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Washington establishes surcharge on service businesses

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Washington Gov. Jay Inslee recently signed into law House Bill 2158, which imposes an additional surcharge on businesses reporting under the service and other activities Business and Occupation (B&O) tax classification.1 Specifically, the surcharge is applied in a three-tiered system based upon service type which increases the applicable 1.5% B&O tax rate by 0.30%, 0.50%, or 1% depending on the applicable tier. Ultimately, the imposition of this additional surcharge on service businesses will increase B&O tax exposure by 20% for tier 1 entities, 33.33% for tier 2 entities, and 66.67% for tier 3 entities. Further, other legislation imposes additional B&O taxes on certain specified financial institutions2 and international investment managers.3

Washington B&O tax Washington’s B&O tax is generally imposed on gross receipts attributable to business activities conducted within the state, without any deduction for the costs of doing business. The B&O tax rate varies depending on the classification of a taxpayer’s business activities. For example, businesses reporting under the retail classification are taxed at a rate of 0.471% 4, while manufacturers, wholesalers and distributors are taxed at a rate of 0.484%.5 Currently, businesses reporting under the service and other activities classification are taxed at a rate of 1.5%.6

Workforce education surcharge The recent legislation acknowledges the need to invest in Washington students so that they gain the necessary skills to fill anticipated job openings. Beginning Jan. 1, 2020, Washington will impose what is termed a “workforce education surcharge” on select businesses reporting under the service and other activities classification. The surcharge will be based on a three-tiered system of graduated rates.

Tier 1 The tier 1 surcharge applies to more than 40 types of service business activities, including architecture and engineering services, legal services, insurance carriers, financial services, medical services, software publishing, scientific research, electronic shopping, telecommunications services, and other services.7

Specifically, the surcharge is imposed on selected businesses based on their primary business activity.8 An activity is considered to be “primary” if more than 50% of the cumulative gross income of the business was generated by such activity in the entire current year or preceding calendar year.9 The surcharge is equal to 20% of the total taxes payable under the service and other activities B&O tax rate (an increase of 0.3% to the current tax rate, from 1.5% to 1.8%). 10

Tier 2 Tiers 2 and 3 apply to advanced computing businesses, with the tiers differentiated by the level of worldwide gross revenue thresholds.11 Specifically, “advanced computing” is defined as “designing or developing computer software or computer hardware, whether directly or contracting with another person, including modifications to computer software or computer hardware, cloud computing services, or operating an online marketplace, an online search engine, or online social networking platform.”12 An annual $4 million minimum surcharge and a $7 million cap apply to amounts paid by an affiliated group with at least one member engaged in the business of advanced computing and that has worldwide gross revenue of more than $25 billion during the current or preceding calendar year.13

Tier 2 of the surcharge is imposed on advanced computing businesses that have worldwide gross revenue of more than $25 billion but less than $100 billion. Instead of the 20% surcharge, the surcharge is 33.33% of the total taxes payable under the service and other activities B&O tax rate (an increase of 0.5% to the current tax rate, from 1.5% to 2%).14

Tier 3 Tier 3 of the surcharge is imposed on advanced computing businesses that have worldwide gross revenue of more than $100 billion. Instead of the 20 percent surcharge, the surcharge is 66.66% of the total taxes payable under the service and other activities B&O tax rate (an increase of 1% to the current tax rate, from 1.5% to 2.5%).15

Other service B&O tax increases Effective Jan. 1, 2020, specified financial institutions will pay an additional tax of 1.2% of gross income taxed under the service and other activities B&O tax classification.16 A “specified financial institution” is a financial institution (or a company owned by a financial institution) that is a member of a “consolidated financial institution group” reporting at least $1 billion in annual net income on its consolidated financial statement filed with the Federal Financial Institutions Examination Council for the previous calendar year.17

Effective July 1, 2019, legislative definitional changes will likely reduce the number of international investment managers qualifying for a reduced B&O tax rate of 0.275% (rather than 1.8%).18 Notably, “qualifying international investment managers” will retain the 0.275% rate. However, if a qualifying international investment manager fails to meet specified requirements, including maintaining more than 25% of its employees in Washington, the taxpayer will no longer qualify for the preferential rate. Thereafter, the Department will require payment of an amount equal to the entire economic benefit of the lower rate plus interest (but not penalties) going back to the shorter of: (a) the current calendar year plus the previous nine calendar years; or (b) July 1, 2019. 19

