Aircraft Excise Tax. The aircraft excise tax applies to privately-owned small planes registered in Washington and used for personal or business purposes. Several classes of aircraft are exempt from the tax, including commercial aircraft primarily used for interstate commerce and aircraft registered in other states. The tax is collected annually as a registration fee by the Department of Transportation. The amount of aircraft excise tax owned depends on the aircraft type or is determined by aircraft weight for aircrafts owned and operated by a commuter air carrier that is not an airplane company. All revenue from the aircraft excise tax is deposited to the Aeronautics Account for the maintenance and improvement of airports in Washington.
Brokered Natural Gas Tax. When a consumer uses natural or manufactured gas, and the person who sold the gas to the consumer has not yet paid public utility tax (PUT) on the sale, use tax is due for the privilege of using the gas. The tax does not apply to gas delivered to the consumer by means other than through a pipeline. This includes compressed natural gas and liquefied natural gas. The state tax rate is 3.852 percent, which is equivalent to the rate of the PUT on gas distribution businesses.
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 for businesses with taxable income of less than $1 million or 1.75 percent for 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.
Hazardous Substance Tax. Hazardous substance tax is a tax on the first possession of hazardous substances in Washington. The tax applies to petroleum products, substances listed in the Comprehensive Environmental Response, Compensation and Liability Act, and Federal Insecticide, Fungicide, and Rodenticide Act registered pesticides. The rate of the tax for petroleum products is by barrel and adjusted for inflation every fiscal year. The rate for fiscal year 2025 is $1.48 per barrel. Nonpetroleum products and petroleum products that do not remain in a liquid state are taxed at a rate of 0.7 percent multiplied by the wholesale value of the product.
Insurance Premiums Tax. All net premiums collected and received by authorized insurers, surplus line brokers, and registered eligible captive insurers are subject to the state's insurance premiums tax. The insurance premiums tax rate is 2 percent, except for ocean marine and foreign trade which is subject to a rate of 0.95 percent. For property and casualty insurance in which Washington is the insured's home state, the tax is computed upon the entire premium regardless of whether the policy covers risks or exposures that are in this state. For all other lines of insurance, the tax is computed upon the proportion of the premium that is properly allocable to the risks or exposures located in this state.
Leasehold Excise Tax. State leasehold excise taxes are levied and collected on the act or privilege of occupying or using publicly owned real or personal property through a leasehold interest. A leasehold interest is an interest in publicly owned real or personal property that exists by virtue of any lease, permit, license, or other written or verbal agreement between a public owner and a person who would not be exempt from property taxes if that person owned the property. The leasehold excise tax is levied at a rate of 12.84 percent of taxable rent.
Oil Spill Response and Administration Taxes. Oil spill response and oil spill administration taxes apply when a marine terminal or bulk oil terminal receives crude oil or petroleum products in Washington from a vessel or barge, rail tank car, or a pipeline. The oil spill response tax rate is $0.01 per 42-gallon barrel of crude oil or petroleum product. The oil spill administration tax rate is $0.04 per 42-gallon barrel. When funds in the Oil Spill Response Account fall to $8 million, owners of crude oil or petroleum products must pay the oil spill response tax. Once the Oil Spill Response Account balance exceeds $9 million, the Department of Revenue (DOR) turns the tax off until the Oil Spill Response Account balance dips below $8 million again.
Petroleum Products Processing Tax. A tax is imposed on the first possession of petroleum products in Washington. The tax is imposed on the wholesale value of petroleum products in the state. Petroleum products include plant condensate, lubricating oil, gasoline, aviation fuel, kerosene, diesel motor fuel, benzol, fuel oil, residual oil, and every other product derived from the refining of crude oil. Crude oil or liquefiable gases are not petroleum products. The rate of the tax is 0.003 percent.
Property Tax. All real and personal property in the state is subject to property tax each year based on its value, unless a specific exemption is provided by law. The Washington State Constitution limits regular property tax levies to a maximum of 1 percent of the property's value. Excess levies are not subject to this constitutional limit and require voter approval. There are statutory rate maximums for individual taxing districts and aggregate rate maximums to keep the total tax rate of regular property taxes within the constitutional limit.
All regular levies, except the state levies, are subject to a statutory revenue growth limit. If the taxing authority has a population of 10,000 or more, the revenue growth limit is the lesser of inflation, or 1 percent plus the valuation of new construction. If the taxing authority has a population of less than 10,000, the revenue growth limit is 1 percent plus the value of new construction.
Public Utility Tax. The PUT applies to the gross operating income of public service businesses, including businesses engaging in transportation. The PUT is in lieu of the B&O tax and, similar to the B&O tax, applies to the gross receipts of a business without deductions for the costs of doing business.
