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December 21, 2022

Washington Tax Reform Work Group recommends replacing business and occupation tax with Texas-style margins tax

  • The new margins tax could begin for gross income earned in 2027 and thereafter.
  • The margins tax would be broad-based and could be imposed at an estimated 2.95% rate.
  • The legislature will have to address numerous implementation and transition details if it takes up this recommended proposal.

On December 13, 2022, the Washington Tax Structure Work Group (Workgroup) recommended introducing legislation during the 2023 session to repeal the state's business and occupation (B&O) gross receipts-based tax and replacing it with a margins tax modeled after the Texas franchise tax. Under the recommendation, the B&O tax could be eliminated on January 1, 2027, with the margins tax in effect for gross income earned in 2027 and thereafter.


The Workgroup was established by the Washington legislature in 2017 and consists of nine voting members (two Republicans and two Democrats from both legislative chambers and an appointee from the Governor) and three non-voting members representing the Department of Revenue, the Association of Washington Cities and the Washington State Association of Counties. It has spent the last five years studying the state's current tax structure and alternative tax systems that would enhance the tax regime's "[e]quity, adequacy, stability, and transparency," while preserving revenue neutrality.1 Though the Workgroup considered multiple options, it voted 6 to 1 on December 13 to recommend replacing the B&O tax with a margins tax.2

Recommended margins tax

While legislative language has not been proposed and most of the details of implementing a margins tax replacement are still being developed, the Workgroup's proposal includes the general principles for the new tax regime. The recommended margins tax regime would:

  • Apply a single default 2.95% rate based on Washington Department of Revenue calculations to maintain revenue neutrality
  • Apply on a combined-group basis with the inclusion of all entity types in a single group, applying the Finnigan3 method of apportionment
  • Apply the same nexus standards imposed under the current B&O tax (i.e., economic nexus provisions)
  • Be calculated using worldwide gross income under Washington's existing definition, but with all deductions, exclusions and exemptions eliminated other than those deemed necessary for legal compliance or administration
  • Determine the pre-apportioned margin by deducting the greatest of the following:
    • Cost of goods sold based on federal reporting
    • Total compensation paid based on federal reporting
    • 30% of taxable income
    • $1 million
  • Apportion the resulting taxable margin to Washington using a single sales factor formula
  • Repeal most currently available B&O credits
  • Allow limited carryforward of existing B&O credits

Additionally, as discussed by the Workgroup, the margins tax regime would:

  • Be paired with a new vendor compensation credit for retailers under the existing sales tax
  • Continue to impose various B&O tax rate surcharges
  • Tax in-state manufacturers with no Washington-sourced sales on the value of their manufactured goods under a special provision similar to the current B&O tax methodology
  • Not apply to companies paying the public utility tax
  • Include an elective alternative "EZ" tax filing methodology for taxpayers with under $5 million in global gross receipts, which would apply at a 1.75% rate


While the Workgroup acknowledges some businesses will pay more and some will pay less tax when moving from the B&O tax to a margins tax, it has not provided detailed projections of the industry-by-industry impact. Some industries receive significant tax incentives or are subject to preferential B&O rates, and their overall tax obligations may increase. Businesses that have total receipts under the $1 million deduction threshold would owe no margins tax where they may be currently paying B&O tax.

Once the measure is formally introduced, the legislature will have to address significant transition, administration and policy issues. Taxpayers currently subject to the B&O tax should consider participating in the legislative process when the legislature considers the Workgroup's recommended margins tax.

EY will monitor this development and issue Tax Alerts as warranted.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation Group
   • Darcy Kooiker (
   • Scott Roberti (
   • David Sawyer (

Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor


1 2021 S.B. 5092 § 137(2)(d)(vi) (enacted May 18, 2021).

2 Tax Structure Work Group, Draft Proposal: Replace the Business and Occupation Tax with a Margin Tax (Dec. 9, 2022),

3 Under the Finnigan approach, the numerator of the sales factor will include all sales sourced to Washington regardless of the separate entity to which those sales are attributed.