22 May 2025 Washington governor signs laws to expand sales tax base and increase business and occupation tax rates
On May 20, 2025, Washington Governor Bob Ferguson signed several tax-related bills into law. These changes:
Effective January 1, 2026 through December 31, 2029, HB 2081 imposes a new 0.5% surcharge on businesses with Washington taxable income exceeding $250 million. The new surcharge is "in addition to all other taxes imposed." Exemptions from the surcharge include, but are not limited to, the following:
HB 2081, for purposes of the B&O tax investment income deduction, clarifies the meaning of "incidental to the main purpose of the business." Effective January 1, 2026, "investments" are considered incidental if the total worldwide gross income from the investments is less than 5% of the business's total worldwide gross income of the business annually. A full deduction, regardless of whether investments are incidental to the main purpose of a business, is available for nonprofit organizations, collective investment vehicles, retirement accounts, and family investment vehicles. Deductions are not be allowed for amounts (1) derived from investments of persons who are invested in a collective investment vehicle but not themselves a collective investment vehicle; (2) received by persons as compensation for services rendered to the collective investment vehicle and/or the collective investment vehicle's investors; (3) derived from sources other than investments by a collective investment vehicle; or (4) amounts derived from factoring. The Washington Department of Revenue is required to adopt implementing rules. SB 5794 repeals or allows to sunset a handful of B&O tax preferences, including the international services B&O tax credit. SB 5794 also repeals the B&O tax exemption for state-chartered credit unions that merge with or acquire a regulated bank and subject them to a 1.2% B&O tax rate beginning October 1, 2025. Effective April 1, 2026, SB 5794 repeals the exemption for renting or leasing individual storage space at self-service storage facilities. Such rental or leasing activity is subject to B&O tax at applicable Service and Other Activities tax rate of either 1.5%, 1.75%, or 2.1% depending on the total amount of taxable income. Governor Ferguson vetoed the section of the bill that would have eliminated the B&O tax deduction for interest on real estate loans so the exemption remains intact. HB 2020 creates a new 3.1% B&O tax rate for payment card processors and allows them to deduct certain fees retained by persons other than the processor from the measure of the B&O tax. Deductible fees retained by persons other than the processor include interchange fees, network fees, and portions of fees retained by other processors. The new tax does not apply to payment card processing activities involving credit, debit, or prepaid card transactions in which:
OR
Payment card processing activities exempt from the new rate are subject to the rate applicable for the Service and Other Activities B&O tax classification. The legislature made clear it was addressing the B&O taxation of payment card processors' activities on a prospective basis and that it "does not intend for inferences as to the taxability of prior periods to be drawn from the passage of this act." SB 5814 expands the sales tax base to additional services, including:
SB 5814 creates an exclusion from sales tax for telehealth and telemedicine services and for sales of specified services between members of an affiliated group, including IT services, custom website development, data processing and entry, advertising, security and investigation services. SB 5813 increases the capital gains tax rate on long-term capital gains exceeding $1 million to 9.9%, beginning January 1, 2025. The tax rate on capital gains of $1 million or less remains at 7%. The current $270,000 standard deduction also remains unchanged. On May 20, the governor also signed into law other bills containing tax-related provisions. These bills make the following changes. HB 2077 imposes a new excise tax on the banking and sale of surplus zero-emission vehicle credits under the state's clean vehicles program. SB 5801 increases the tax rates on fuel and special fuels effective July 1, 2025, and provides for annual increases starting July 1, 2026 for fuel and July 1, 2028 on special fuel. SB 5801 also increases various taxes and fees on motor vehicles, luxury taxes of vehicles and aircraft, recreational vessels, rental cars, peer-to-peer car sharing and electric vehicles. The reclassification of the services listed in SB 5814 will subject them to the Retailing B&O tax and sales tax, rather than the Service and Other Activities B&O tax, which changes the sourcing rules applicable to those services. It also raises new questions about how resale exemptions apply and whether use tax may be due. For activities now defined as a retail sale with transactions sourced to Washington, the seller's B&O tax rate applicable to those transactions will decrease significantly. Finally, the provisions imposing sales tax on internet-based advertising, while exempting print and other physical advertising, will most likely create legal challenges under the Internet Tax Freedom Act. While HB 2081 clarifies some aspects of the B&O taxation of investment income, the bill leaves unanswered questions of how investment income is apportioned to Washington and who is deemed to be engaging in business and subject to the tax. While the imposition of the new 0.5% tax rate surcharge for any company with more than $250 million of qualifying Washington taxable income in a calendar year could create a significant additional amount of tax liability, taxpayers should carefully review the many exclusions from the surcharge, including those related to specific types of manufacturing activities and revenue from selling food and prescription drugs. HB 2018's 7.5% tax rate surcharge on advanced computing activities is more than a 600% rate increase. This surcharge applies to business organizations and their affiliates that have more than $25 billion of worldwide revenue and perform advanced computing activities, including any affiliate in the group that designs or develops computer software or hardware. The tax has been interpreted broadly to apply to more taxpayers than may have been originally intended due to expansive application by the Department of Revenue of the term "designing or developing computer hardware or software." SB 5794 makes the long-term rental of mini storage units subject to the Service and Other B&O tax. The Washington Supreme Court ruled the tax on long-term rentals of real estate violates the state constitution in the 1960 case Apartment Operators Association of Seattle v. Schumacher.1 If the imposition of B&O tax on mini storage rentals is not challenged in court, the legislature may in the future attempt to extend the B&O tax to additional types of real estate, including office space and residential housing. Operators Association of Seattle v. Schumacher1. If the imposition of B&O tax on mini storage rentals is not challenged in court, the legislature may in the future attempt to extend the B&O tax to additional types of real estate, including office space and residential housing.
Document ID: 2025-1125 | ||||||||