Six different rates apply, depending upon the specific utility activity. The rates, including permanent surtaxes, are:
Real Estate Excise Tax. Real Estate Excise Tax (REET) applies to real estate transactions including the sale of property and the transfer of controlling interest in property. The rate applies to the selling price and is usually paid by the seller. The REET is due and payable to the county treasurer in which the property is located on the date of the sale, regardless of the date of recording, except in a controlling interest transfer. The REET is imposed at the following rates:
Rental of Real Estate. The rental of individual self-service storage space at self-storage facilities is considered a rental of real property and is exempt from B&O tax when customers have direct access to individual storage units and the space is rented for 30 days or longer. The customers are not charged retail sales and use tax on the amount of their rent.
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 from 0.5 percent to 4.1 percent, depending on the location.
Soft Drinks Syrup Tax. Soft drinks syrup tax is a tax on the wholesale or retail sale of syrup used in making carbonated beverages. Successive sales of previously taxed syrup are not subject to the tax. The rate is $1 per gallon.
South Dakota v. Wayfair, Inc., et al. Decision. On June 21, 2018, the United States Supreme Court decided South Dakota v. Wayfair, Inc., et al. (Wayfair) and overturned the physical-presence nexus requirement established under Quill Corp. v. North Dakota (Quill). The Quill decision prohibited states from requiring mail order businesses to collect sales tax from customers located in the state, unless those sellers had a physical presence within the state. Quill has since been interpreted as applying to all types of remote sellers. Under Quill, no state could require remote sellers to collect retail sales tax unless they had a physical presence within that state.
Wayfair created a new substantial nexus standard. Under this new standard, a state can require a remote seller to collect sales tax “when the remote seller ‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction.” Wayfair also upheld South Dakota’s law establishing dollar and transaction thresholds for mandatory retail sales tax collection. Specifically, the law imposed a collection obligation on remote sellers with gross sales over $100,000 or 200 or more transactions in the state in the current or prior calendar year.
Nexus. Nexus is the standard for determining if a nonresident business could be required to remit taxes to Washington. The concept is based on two provisions in the federal Constitution. First, the Due Process Clause which the United States Supreme Court has determined requires a connection between the business to be taxed and the taxing jurisdiction. Next, the Dormant Commerce Clause, a legal doctrine which the United States Supreme Court has determined prohibits states from discriminating against nonresident sellers, also includes a requirement that the nonresident seller have nexus to the state.
Nexus must ultimately establish a sufficient connection between the activities of a company and the taxing jurisdiction. An activity is deemed to have nexus if it has either a physical or economic presence in the state. In-state businesses generally satisfy the physical presence standard established under Quill by mere residency. Physical presence includes the presence of employees or representatives, property, or other physical connections to the state.
To tax a remote or nonresident business, the state must establish an economic nexus based on a threshold of economic activity within a state. Prior to the court overturning Quill, Washington and other states began implementing different nexus standards to reach remote sellers without a physical presence. In 2010, Washington moved to an economic nexus standard for service B&O tax. Under the new standard, an out-of-state business had nexus in Washington if the business had at least $50,000 of property or payroll, $250,000 of sales, or at least 25 percent of its total property, payroll, or sales in Washington. In 2015, the state extended the economic nexus standard to wholesaling B&O tax. In 2017, Washington moved to economic nexus for retailing B&O tax under the Market Place Fairness Act. The sales threshold was changed to $285,000 for economic nexus and required remote sellers and marketplace facilitators, such as Amazon, eBay, and Wayfair, with more than $10,000 in Washington gross receipts to collect and remit sales tax. In 2019, in response to the Wayfair decision, the state further changed its economic nexus threshold requirements. The standard is now that a remote seller or marketplace facilitator has nexus if they have gross receipts of $100,000 in a given year for both sales and B&O tax purposes.
Tax Preferences. State law requires a periodic review of most tax preferences to determine if their continued existence or modification serves a public policy objective. Tax preferences include tax exclusions, deductions, exemptions, preferential tax rates, deferrals, and credits. The enabling legislation assigns specific roles in the review process to two different entities. The job of scheduling tax preferences, holding public hearings, and commenting on the reviews is assigned to the Citizen Commission for Performance Measurement of Tax Preferences (Commission). The responsibility for conducting the reviews is assigned to the staff of the Joint Legislative Audit and Review Committee (JLARC).
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 JLARC can use to review the effectiveness of the preference in achieving its stated public policy objectives. JLARC generally reviews tax preferences once every ten years, unless state statute requires otherwise, and makes recommendations to the Legislature on whether a tax preference should be continued, eliminated, or modified, including clarifying the public policy objective of the preference. A review report may include comments from the Commission and note whether the Commission endorses JLARC's recommendations.
All new tax preferences automatically expire after ten years unless an alternative expiration date is provided.
Interest on Real Estate Loans Business and Occupation Tax Deduction. Banking, lending, security, and other financial businesses with locations in ten states or less may deduct from B&O tax interest income received on investments or loans primarily secured by first mortgages or trust deeds on nontransient residential properties. Interest amounts deductible 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' accounting records according to generally accepted accounting principles.
JLARC reviewed the tax deduction in 2015, and in the absence of a stated public policy objective by the Legislature, inferred the objectives were to stimulate Washington’s residential housing market by making loans available to home buyers at lower cost and limit the deduction to community banks.
