case of spouses or domestic partners, their combined standard deduction is limited to $1 million, regardless of whether they file joint or separate returns. The standard deduction is adjusted annually for inflation beginning in 2030. The standard deduction is reduced for an individual who was not a resident for the entire year. The reduction is based on a fraction which equals the individual's Washington base income divided by their total federal AGI.
Second, a taxpayer may deduct from their Washington base income the amount of charitable contributions they claimed for the taxable year under section 170 of the internal revenue code, up to a maximum deduction of $100,000 per individual, or in the case of spouses or domestic partners, their combined charitable deduction is limited to $100,000, regardless of whether they file joint or separate returns.
Third, a taxpayer must add to the taxpayer's Washington base income the taxpayer's distributive share of the tax expense incurred by a pass-through entity making an election to pay the tax at the entity level.
Fourth, a taxpayer may deduct from the taxpayer's Washington base income the amount deposited into a CCF to be later used for the construction, reconstruction, or acquisition of fishing vessels, if the contribution amount has reduced the taxpayer's federal taxable income for the taxable year.
Tax Credits.
A resident individual may claim a tax credit for any income tax paid to another state, or to a political subdivision of that state, on income that is also subject to tax under this bill.
A tax credit is available against taxes owed under the bill for any B&O tax or public utility tax paid on the same income that is subject to the new tax.
A tax credit is also available for any Washington capital gains tax paid on capital gains taxed under the bill.
Allocation and Apportionment.
For resident individuals, all income is allocated to the state of Washington.
For nonresident individuals, income derived from sources within this state is assigned to Washington based on various allocation and apportionment methodologies.
An individual who is not a Washington resident for an entire tax year is considered a part-year resident. Their Washington adjusted gross income includes all income earned while considered a resident plus only Washington-source income earned while a nonresident. Special rules apply to income from a pass-through entity.
Nonresident Employment Compensation.
A nonresident individual is subject to tax on the portion of their federal AGI derived from employment within the state of Washington, regardless of the location of the commercial domicile of the employer. Compensation for services performed by a nonresident as part of their employment is allocated to this state to the extent the services are rendered within the state. If the services are performed both within and outside the state, the compensation will be apportioned based on the ratio of days worked in the state to total days worked, or by another reasonable method approved by the DOR.
Nonresident Business Activities.
For a nonresident operating a business within and outside the state, income is assigned to the state generally following a model law called the Uniform Division of Income for Tax Purposes Act (UDITPA) developed by the Multistate Tax Commission. Under UDITPA income from a business, trade, or profession carried on in this state, including any distributive share of a pass-through entity of a business, trade, or profession carried on in this state, must be classified as either apportionable income or non-apportionable income. Apportionable income is assigned to the state using a receipts factor based on in-state versus total receipts.
In addition, income is apportioned as follows:
The bill also addresses the allocation of income to Washington from net rents and royalties from tangible property and patent and copyright royalties.
Nonresident Professional Athletes Compensation.
For nonresident members of a professional athletic team, the portion of compensation attributable to athletic performances in the state must be apportioned to Washington. To determine this amount, a duty day methodology is used. The portion of the compensation apportioned to Washington for a nonresident athlete is that portion of compensation received for the tax year that bears the same ratio to total compensation received for the tax year as the number of duty days within this state bears to the total number of duty days spent both within and outside the state during the tax year. "Duty days" is defined as the days during the tax year from the beginning of the official preseason training period of a professional athletic team through the last game in which the professional athletic team competes or is scheduled to compete during the tax year.
Nonresident Student Athletes' Name, Image, and Likeness.
For nonresident student athletes, the portion of the AGI of a nonresident student athlete derived from the commercial use of the student athlete's name, image, or likeness (NIL) is allocated to this state if the publicity services provided by the student athlete related to such commercial use of the student athlete's NIL primarily occur in Washington. Payments by an institution of higher education representing a percentage of institutional athletic revenues to a nonresident student athlete will be apportioned to Washington in a form and manner consistent with a duty day methodology developed by the DOR. The DOR is required to submit proposed legislation to the Legislature that would implement an apportionment methodology using a duty day approach by January 1, 2028.
A part-year resident's Washington adjusted gross income includes all income earned while a resident plus only Washington-source income earned while a nonresident. Special rules apply to income from a pass-through entity.
Pass-Through Entity Tax Election.
Pass-through entities, such as partnerships and limited liability companies, may elect to pay tax at the entity level. The tax rate is 9.90 percent, and the tax amount would be similar to the Washington tax liability of the individual owners. Pass-through entities may opt in annually by filing an election by the DOR's deadline, no later than June 15 of the taxable year, and the election is irrevocable for that year. The election must be signed by an authorized person, depending on the entity type. Electing entities must make estimated tax payments similar to individuals, based on reasonable income estimates, though no estimated payments are required before July 1, 2029. Owners receive a credit for their share of tax paid by the entity and must report their distributive income on their own Washington returns. Resident and nonresident owners report income differently based on sourcing rules, but both may claim the credit. In calculating the individual Washington taxable income, owners must add back any distributive share of the tax expense deduction that is reflected in the federal AGI. Electing entities must file an annual return with all required information, and the DOR may adopt rules to administer and streamline the process.
Estimated Tax Payments.
