The 2019 Washington Legislative Session adjourned on April 28, 2019, with the legislature approving a $52.4 billion two-year state operating budget. The budget includes a variety of excise tax increases and other changes.
While many of these bills haven’t yet been signed by Washington State Governor Jay Inslee, it’s anticipated that all bills will be signed into law and enacted as described below.
Here’s an overview of the Washington State excise tax changes.
Business & Occupation Tax Increases
Services and Other Activities
Businesses subject to the Service and Other Activities Business and Occupation (B&O) tax currently pay tax on 1.5% of the businesses’ taxable receipts, after considering apportionment. However, House Bill (HB) 2158 states that, effective January 1, 2020, the Service and Other Activities B&O tax rate will increase in the following ways:
- 1.8% for approximately 43 select professional service businesses, including architecture and engineering services, legal services, data processing, software publishing, insurance carriers, telecommunication services, and more.
- 2% on income from services and other activities of advanced-computing affiliated groups with revenue of more than $25 billion, but not exceeding $100 billion.
- 2.5% on income from services and other activities of advanced-computing affiliated groups with revenue of more than $100 billion.
Advanced-Computing Affiliated Groups
A group is considered to be an advanced-computing group if it designs or develops computer software or computer hardware, whether directly or through a contract with another entity.
These services could include the following:
- Modifying computer software, computer hardware, or cloud-computing services
- Operating an online marketplace, online search engine, or online social-networking platform
Specified Financial Institutions
Financial institutions are currently subject to the 1.5% Service and Other Activities B&O tax. Effective January 1, 2020, Substitute House Bill (SHB) 2167 stipulates the B&O tax rate for specified financial institutions will increase to 3%.
Specified financial institution is a financial institution that’s a member of a consolidated financial institution group that reported annual net income of at least $1 billion on its consolidated financial statement for the previous calendar year.
Travel Agents and Tour Operators
Currently, travel agents and tour operators pay B&O tax under a preferential tax rate of 0.275%. However, effective July 1, 2019, Senate Bill (SB) 6004 stipulates that this rate increase to 0.9% for those with annual taxable revenue in excess of $250,000 after considering apportionment.
International Investment Managers
Certain international investment management businesses currently pay B&O tax under a preferential tax rate of 0.275%. Effective July 1, 2019, Engrossed Senate Bill (ESB) 6016 stipulates the B&O tax rate for most international investment management businesses will increase to 1.8%. Limited qualifying international investment managers, however, will be eligible for the current preferential rate.
However, if a qualifying international investment manager fails to maintain more than 25% of its employees in Washington State, the business will lose the ability to pay at the preferential rate. The Washington State Department of Revenue (DOR) will then require the business pay the amount equal to the economic benefit of the preferential rate, plus interest, for the shorter of the following periods:
- The current calendar year plus the previous nine calendar years
- Until July 1, 2019
Real Estate Excise Tax Rate Changes
Graduated Real Estate Excise Tax Rates
Currently, the Washington State portion of the real estate excise tax (REET) rate is 1.28%. Beginning January 1, 2020, Engrossed Substitute House Bill (ESHB) 5998 stipulates REET will be imposed at the following state rates—though additional local rates may apply:
- 1.1% if the selling price is equal to or less than $500,000
- 1.28% on the portion of the selling price that’s greater than $500,000 but equal to or less than $1.5 million
- 2.75% on the portion of the selling price that’s greater than $1.5 million but equal to or less than $3 million
- 3% on the portion of the selling price that’s greater than $3 million
Selling Price Thresholds
Beginning January 1, 2022, and every four years thereafter, the DOR may increase the selling price thresholds to reflect the lesser of 5% or the growth in the Consumer Price Index for Shelter over the past four years.
Timberland and Agricultural Rates
The current 1.28% REET rate will continue to apply to timberland and agricultural land.
In the case of controlling interest transfers, the bill modifies the term sale, for the purpose of determining if the REET applies. Rather than applying to a 12-month period, the REET applies to the transfer or acquisition within any 36-month period of a controlling interest in any entity with interest in real property in the state.
To track the new controlling interest provisions, legal entities that are required to file annual reports with the Washington Secretary of State must disclose transfers of one-sixth or more of the entity. If an entity fails to report this information and it’s determined that REET is due, the entity will be liable for the REET due plus a 50% evasion penalty.
Retail Sales Tax Changes
Nonresident Sales Tax Exemption
Historically, retail sales tax hasn’t applied to purchases of certain goods made by nonresidents for use outside of Washington State. The term nonresidents includes persons from other states, possessions, or territories of the United States, Canadian provinces, or Canadian territories that don’t impose a sales tax, use tax, value-added tax, or similar tax at a rate of 3% or more. To make a tax-exempt purchase, the nonresident buyer must typically provide the seller with a valid picture identification or an authorized exemption certificate.
However, effective 90 days from the date of adjournment of the session, ESHB 5998 converts the nonresident sales tax exemption to a remittance program. That means nonresidents must pay Washington sales tax at the time of purchase and request a refund from the state. However, the following conditions apply:
- Taxpayers may only request a refund for the immediately preceding calendar year
- The refund requested must be $25 or more
- A nonresident may only make one refund request per calendar year
Other Important Tax Changes
The following additional changes were also introduced in the 2019 Washington State Legislative Session:
- Excise tax returns. Effective January 1, 2021, HB 1059 changes the due date for annual excise tax returns from January 1 to April 15.
- Timber industry B&O rates. HB 1324 authorizes a 20-year extension of a more competitive B&O treatment for the timber industry. The bill takes effect 90 days after adjournment of the session in which the bill is passed. However, the bill is null and void unless funded in the budget.
We’re Here to Help
For more information about how your business could be affected by the 2019 Washington State Legislative Session, visit our tax planning guide, contact your Moss Adams tax professional, or email firstname.lastname@example.org.