Recap of $1B+ in new taxes passed by the Legislature
During this year’s legislative session the Washington State Legislature passed several tax bills that will increase total revenues by $1.1 billion. Here’s a recap, based on an analysis by the Washington Research Council:
B&O tax increase on many services
Bill E2SHB 2158 imposes a surcharge of 20% on top of current B&O taxes for businesses in certain sectors in the “other business or service activities” category beginning Jan. 1, 2020. This includes many professions involved in the construction industry, including architects, engineers, environmental consultants, legal services, insurance carriers, accounting and more. Rates will increase from 1.5% to 1.8%.
The bill states that these professions were selected for the increase because these are “professions that depend on higher education”, and the revenue is earmarked for higher education via the new Workforce Education Investment, funding things like an expansion of the State Need Grant and additional STEM slots at public universities.
Advanced computing businesses are bit with even higher B&O tax increases, 33.3% or 66.7% depending on the size of the firm.
The bill includes language that any ambiguity or question about whether the provisions apply to a particular business “should be construed in favor of application of the surcharges” through Dec. 31, 2021. This is an unusual standard not applied to other general tax sources.
Real estate excise tax (REET) increase
Under current law, the real estate excise tax (REET) rate is a flat 1.28% of the sales price of real property. Bill ESSB 5998 reduces the tax for some taxpayers and increase it for others. Beginning Jan. 1, 2020, the rate will be 1.1% on the portion of the selling price that is $500,000 or less; 1.28% on the portion that is between $500,000 and $1.5 million; 2.75% on the portion between $1.5 million and $3 million; and 3% on the portion that is more than $3 million. Every four years, the selling price thresholds will be adjusted to the lesser of the growth in the consumer price index for shelter or 5%.
Payroll tax increase for long term care
Beginning Jan. 1, 2022, bill 2SHB 1087 imposes a payroll tax of 0.58% of wages to fund a new long-term care benefit (up to $36,500 in lifetime benefits), covering things such as skilled nursing care, meal preparation, meal delivery, environmental modifications (e.g. building a wheelchair ramp), adult family homes, and home health services.
Hazardous substance tax increase
Currently, hazardous substances are taxed at a rate of 0.7% of wholesale value. Under bill ESSB 5993, beginning July 1, 2019, the rate will be $1.09 per barrel for petroleum products. Every year, the per barrel rate will be adjusted by the implicit price deflator for nonresidential structures. It is estimated the tax will increase the price of gasoline by about 1 cent per gallon. The revenue will fund capital projects, including hazardous waste clean-up and water protection programs via the MTCA (Model Toxics Control Act) program.
Non-resident sales tax
Bill ESSB 5997 changes the current sales tax exemption for nonresidents to a refund program. Under the bill, nonresidents making purchases in Washington will pay state and local sales taxes to the seller. The following calendar year, these buyers may request a refund of sales taxes paid from the Department of Revenue.
Tax increase on large financial institutions
Bill SHB2167 imposes an additional tax of 1.2% for financial institutions with annual new income of at least $1 billion, increasing their tax rate from 1.5% to 2.7% (on top of the impact of the B&O tax increase). The bill will affect about 20 firms (none headquartered in Washington State), and there is some concern the bill may violate the interstate commerce clause of the Constitution.
The bill was particularly controversial due to the lack of process with which it was passed: The bill was made public two days before the end of the legislative session and passed the House on the same day and the Senate two days later.
International investment management tax rate
Bill ESB 6016 narrows eligibility for the preferential B&O tax rate (0.275 percent) for international investment management services to companies with more than 25 percent of their employees located in Washington and that meet other criteria.
Travel agents and tour operators
Bill ESSB 6004 increases the B&O tax rate on travel agents and tour operators that have annual taxable amounts of more than $250,000 from 0.275% to 0.9% beginning July 1, 2019.
Online/remote sellers tax
In 2018, the U.S. Supreme Court held that states can require out-of-state sellers to collect and remit sales taxes sold to their residents (Wayfair decision). Bill SSB 5581 makes changes to state sales tax law to conform with the Supreme Court’s decision, and it makes changes to other tax areas (including the B&O tax) for consistency.
Vapor products tax
Bill E2SHB 1873 imposes a tax on vapor products of $0.09 per milliliter of solution for accessible containers of solution that are larger than five milliliters and $0.27 per milliliter of solution for all other vapor products.
Click here to see the full analysis by the Washington Research Council regarding these tax changes.
For questions or comments, contact AGC Chief Lobbyist Jerry VanderWood, 360.352.5000.