Beginning July 1, 2030, individuals subject to the tax must make estimated payments to the DOR using rules aligned with federal estimated tax payment requirements. The estimated tax amount is calculated by dividing the annualized tax by the number of months in the reporting period. Estimated tax payments are not required when the annualized tax liability is under $5,000.
Penalties and interest may apply to underpaid estimated taxes unless the estimated tax payments are either at least 90 percent of the tax shown on the tax return or 100 percent of the tax shown on the previous year's tax return.
Administration of the Tax.
Taxpayers owing tax must annually file a Washington income tax return on or before the filing date of the taxpayer's federal income tax return. Individuals not owing tax are not required to file a return. Tax returns and all supporting documents, must be filed electronically using the DOR's online tax filing service or some other method of electronic reporting allowed by the DOR. A taxpayer is required to attach a copy of the taxpayer's federal income tax return and other supporting documentation. Each taxpayer required to file a Washington income tax return must, without assessment, notice, or demand, pay any tax due to the DOR on or before the filing date, regardless of any filing extension.
If a taxpayer has obtained an extension of time for filing the federal income tax return for the taxable year and the taxpayer provides the DOR, on or before the date fixed for the filing of the return and regardless of any filing extension, information satisfactory to the DOR confirming the federal extension, the taxpayer is entitled to the same extension of time for filing the return.
If any Washington tax return is due, and is not filed with the DOR by the due date or any extension granted by the DOR, a penalty is assessed in the amount of 5 percent of the tax due for the taxable year covered by the return for each month or portion of a month that the return remains unfiled. The total penalty assessed may not exceed 25 percent of the tax due for the taxable year covered by the delinquent return.
If the federal income tax liabilities of both spouses are determined on a joint federal return for the taxable year, they must file a joint Washington income tax return. If the federal income tax liability of any individual, including either spouse of a marital community, is determined on a separate federal return for the taxable year, they must file separate Washington tax returns. State-registered domestic partners may file a joint Washington tax return even if they filed separate federal returns for the taxable year. The liability for Washington income tax of each spouse or state-registered domestic partner is joint and several, except under certain conditions.
A taxpayer's method of accounting for purposes of the tax is the same as the taxpayer's method of accounting for federal income tax purposes. If no method of accounting has been regularly used by a taxpayer for federal income tax purposes or if the method used does not clearly reflect income, the Washington income tax due must be computed by the cash method of accounting.
Interest and penalties for underpayments and overpayments of taxes under current law are applied to such underpayments and overpayments with respect to Washington income taxes owed as part of the April tax return. There is also a 5 percent penalty applied for the substantial underpayment of estimated Washington income tax payments. "Substantially underpaid" means that an individual's total annual estimated Washington income tax payments were less than 80 percent of the actual annual Washington income tax due and at least $5,000.
Crimes.
Any person who knowingly attempts to evade the Washington income tax is guilty of a class C felony. Any person who knowingly fails to pay tax, pay estimated tax, make returns, or supply information, as required under the bill, is guilty of a gross misdemeanor.
Miscellaneous Provisions.
Various pension statutes are modified to specify that pension income is not exempt from the Washington income tax.
If a court of final jurisdiction invalidates the Washington income tax, the entire bill is null and void.
Initiative 2111 is amended to specify that it does not apply to the Washington state income tax.
All new tax preferences created in the bill are exempt from the automatic ten year expiration date, TPPS, and JLARC review.
The bill specifies that the new tax is necessary for the support of the state government and its existing public institutions and also specifies that the DOR will continue with implementation efforts regardless of litigation.
Distribution of Revenues.
Seven percent of the revenues from the Washington income tax are deposited in a new local government public defense funding stabilization account where revenues must be used by cities and counties for public defense services. The remainder of new revenues are deposited in the State General Fund to fund a new sales and use tax exemption for grooming and hygiene products, the expiration of the B&O surcharge on high-grossing businesses a year early, the January 1, 2030, expiration of the applicability of sales tax to certain services enacted in 2025, the expansion of a small business tax credit, and the WFTC program, including its expansion.
Local Government Public Defense Funding Stabilization Account.
The revenues deposited in a new Local Government Public Defense Funding Stabilization Account must be used by cities and counties for public defense services. Ten percent is distributed to cities on a pro rata basis, based upon the annual number of misdemeanor criminal cases filed in courts under each city's jurisdiction, as determined by the Office of Public Defense. The remaining 90 percent is distributed to counties as follows:
Tax Relief.
The bill extends the age requirement of the WFTC program eligibility to individuals 18 years of age or older, regardless of the number of qualifying children. This expanded eligibility takes effect on January 1, 2029, for applications submitted beginning in calendar year 2029. The expansion of the WFTC program eligibility is included in the current TPPS for the WFTC Program and is exempt from the ten-year expiration date.
Beginning January 1, 2029, grooming and hygiene products are exempt from the sales and use tax.
Beginning January 1, 2029, for non-service businesses, the small business B&O tax credit amount is increased from $55 per month in the tax reporting period to $125 per month. For service businesses, the small business B&O tax credit amount is increased from $160 per month in the tax reporting period to $375 per month. The B&O tax annual filing threshold is increased to $250,000.
The B&O surcharge on businesses with gross income exceeding $250 million is expired one year early—January 1, 2028 instead of January 1, 2029.
The sales and use taxes for retail services included under ESSB 5814—Chapter 422, Laws of 2025, except for advertising services, are repealed effective January 1, 2030.