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.
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.
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.
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:
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.
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.
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.
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.
Credit Unions. . Federal and state-charted credit unions are exempt from B&O tax.
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.
Tax Preference Repeals. Beginning January 1, 2026, the following tax preferences are repealed or sunset:
State-Chartred Credit Unions. Beginning October 1, 2025, if a state-chartered credit union merges with or acquires a bank regulated by the DFI, the credit union is no longer exempt from the B&O tax. The B&O tax will be 1.2 percent of the gross income of the state-chartered credit union.
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 activities 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.