JLARC recommended the Legislature review and clarify the purpose of the tax deduction because the original inferred public policy objective of stimulating the residential housing market may no longer apply given the changes in the lending industry and the rise of the secondary mortgage market. The review noted that:
The review additionally noted that "community banks," defined as those operating in ten or fewer states, included commercial banks, savings and loan associations, savings banks, and certain mortgage companies. JLARC recommended limiting the tax preference beneficiary to portfolio lenders or those lenders that retain a threshold portion of their mortgages in their own portfolios for the duration of the loans.
Interstate Transportation—Public Utility Tax Deduction for In-State Portion. Wholly instate freight transport—trips from one point in Washington to another—are fully subject to PUT. Current law provides a deduction from the PUT for instate portions of the interstate shipments of goods where the carrier authorizes the shipper to stop the shipment in Washington to store, manufacture, or process the goods, then continues to transport the same goods or their equivalent, in the same or a converted form, to the final destination noted under a through freight rate, also known as a through bill of lading. The preference applies to transportation of goods by truck, rail, and certain water transportation. Current law also provides a PUT deduction for the transportation of commodities from a point in Washington directly to an instate port, dock, wharf, export elevator, or shipside for direct shipment by a vessel outside the state.
JLARC reviewed these deductions in 2010 and noted that the Legislature did not state its intent when these preferences were enacted in 1937. The implied intent appears to be based on the 1930s-era United States Supreme Court analysis and interpretation of federal Commerce Clause prohibitions. At the time, the United States Supreme Court interpreted the federal Commerce Clause in the United States Constitution to bar a direct tax on gross receipts from activities related to interstate transportation. These PUT deductions were consistent with the constitutional analysis of Commerce Clause prohibitions at the time. JLARC further noted that taxing the instate portion of interstate transportation activities is now recognized as constitutional as long as the tax satisfies a four-prong test promulgated by the United States Supreme Court in Complete Auto Transit v. Brady—1977, which held that a state tax does not violate the Commerce Clause when it is applied to interstate activity if:
Prescription Drug Resellers Preferential Business and Occupation Tax Rate. Income from licensed businesses warehousing and reselling prescription drugs for human use receive a preferential B&O tax rate of 0.138 percent, rather than the wholesaling tax rate of 0.484 percent.
The tax preference was lasted reviewed by JLARC in 2013. In the absence of stated public policy objectives, JLARC inferred the objective of the preferential B&O tax rate reduce a competitive disadvantage for wholesalers operating Washington warehouses relative to out-of-state drug distributors that have no nexus to Washington and pay no B&O tax. JLARC recommended continuing the tax preference because the review determined it was meeting its inferred public policy objectives.
Insurance Producers, Title Insurance Agents, and Surplus Line Brokers Preferential Business and Occupation Tax Rate. Insurance producers, title insurance agents, and surplus line brokers receive a preferential B&O tax rate of 0.484 percent on income received, rather than the service and other activities B&O tax rate of 1.5 percent or 1.75 percent.
JLARC last reviewed this tax preference in 2012 and inferred the public policy objectives are to:
The recommendation to the Legislature was to review and clarify the public policy objectives for the preferential tax rate as they may no longer apply. The report noted it was unclear why the Legislature is providing different tax treatment to businesses with similar agent and subagent relationships. The comment was in response to insurance agencies and stock brokerages paying B&O tax on gross commissions without deduction for commissions shared with subagents, while real estate subagents are exempt if the tax on the commission is paid by the agent.
International Charter and Freight Brokers Preferential Business and Occupation Tax Rate. Income from performing the certain international business activities is subject to the preferential B&O tax rate of 0.275 percent, rather than the service and other activities B&O tax rate of 1.5 percent or 1.75 percent. The preferential rate applies to steamship agents, customs house broker, freight forwarders, air cargo agents, and vessel or cargo charter brokers in foreign commerce. Domestic charter and freight brokering business activities do not qualify for the preferential rate. Instead, the income from those activities is subject to the service and other activities B&O tax rate of 1.5 percent or 1.75 percent.
Stevedoring Preferential Business and Occupation Tax Rate. Income from businesses performing stevedoring and similar waterborne cargo handling activities receive a preferential B&O tax rate of 0.275 percent, rather than the service and other activities B&O tax rate of 1.5 percent or 1.75 percent.
In 2012, JLARC conducted a combined review of the preferential B&O tax rate for stevedoring and international charter and freight brokers. The recommendation to the Legislature was to review and clarify these tax preferences as the public policy objectives are unclear. JLARC did infer that the purpose of the preferential tax rate for stevedoring activities is to make Washington ports and the businesses more competitive; however, it did not apply this same objective to the preferential tax rate for international charter and freight brokers.
The report did note that the Legislature's stated a public policy objective in 1998 for reducing the tax rates for both stevedoring and international charter and freight brokers was to simplify the tax code by consolidating B&O tax rates. JLARC further noted that given changes to the B&O tax structure since that time, the stated public policy objective may no longer be applicable.
