Business and Occupation Tax.  The state business and occupation (B&O) tax is Washington's primary business tax. It is a gross receipts tax measured on the value of products, gross proceeds of sale, or gross income of the business. There are no deductions from the B&O tax for labor, materials, taxes, or other costs of doing business. The B&O tax rate varies by classification (activity). The major rates are: 0.471 percent for retailing activities, 0.484 percent for manufacturing and wholesaling activities, and for service and other activities, either 1.5 percent or 1.75 percent, depending upon the amount of annual gross income of the business. 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. The state B&O tax includes a number of preferential tax rates, credits, exemptions, and deductions as well as several increased rates or surcharges.

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 capped at $9 million per year.  All receipts from the ACS are deposited into 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.  State law provides for a range of tax preferences that confer reduced tax liability upon a designated class of taxpayer.  Tax preferences include tax exclusions, deductions, exemptions, preferential tax rates, deferrals, and credits.  Washington has 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 the Joint Legislative Audit and Review Committee can use to evaluate the effectiveness of the preference.  All new tax preferences automatically expire after ten years unless an alternative expiration date is provided.

Business and Occupation Tax Rate for Payment Card Processing.  A B&O tax rate of 3 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 tax preference performance review.

PRO: The bill clarifies the tax base for payment card processors by applying tax to the processing fee and not other fee components like interchange and network fees. The payment card processing industry is willing to pay the higher tax rate in exchange for clarification around which processing fees are taxable. The bill is equitable and allows processors to continue serving small businesses. The future net fiscal impact of this bill should extinguish any immediate loss in revenue. Small businesses need certainty in the tax treatment of processing fees. The bill is a win-win for the state and small businesses.