On February 10, 2020, Governor Jay Inslee signed into law SB 6492, which repeals the state's workforce education investment surcharge enacted in 2019. This surcharge applied to a broad base of services subject to the state's business and occupation (B&O) tax. The new law replaces this surcharge with a B&O tax rate increase on these services. The surcharge imposed on advance computer services was modified, but still remains in place.

The repeal of the B&O surcharge is retroactively effective to January 1, 2020. The tax rate increase and the modified surcharge on advance computer services take effect on April 1, 2020.

Background

Legislation (HB 2158) enacted in 2019 and effective on January 1, 2020, imposed B&O tax surcharges on gross income derived from different categories of service businesses at rates of 20%, 33.33%, and 66.66%. The 20% surcharge applied to 43 categories of service activity businesses, while the higher 33.33% and 66.66% surcharges applied to select advance computing businesses (with the higher rate applied based on higher levels of worldwide gross revenue). (See Tax Alert 2019-0922).

Increased B&O tax rate and modified surcharge

SB 6492 raises the baseline B&O tax rate for service activities from 1.5% to 1.75% of gross income. The tax rate increase, however, does not apply to:

• Hospitals
• Businesses with less than $1 million in gross income (for affiliated persons, the $1 million is based on the aggregate gross income of the businesses subject to this tax)¹
• Advanced computer services (which continue to be subject to the surcharges)

These excepted services remain subject to a 1.5% B&O tax rate.

In addition, SB 6492 replaces the two-tier surcharge on advance computer services with a single surcharge equal to 1.22% of gross income. Beginning April 1, 2020, the new surcharge applies to advance computer service businesses with gross worldwide income over $25 billion. The surcharge is capped at $9 million (unlike the prior surcharge, which had a $4 million minimum and a $7 million cap). The surcharge must be paid on a quarterly basis. Lastly, SB 6492 amends the definition of "select advance computing business" to exclude financial institutions.

Implications

While SB 6492 repeals the surcharge on many service activity businesses, it does not affect the additional 1.2% B&O tax imposed on specified financial services (see, Wash. Laws 2019, HB 2167). The constitutionality of this tax, however, is being challenged.²

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ENDNOTES

¹ For a person claiming to be subject to the 1.5% rate for having less than $1 million in gross income, the Washington Department of Revenue (Department) may require the person to identify all its affiliates, including their Department tax registration number or unified business identifier number, or to certify that it is not affiliated with any other person. If the Department establishes that a person with the intent to evade the additional tax due under the 1.75% B&O tax rate failed to provide the Department with complete and accurate information, that person will be ineligible for the 1.5% B&O tax rate for the current and following four calendar years.

² See Washington Bankers Ass'n et al. v. Wash. Dept. of Rev., No. 19-2-29262-8 SEA (Wash. Superior Ct., King County).