Precious Metals and Bullion Tax Exemptions. Sales of precious metals and monetized bullion are exempt from B&O and sales and use taxes. Bullion dealers are subject to B&O tax under the service classification on amounts received in commissions for buying and selling bullions on behalf of customers.
In 2024, JLARC reviewed the tax preference and recommended that the Legislature should determine whether to continue the exemption for sales of precious metals and monetized bullion. The report noted that the preference may not be achieving the inferred public policy objective of making Washington coin and bullion dealers more competitive with out-of-state competitors by treating precious metal and bullion sales like sales of investments rather than sales of tangible personal property.
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.
In 2024, JLARC reviewed this tax preference and recommended that the Legislature should state public policy objectives and, if applicable, set performance metrics. JLARC inferred that the public policy objective was to incentivize electric and gas utility companies to provide additional energy assistance to low-income customers. Review findings indicated that, although tax preference beneficiaries report increasing amounts of energy assistance, the credit is likely of limited influence.
Dentistry Prepayments Insurance Premiums Tax Exemption. Health service contractors and health maintenance organizations are exempt from the insurance premiums tax for amounts received for dental coverage. The exemption does not apply to:
In 2013, JLARC reviewed this tax preference and recommended it be eliminated because the inferred public policy objective of providing a temporary exemption during the transition of health care service contractors to certified health plans is no longer applicable. Specifically, the report noted that the tax exemption was created in response to the Legislature enacting comprehensive health care reform and expanding the Basic Health Plan to low-income uninsured individuals. To pay for implementing health care reform, the Legislature increased taxes on several products and services, including health service contractors and health maintenance organizations. The tax increases were the result of shifting from the B&O tax to the insurance premiums tax, which is higher, and effectively eliminating certain tax deductions that were allowed under the B&O tax but not the insurance premiums tax. That same legislation included a temporary insurance premiums tax exemption for prepayments received for dentistry services. The exemption was to expire once the transition of health care service contractors to certified health plans was complete. The transition to certified health plans did not occur and the relevant provisions were repealed, effectively making the insurance premiums tax exemption permanent.
The report notes that the Commission did not endorse the recommendation of JLARC to terminate the insurance premiums tax exemption. The Commission recommended that the Legislature review and clarify whether this exemption is serving a broad-based public policy objective.
International Investment Management Services Preferential Business and Occupation Tax Rate. Businesses providing qualifying international investment management services (IIMS) receive a preferential B&O tax rate of 0.275 percent, rather than the service and other activities B&O tax rate of 1.5 percent or 1.75 percent. A business is engaged in qualifying IIMS if it meets all the following qualifications:
In 2014, JLARC reviewed this tax preference and recommended the Legislature determine if the preference is still necessary since Washington’s 2010 adoption of an economic nexus and apportionment standard has reduced the competitive disadvantage for international investment management businesses located in-state as compared to those located out-of-state.
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.
JLARC reviewed this tax preference in 2023 and recommended the Legislature terminate the tax credit because it has not achieved the stated intent of attracting and retaining businesses in a CEZ or international service districts that provide professional services to international customers.
International Banking Facilities Business and Occupation Tax Exemption. International banking facilities are exempt from B&O tax. An international banking facility is:
JLARC's 2017 review of this tax preference recommended that the Legislature review and clarify the B&O tax exemption for international banking facilities to provide an explicit public policy objective. The report noted that it is unclear whether the tax preference had any impact on the inferred public policy objective of encouraging the establishment of international banking facilities in Washington. The report further noted that the state moving to an economic nexus standard may have diminished the value of this preference.
Baseball Stadium Sales and Use Tax Deferral. The original construction of a public baseball stadium, owned by a public facilities district, qualifies for a sales and use tax deferral if it has a retractable roof or canopy and has natural turf. The preference has the purpose of encouraging the construction of a professional baseball stadium in King County. The construction of Safeco Field, now T-Mobile Park, was completed in January 2000, and the repayments of deferred sales and use taxes were completed in 2014.
Football Stadium Sales and Use Tax Deferral. Public stadium authorities are eligible to defer sales and use taxes on the construction of professional football and soccer stadiums and adjacent exhibition centers. Deferred sales tax is repayable over ten years, starting five years after the stadium becomes operational. The preference has a purpose of encouraging the construction of a professional football and soccer stadium and adjacent exhibition center in Washington. Qwest Field, now Lumen Field, and its exhibition center, which qualified for the deferral, were completed in 2002. Repayment began in 2007 and was completed in 2016.
Ferrosilicon Sales and Use Tax Exclusion. The definition of retail sale excludes property used in producing ferrosilicon, which is then used to make magnesium. These sales are classified as wholesale transactions. The exempt items must be used primarily to create a chemical reaction with an ingredient of ferrosilicon. No taxpayers claim this exemption.
