December 21, 2022
Washington Tax Reform Work Group recommends replacing business and occupation tax with Texas-style margins tax
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:
Additionally, as discussed by the Workgroup, the margins tax regime would:
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.
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), https://static1.squarespace.com/static/5fc92c4eb6a6dd36b144ba73/t/63937c1aa733694401be9855/1670609946437/E0235-3+Margin+Tax_12092022.pdf.
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.