Commentary Gov. Inslee recently showed his appreciation to the Washington legislature for their efforts by tweeting, “Thank you to #waleg for furthering our #CareerConnectWA efforts by passing H.B. 2158, which invests in workforce education to prepare our students for their careers in Washington’s job force.” Notably, H.B. 2158 sparked strong debate between Washington Republicans and Democrats, and was narrowly passed by the House 52-45 and the Senate 25-22, along party lines. Republicans strongly opposed the new service and other activities surcharge, which they anticipate will increase taxes by about $1 billion and impact 90,000 business in the state. Republican representative Luanne Van Werven was quoted as saying, “[i]t defies logic that we are asking these businesses to expand a future workforce, but we are taxing them so they won’t be able to expand.”20

By contrast, Washington Democrats viewed the passing of H.B. 2158 as a victory for the state, especially in light of the legislature’s failure to enact a controversial capital gains tax that was originally included in H.B. 1109. The original version of H.B. 1109 permitted the enactment of a capital gains tax to accommodate approved appropriations by the Washington Department of Revenue. However, this provision did not make it to the signed version of the bill.

The addition of a surcharge to the existing B&O tax structure will dramatically affect the tax exposure of service businesses, particularly advanced computing companies, such as Microsoft, Amazon, Google, and Facebook. While having a $7 million ceiling may shield some advanced computing businesses from drastic tax increases, the $4 million floor will undoubtedly increase taxes for some Washington advanced computing businesses. However, the $4 million minimum could result in future legal disputes, as there is some uncertainty in the tax community regarding actual application of the new law. For example, query whether Washington could constitutionally impose a $4 million minimum surcharge on a Chinese-affiliated group with $25 billion in worldwide gross income, but only $1 million in Washington gross income. 

The bill’s targeting of so-called “advanced computing businesses” is somewhat surprising given Amazon’s recent public search for a new location for its second headquarters instead of substantially expanding its presence in Washington state. However, given the state’s continued failure to enact a capital gains tax, it is likely that state legislatures viewed the service and other activities surcharge targeted at advanced computing businesses as the path of least resistance for a tax increase to raise revenue for specific needs.



1 H.B. 2158, Laws 2019.
2 H.B. 2167, Laws 2019.
3 S.B. 6016, Laws 2019.
4 WASH. REV. CODE § 82.04.250.
5 WASH. REV. CODE § 82.04.270.
6 WASH. REV. CODE § 82.04.290(2).
7 H.B. 2158, § 74, WASH. REV. CODE § 82.04.xxx(2)(a)-(qq). 42 different service categories are described, which generally correspond to the types of businesses classified under the “Service and Other Activities” category for B&O tax purposes.
8 H.B. 2158, § 74, WASH. REV. CODE § 82.04.xxx(2).
9 H.B. 2158, § 74, WASH. REV. CODE § 82.04.xxx(3).
10 H.B. 2158, § 74, WASH. REV. CODE § 82.04.xxx(1)(a).
11 H.B. 2158, § 74, WASH. REV. CODE § 82.04.xxx(4).
12 H.B. 2158, § 74, WASH. REV. CODE § 82.04.xxx(4)(f)(i).Exceptions apply for persons primarily engaged in the provision of commercial mobile service and the operation and provision of access to certain transmission facilities using wired telecommunications networks. See H.B. 2158, § 74, WASH. REV. CODE § 82.04.xxx(4)(f)(vi).
13 H.B. 2158, § 74, WASH. REV. CODE § 82.04.xxx(4)(b).
14 H.B. 2158, § 74, WASH. REV. CODE § 82.04.xxx(4)(a)(i).
15 H.B. 2158, § 74, WASH. REV. CODE § 82.04.xxx(4)(a)(ii).
16 H.B. 2167, § 2, WASH. REV. CODE § 82.04.xxx(1).
17 H.B. 2167, § 2, WASH. REV. CODE § 82.04.xxx(2)(e)(1).
18 S.B. 6016, Laws 2019.
19 WASH. REV. CODE § 82.04.293(1)(c), (5). See S.B. 6016, Laws 2019.
20 James Nani, “Wash. Bill That Could Hike Biz Taxes By $900M Heads To Gov.,” 2019 Law360 119-181 (April 29, 2019).



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