Aluminum Master Alloy Producers Business and Occupation Tax Exclusion. A person who produces aluminum master alloys is a processor for hire rather than a manufacturer, regardless of the portion of aluminum provided by the person's customer. Producers of aluminum master alloys pay processing for hire B&O tax upon the total charge for those services. There are no aluminum smelters in Washington. No taxpayers qualify for this exclusion.
Packing Agricultural Products Business and Occupation Tax Exclusion. Manufacturing B&O tax excludes the process of packing agricultural products. This includes sorting, washing, rinsing, grading, waxing, treating with fungicide, packaging, chilling, or placing in a controlled atmospheric storage. This exclusion is a duplication of the B&O tax deduction under RCW 82.04.4287.
Group Discount Purchases Business and Occupation Tax Exemption. Memberships in a qualifying discount program are exempt from B&O tax if the seller delivers the membership materials to a point outside the state. No taxpayers claim this exemption.
Minor Final Assembly Completed in Washington Business and Occupation Tax Deduction. The value of a product initially manufactured outside the state may be deducted from the gross amount reported under the manufacturing B&O tax, by manufacturers in Washington, when the following criteria are met:
The amount of the deduction is equal to the value of the product prior to being brought into Washington. Changes in federal import regulations have resulted in imported truck components no longer being assembled at Washington ports and no taxpayers claim this deduction.
Insurance Claims for State Health Care Coverage Business and Occupation Tax Deduction. Insurance companies may take a B&O tax deduction for amounts paid on medical or dental claims for state employees incurred prior to July 1, 1990. The purpose of the deduction is to prevent placing commercial insurers at a competitive disadvantage in bidding for state contracts by providing commercial insurers with a deduction that is available to health care contractors and health maintenance organizations. The state now self-insures, and no commercial insurer was selected to provide the uniform health plan for state employees. No taxpayers claim this deduction.
Tuition Fees of Foreign Degree-Granting Institutions Business and Occupation Tax Deduction. Approved branch campuses of foreign degree-granting institutions may deduct income from B&O taxes if exempt from federal income taxes. No taxpayers claim this deduction.
Hospital Delivery System Reform Incentive Payments Business and Occupation Tax Deduction. Certain hospitals may take a B&O tax deduction for income from Medicaid delivery system reform incentive payments and the transformation project funding distributed by the Health Care Authority through Medicaid demonstration project number 11-W-00304/0. The Centers for Medicare and Medicaid Services approved the project in accordance with section 1115(a) of the Social Security Act. To claim this deduction, a hospital must be owned by a municipal corporation or political subdivision or must be affiliated with a state institution. No taxpayers claim this deduction.
Testing and Safety Labs Business and Occupation Tax Credit. 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 not charge the state for the provided services. No taxpayers claim this credit.
Natural Gas Sold to Direct Service Industry Business and Occupation Tax Credit. Direct service industry (DSI) customers, persons who purchase electric power directly from the Bonneville Power Administration, may take a B&O tax credit for the amount of PUT due on purchases of natural or manufactured gas used to generate electric power consumed by the DSI customer at its own gas turbine electrical generation facility. The DSI customer may use the tax credit for 60 months following the first qualifying gas purchase and the DSI customer must maintain its existing level of employment to take the credit. No taxpayers claim this credit.
Aluminum Smelter Purchases of Electricity or Natural Gas Business and Occupation Tax Credit. Businesses selling electricity, natural gas, or manufactured gas are exempt from B&O tax on sales made to an aluminum smelter when the contract requires the seller to pass the tax savings on to the buyer in the form of reduced power prices. The seller takes the exemption in the form of a tax credit. This tax incentive applies principally to sellers of brokered natural gas because most sellers of power are subject to the PUT and not B&O tax. No taxpayers claim this credit.
Electricity or Gas Sold to Silicon Smelters Business and Occupation Tax Credit. Persons subject to B&O tax are eligible to take a credit against the tax on the gross income from sales of electricity, natural gas or manufactured gas made to a silicon smelter. The credit is equal to the gross income from the sale multiplied by the corresponding tax rate in effect at the time of the sale. The person taking the credit must specify in the contract of sale of electricity or gas to the silicon smelter that the price charged will be reduced by the credit amount. Resale or remarketing of the electricity or gas originally obtained by contract for the smelting process is not eligible for the credit. This tax preference expires on July 1, 2027. If smelters do not meet the employment requirements, the tax preference will expire on January 1, 2024. Smelters did not meet the contingency, and the tax preference expired.
Aircraft Part Prototypes Sales and Use Tax Exemption. Sales of tangible personal property incorporated into or used for modifications made to prototypes of aircraft parts and auxiliary equipment are exempt from sales and use taxes if the business developing the prototypes has taxable annual income of $20 million or less. The exemption is limited to $100,000 per business per calendar year. No taxpayers claim this exemption.
Aluminum Production Anodes and Cathodes Sales and Use Tax Exemption. The sale or use of carbon, petroleum coke, coal tar, pitch, and similar substances that become an ingredient or component of anodes and cathodes used in manufacturing aluminum for sale are exempt from sales and use tax. No taxpayers claim this exemption.
