May 14, 2019 Washington legislature approves B&O tax surcharge on over 40 services, rate increase on certain financial institutions, other changes On May 21, 2019, Washington Governor Jay Inslee signed into law bills HB 2167, HB 2158, SB 6016 and SB 5998, which are discussed in this Alert. The Washington legislature has approved, and sent to Governor Jay Inslee, bills that would increase taxes on various businesses. The bills would impose an additional business and occupation (B&O) tax on specified financial institutions, impose B&O tax surcharges on over 40 services (with a higher surcharge imposed on select advance computing businesses), narrow the qualifications for the B&O preferential tax rate for international investment management companies, and establish a graduated real estate excise tax. A summary of these changes follows. B&O tax rate increases and surcharges Rate increase for specified financial institutions Beginning January 1, 2020, HB 2167, if enacted, would impose an additional 1.2% B&O tax (in addition to the current rate of 1.5%) on the gross taxable service and other income of specified financial institutions. A "specified financial institution" is defined as a financial institution that is a member of a consolidated financial institution group that reported on its consolidated financial statement for the prior calendar year annual net income of at least $1 billion, not including net income attributable to noncontrolling interests.1 If specified financial institutions are no longer required to file a consolidated financial statement, a specified financial institution means any person that was subject to the additional tax in at least two of the prior four calendar years. A "financial institution" is defined as:
B&O tax surcharges Beginning with business activities occurring on or after January 1, 2020, HB 2158, if enacted, would impose B&O tax surcharges — at rates of 20%, 33.33% and 66.66% — on income from certain services. A 20% workforce education investment surcharge applicable to business activities taxed under RCW 82.04.290(2), before application of any tax credits, would be imposed on "specified persons." A "specified person" is any person primarily engaged within Washington in any combination of over 40 enumerated activities. Some of the activities to which the surcharge would apply include:
For persons that report under more than one tax classification, the surcharge would only apply to business activities taxed under RCW 82.04.290(2). For purposes of the surcharge, a person is primarily engaged within Washington in any combination of the enumerated activities if more than 50% of the person's cumulative gross amount reportable (i.e., total value of products, gross proceeds of sales, and gross income of the business, reportable to the revenue department before application of any tax deductions) under this chapter during the entire current or immediately preceding calendar year was generated from engaging in one or more of these activities. Additionally, the higher surcharges would be imposed on select advance computing businesses (i.e., a person that is a member of an affiliated group with at least one member of the affiliated group engaged in the business of advanced computing). The surcharge would be 33.33% for an affiliated group with worldwide gross revenue of more than $25 billion but not more than $100 billion, during the entire current or immediately preceding calendar year. The surcharge would increase to 66.66% for worldwide gross revenue over $100 billion. The combined surcharge paid by all members of an affiliated group could not be less than $4 million or more than $7 million annually. The term "advanced computing" is defined as "designing or developing computer software or computer hardware, whether directly or contracting with another person, including modifications to computer software or computer hardware, cloud computing services, or operating an online marketplace, an online search engine, or online social networking platform." Lastly, the Legislature made clear that it "intends the provisions of this act to be applied broadly in favor of application of the surcharges," and recommended that any provision of the act deemed ambiguous by a court, the tax appeals board, or any other judicial or administrative body "be construed in favor of application of the surcharges." International investment management companies Effective July 1, 2019, SB 6016, if enacted, would narrow the qualifications for the international investment management services (IIMS) preferential B&O tax rate (0.275%, instead of the general service rate of 1.5%) by adding additional requirements. As revised, a person would be engaged in the business of providing qualifying IIMS if:
An affiliate of a person engaged in the business of providing qualifying IIMS is deemed to be providing qualifying IIMS if certain qualifications are met. SB 6016 would add a clawback provision. Under the clawback provision, a qualifying IIMS that no longer met the Washington employment eligibility requirement, would have to pay an amount equal to the lesser of:
This amount would be immediately due and payable. Further the Washington Department of Revenue would be required to assess interest, but not penalties, on the amount due under this provision. SB 6016 would also expand and extend the sales and use tax exemption for the purchase of standard financial information by a qualifying international investment management company (QIIMC). The exemption would be extended through July 1, 2031 (from July 1, 2021), and expanded to include the sale of standard financial information to a QIMMC's affiliate. Real estate excise tax (REET) rate changes The State of Washington and various localities impose the REET on the transfer of Washington real property, including the transfer of controlling interests in entities that own Washington real property. The combined State and local REET rate in most areas is 1.78%, with the State component equal to a flat tax rate of 1.28%. SB 5998, if enacted, would establish new, graduated REET State rates, which would replace the current flat rate of 1.28%. Beginning January 1, 2020, the REET would be imposed as follows: (1) 1.1% if the selling price is $500,000 or less; (2) 1.28% on the portion of the selling price over $500,000, but less than or equal to $1.5 million; (3) 2.75% on the portion of the selling price over $1.5 million, but less than or equal to $3 million; and (4) 3% on the portion of the selling price that exceeds $3 million. Timberland and agricultural land would remain taxable at 1.28%. In 2022 and every fourth year thereafter, the selling price thresholds would be adjusted to reflect the lesser of 5% or the growth in the consumer price index. The thresholds would not be adjusted if the growth is zero (or below). SB 5998 would also increase the aggregation period for transfers of economic interests in real estate entities. The REET would apply to any transfer or acquisition of a "controlling interest" (i.e., 50% or more) in an entity with Washington real property by aggregating transactions made within a rolling 36-month period (currently, the aggregation period is 12 months). Lastly, recognizing that some taxpayers may attempt to avoid or reduce REET liabilities, the bill would authorize the revenue department to disregard the form of transaction(s) and determine proper tax treatment based on substance, considering several factors. Implications The B&O tax rate increase on certain financial institutions, as well as the B&O tax surcharges on over 40 services would be in addition to taxes already imposed. Taxpayers should review the list of activities subject to the B&O tax surcharges to determine whether they will be liable for additional Washington state taxes. Taxpayers qualifying as an international investment management services business should review the changes to the qualifications, as they have been significantly narrowed to limit the number of taxpayers that will qualify for the preferential rate. Accordingly, many taxpayers that previously qualified for the preferential rate will no longer qualify under the revised provisions. Finally, buyers and sellers of Washington real property (whether directly or indirectly through legal entities) should take note of the change to graduated REET state rates, which may result in significant increases in REET liability on real estate transactions. ———————————————
——————————————— 1 The terms "net income" and "noncontrolling interests" have the same meaning as used in the consolidated financial statement. | |||||||||||||
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