Washington revises new B&O tax increases for service-based businesses
TAX ALERT |
On Feb. 10, 2020, Washington Gov. Jay Inslee signed Senate Bill 6492, repealing the B&O tax surcharges on certain service-based gross receipts and advanced computing businesses enacted through House Bill 2158, the 2019 Workforce Education Investment Act, in favor of a simplified regime.
Washington legislators had gone back to the drawing board after receiving broad-based pushback on the tax increases originally effective Jan. 1, 2020. The surcharges were criticized for being too complicated to administer and likely not to raise as much revenue for higher education assistance as initially intended. For more information on last year’s legislation, please read our alert, Washington increases B&O tax for service-based businesses.
Senate Bill 6492 modifies the B&O tax surcharges as follows:
- Repeals the 20% surcharge on designated service-based businesses and the surcharges on advanced computing businesses enacted in 2019, effective from Jan. 1, 2020
- Increases the current 1.5% service and other activities B&O tax rate on service-based gross receipts to 1.75% for all businesses with gross income of one million dollars or more (except hospitals and large advanced computing businesses), effective April 1, 2020
- Maintains the current 1.5% service and other activities B&O tax rate on service-based gross receipts for hospitals, large advanced computing businesses, and businesses with gross income of less than one million dollars
- Imposes a new 1.22% surcharge on the gross income of advanced computing businesses with more than $25 billion of worldwide revenue, capped at $9 million annually, applicable to business activity occurring on or after April 1, 2020. Additionally, due to the extent of the revisions, taxpayers should be cognizant of any new guidance or corrective legislation which may further amend the surcharge.
Businesses with gross income of less than one million dollars may only report under the 1.5% B&O tax rate if they are unaffiliated or their affiliated group reports less than one million dollars of aggregate gross income in the preceding calendar year.
Legislators anticipate Senate Bill 6492 will reduce the number of businesses affected by the original surcharges from about 90,000 to 15,000. Business industries with service-based gross receipts include, but are not limited to, healthcare, financial services, information technology, telecommunications, utilities, engineering, architectural, legal and broadcasting.
Ultimately, Senate Bill 6492 is intended to generate increased B&O tax revenue by simplifying the administration of an increased rate on service-based businesses and advanced computing businesses.
Any business with nexus in Washington, particularly service-based businesses and large technology companies, should speak with their tax adviser and determine if they will owe additional B&O tax on business activities based on these changes. Washington remote taxpayers should also consider that the sales threshold to establish nexus for both the B&O tax and the state sales and use tax is $100,000.