Gravitational Wave Observatory Sales and Use Tax Exemption. Tangible personal property incorporated into a structure which is an integral part of a laser interferometer gravitational wave observatory is exempt from sales and use tax. No taxpayers claim this exemption.
Natural and Manufactured Gas Not Delivered by Pipeline Brokered Natural Gas Tax Exemption. Natural or manufactured gas delivered to customers by means other than through a pipeline is not subject to a brokered natural gas use tax. Natural gas is only delivered via pipeline and no taxpayers claim this exemption.
Silicon Smelter Use of Natural or Manufactured Gas Brokered Natural Gas Tax Exemption. Brokered natural gas use tax does not apply to using natural or manufactured gas by silicon smelters. This tax preference expires on July 1, 2027. If smelters do not meet the employment requirements, the tax preference will expire on January 1, 2024. The tax preference expired as there are no silicon smelter facilities in Washington nor were there any permits for facility projects issued.
Direct Service Industries Brokered Natural Gas Deferral. A deferral of the tax on brokered natural and manufactured gas is created for DSIs that construct a new gas turbine power plant. DSIs are large industrial manufacturers that purchase power directly from the Bonneville Power Administration. This deferral does not require the amount of this tax to be repaid if the DSI continues generating electricity from the gas turbine for a minimum of five calendar years and the DSI's average employment levels have not dropped below the six-year average level. No taxpayers claim this deferral.
Second Narrows Bridge Public Utility Tax Exemption. A PUT exemption is allowed on income derived from operation of State Route 16 (SR 16) corridor transportation systems and facilities constructed and operated. This exemption addresses the second bridge over Puget Sound at the Tacoma Narrows and exempts any tolls received by the operator of the bridge from a PUT. The state receives the tolls, not the business contracted to collect the tolls. Income derived from the operation of SR 16 does not fall under the PUT classifications. Normally, the contractor is subject to B&O tax under the service classification on amounts paid by the state to perform this service. No taxpayer claims this exemption.
Electricity Sold to Direct Service Industry Public Utility Tax Credit. Sales of electricity from a gas turbine electrical generation facility to a DSI customer are eligible for a PUT credit if the facility makes such sales for at least ten consecutive years and reduces the price of the electricity by an amount equal to the credit. The tax credit lasts for 60 months following the first qualifying sale of electricity. The DSI customer must maintain existing employment levels for at least five years to qualify. A DSI customer is an industrial customer that purchases power from the Bonneville Power Administration for its own consumption. No taxpayers claim this credit.
Aluminum Smelter Purchases of Power Public Utility Tax Credit. A business with gross income from the sale of electricity, natural gas, or manufactured gas to an aluminum smelter is eligible for a credit against the PUT owed. The contract for the sale of the electricity or gas must specify that the price charged for the electricity or gas will be reduced by an amount equal to the credit. No taxpayers claim this credit.
Electricity or Gas Sold to Silicon Smelters Public Utility Tax Credit. Persons who sell electricity, natural gas or manufactured gas to a silicon smelter are eligible to take a credit against the PUT. The credit is equal to the gross income from the sale multiplied by the corresponding tax rate in effect at the time of the sale. The contract for sale of electricity or gas to the silicon smelter must specify that the price charged will be reduced by the credit amount. Resale or remarketing of the electricity or gas originally obtained by contract for the smelting process is not eligible for the credit. This tax preference expires on July 1, 2027. If smelters do not meet the employment requirements, the tax preference will expire on January 1, 2024. The contingency was not met, the investment did not occur, and the preference expired.
Alumina and Natural Gas Hazardous Substance Tax Exemption. Any alumina or natural gas possession is exempt from the tax imposed on the privilege of possessing hazardous substances in Washington. Natural gas is not defined as a hazardous substance and is not taxable under the hazardous substance tax. There is no aluminum smelter production in the state. No taxpayers claim this exemption.
Petroleum Used Prior to July 1, 1989, Petroleum Products Tax Exemption. Possession of petroleum before the effective date of tax, July 1, 1989, is exempt. This exemption expires on July 1, 2030. No petroleum products obtained before July 1, 1989, remain in inventory in Washington. No taxpayers claim this exemption.
Inmate Employment Programs Leasehold Excise Tax Exemption. All leasehold interests for businesses that use space in in-state adult correctional facilities in conjunction with comprehensive inmate work programs are exempt from leasehold excise tax. Class 1 Department of Corrections industries are unconstitutional, as ruled by the Washington Supreme Court in 2004. No taxpayers claim this exemption.
Second Narrows Bridge Leasehold Excise Tax Exemption. All leasehold interests in the SR 16 corridor transportation systems and facilities constructed and operated are exempt from leasehold excise tax. This includes the second bridge over Puget Sound at the Tacoma Narrows and its approaches. This exemption was predicated upon the assumption that upon completion of the bridge, the state would lease the bridge to the private entity that constructed the facility to operate and maintain it for the term of the lease. This preference exempts such a lease from leasehold excise tax. The ownership arrangements have since changed and no lease of the facility is contemplated. No taxpayer claims this exemption.
Super-Efficient Airplane Production Facilities Leasehold Excise Tax Exemption. Leasehold interests held by a manufacturer of a super-efficient airplane in property of a port district are exempt from leasehold excise tax. This exemption expires July 1, 2040. No known manufacturers of super-efficient airplanes are located on port property in Washington. No taxpayers claim this exemption.
Transfer where Real Estate Excise Tax Previously Paid or the Lease or Contract Began Prior to the 1951 Exemption. Transfers of real property for which REET taxes have already been paid or through a lease that began prior to 1951 are not subject to state or local REET. No taxpayers claim this exemption.
Foreclosure Relocation Assistance Real Estate Excise Tax Exclusion. For REET purposes, "total consideration paid" does not include any outstanding lien or encumbrances in favor of a governmental body or any relocation assistance provided during a foreclosure. This exclusion clarifies that governmental liens and relocation assistance are not part of the market price of a property. No taxpayers qualify under this exclusion.
Second Narrows Bridge Real Estate Excise Tax Exemption. This preference provides a REET exemption for the transfer of SR 16 corridor transportation systems and facilities constructed under a public-private transportation initiative. As originally planned, this exemption enabled the transfer of the newly constructed second bridge at the Tacoma Narrows to the private operator of the bridge without incurring REET. More broadly, this exemption applies to any sale of transportation systems and facilities along the SR 16 corridor, including capital improvements and additions to the corridor’s infrastructure, roads, bridges, equipment, park and ride lots, transit stations, transportation management systems, and other related transportation investments. No taxpayers claim this exemption.
Carbonated Beverage Syrup Purchased Before June 1, 1991, Syrup Tax Exemption. Carbonated beverage syrup taxed at first possession prior to June 1, 1991, is exempt from syrup tax. The imposition of the carbonated beverage tax changed in 1991. Instead of taxation at first possession of the product, the tax applies to the wholesale transaction. This exemption avoids double taxation of the same product in 1991. This exemption no longer applies due to the shelf-life of syrup.
Second Narrows Bridge Property Tax Exemption. A property tax exemption is provided for SR 16 corridor transportation systems and facilities constructed. This exemption is intended to exempt any private property used in conjunction with construction and operation of the second Narrows bridge in Pierce County which spans Puget Sound. When adopted, the exemption was predicated upon the assumption that the bridge would be built with private funding until construction was complete and subsequently deeded to the state. This exemption was therefore intended to lower the overall cost of the project to enhance the likelihood of private investors funding the cost of construction. There is no private property in use on the second Narrows Bridge project. No taxpayers claim this exemption.
Student Loan Organizations Property Tax Exemption. Property owned by nonprofit organizations, exempt from federal income tax, that guarantee federal student loans or issue debt to provide student loans is exempt from property tax. No taxpayers claim this exemption.
Commuter Air Carrier Airplanes Property Tax Exemption. An aircraft owned and operated by a commuter air carrier is exempt from property tax for the calendar year if the owner has paid aircraft excise tax on the aircraft for that year. The aircraft excise tax for commuter air carrier airplanes is based on the gross maximum takeoff weight of the aircraft as follows:
JLARC reviewed this tax preference in 2019 and inferred the public policy objectives were to streamline and simplify tax reporting for qualifying commuter air carriers and provide an alternative to property tax for certain commuter air carriers if they pay an aircraft excise tax that is similar to the amount they would have paid in property tax. The report noted that, while the preference was streamlining and simplifying tax reporting for one beneficiary, the aircraft excise tax was not providing an alternative to property tax that results in a similar amount of tax paid.
Rural County and Community Empowerment Zone New Jobs Business and Occupation Tax Credit. A B&O tax credit is available for each new employment position created by a business located in a rural county engaged in manufacturing, computer-related programming and services performed by a manufacturer, research and development, or commercial testing laboratories. A rural county has an average population density of fewer than 100 persons per square mile or is smaller than 225 square miles. The credit is equal to:
The total statewide credit is limited to $7.5 million per fiscal year.
JLARC reviewed this tax preference in 2023 and recommended the Legislature continue but modify the preference. The report noted that, while the preference has been used by businesses that created jobs in eligible areas, participation was declining. The recommendations from JLARC included increasing the wage thresholds and credit amounts to reflect current economic conditions and encourage participation.
Manufacturers' Job Creation Sales and Use Tax Deferral. The Manufacturers' Job Creation Program, also referred to as the Invest in Washington Pilot Program, provides a sales and use tax deferral for two investment projects per calendar year. The deferral applies to sales and use taxes on up to $10 million in charges for the construction, expansion, or renovation of facilities and purchases of eligible machinery and equipment. One project must be in Eastern Washington and one project must be in Western Washington. Projects approved for a rural deferral cannot receive the deferral; and projects cannot receive multiple pilot program deferrals. The program expires January 1, 2026.
JLARC reviewed this tax preference in 2021 and recommended extending its expiration date because the preference is accomplishing its stated public policy objective of generating full-time jobs. JLARC also recommended clarifying whether jobs should be permanent or temporary full-time positions.
Nonprofit Hospitals Property Tax Exemption. Nonprofit hospitals are exempt from property taxes on real and personal property.
Nonprofit Cancer Treatment Clinics Property Tax Exemption. Property tax does not apply to real and personal property used by nonprofit cancer prevention, detection, or treatment facilities. The property tax exemption also applies to real and personal property used by a municipal hospital corporation for cancer prevention, detection, or treatment.
In 2022, JLARC conducted a combined review of the nonprofit hospital and cancer clinic property tax exemptions and recommended the Legislature should clarify the objectives of the preferences as both were enacted before the Legislature required a performance statement for new tax preferences.
Aerospace Industry Tax Incentives. Between 2003 and 2020, the Legislature created several tax preferences for aerospace businesses in Washington. The aerospace tax preferences include:
In 2024, JLARC conducted a combined review of the aerospace tax incentives and recommended the Legislature should clarify its expectations for the level of aerospace industry employment.
Financial Institutions' Income from Certain Commercial Airplane Loans Business and Occupation Tax Deduction. Out-of-state financial institutions that make loans to Washington-based commercial airlines for the purchase of commercial airplanes are eligible for a B&O tax deduction. The out-of-state lenders may deduct B&O tax on the interest and fees earned from such loans. The deduction does not apply to financial institutions physically located in Washington.
JLARC reviewed this tax preference in 2019, and recommended that the Legislature should clarify the intent and duration of the tax preference.
Nonprofit Outpatient Dialysis Facilities Property Tax Exemption. Nonprofit outpatient dialysis treatment facilities are exempt from property taxes on real and personal property.
JLARC reviewed this tax preference in 2021, and recommended that the Legislature should clarify the objectives of the preference by including a performance statement.
Commuter Air Carrier Airplanes Equipment Sales and Use Tax Exemption. Sales tax and use tax does not apply to sales or use of:
JLARC reviewed this tax preference in 2019, and recommended that the Legislature should clarify its expectations for this preference by adding a performance statement that clearly states the public policy objectives and metrics to determine whether the objectives have been met.
Commercial Airplane Parts Business and Occupation Tax Exemption. The sale of parts to the manufacturer of a commercial airplane is deemed to take place at the site of final testing or inspection under federal aviation regulation part 21 subpart F or G. Parts sold by Washington sellers for delivery to out-of-state locales are exempt from the state B&O tax if these criteria are met.
JLARC reviewed this tax preference in 2019, and recommended that the Legislature should review and clarify the preferential tax treatment provided to out-of-state manufacturers because it seems to run counter to the Legislature’s stated policy objective of reducing the cost of doing business for Washington compared to locations in other states.
Credit Unions. Credit unions chartered under Washington law are exempt from B&O tax.
Tax Preference Repeals. Beginning January 1, 2026, the following tax preferences are repealed or sunset:
Aircraft Excise Tax for Commuter Air Carrier Airplanes. The aircraft excise tax for commuter air carrier airplanes that qualify for a property tax exemption is increased as follows:
The aircraft excise tax rate for commuter air carrier airplanes expires January 1, 2036, at which time such airplanes will be subject to property tax.
Rural County and Community Empowerment Zone New Jobs Business and Occupation Tax Credit. The credit amount and wages and benefits thresholds for the rural county and community empowerment zone new jobs B&O tax credit are increased as follows:
DOR must annually adjust for inflation the wage and benefits threshold based on the consumer price index. DOR must complete the adjustment by November 25th of the year before the taxes are due.
Modifying the Expiration Date for Certain Tax Preferences. The expiration date of the manufacturers' job creation sales and use taxes deferral program is extended from January 1, 2026, to January 1, 2036.
A January 1, 2036, expiration date has been added for the following tax preferences:
The B&O tax exemption for commercial airplane parts is permanent and exempt from tax preference performance review.
Tax Preference Performance Statements. A tax preference performance statement is added or review metrics are modified for the following tax preferences:
Business and Occupation Tax on Storage Units. Beginning April 1, 2026, the rental or lease of individual self-service storage space at self-storage facilities, regardless of duration, is subject to B&O tax at the services and other activites classification at a rate of 1.5 or 1.75 percent.
The committee recommended a different version of the bill than what was heard. PRO: More revenue is needed to fund essential state programs. The bill adopts the recommendations of the Joint Legislative Audit and Review Committee by repealing tax preferences that are no longer meeting a public policy objective.
CON: The tax increases in this bill are bad for the state's economy and will ultimately increase costs to consumers. Repealing tax preferences puts businesses at an unfair disadvantage to other states.
OTHER: The tax preferences that this bill repeals support industries that create jobs and bring revenue to the state. The bill repeals tax preferences that the Joint Legislative Audit and Review Committee recommended be continued.