The 2019 Washington legislative session has ended, but it was a busy year in terms of tax related bills. The enacted legislation includes business and occupation (“B&O”) tax increases on certain service businesses and financial institutions, changes to the international investment management B&O tax classification, and a move to a graduated real estate excise tax.
B&O Tax Surcharge on Selected Business Activities
Coined as the ‘Workforce Education Investment Act,’ the Legislature established a B&O tax surcharge on select businesses for the stated purpose of providing greater funding for higher education and workforce development. The surcharge will be imposed on “select advanced computing businesses” and businesses that are primarily engaged in any one or more of 43 enumerated service activities. These activities include a broad swath of technology, medical, professional and financial services that are taxed under the “service and other activities” B&O tax classification.
Effective January 1, 2020, specified business will pay B&O tax at a rate of 1.8% on their taxable Washington revenue, while select advance computing businesses with annual worldwide revenues between $25 billion and $100 billion will pay B&O tax at a rate of 2%. Advance computing businesses with worldwide revenues in excess of $100 billion will pay at a rate of 2.5%.
Additional Tax Imposed on Specified Financial Institutions
Also effective January 1, 2020, “specified financial institutions” will pay an additional tax of 1.2% on Washington service receipts. These institutions will now pay a tax at a rate of 3% (made up of the current service and other activities tax rate of 1.5%, the additional tax of 1.2% and the surcharge discussed above of 0.3%). A ”specified financial institution” is a financial institution that is a member of a “consolidated financial institution group” whose annual net income in the previous calendar year was at least $1 billion, as reported on its consolidated financial statement.
International Investment Managers
A preferential B&O tax rate of 0.275% for “international investment management services” was originally enacted in 1995. Although it was believed at the time that this preferential B&O tax rate would apply to only a limited group of taxpayers, a broad range of investment managers and advisors have since shown themselves to qualify.
Effective July 1, 2019, qualification criteria will narrow significantly, including a new requirement that more than 25% of the business’ employees be located in Washington. Many investment managers who previously qualified for this rate will now be subject to the general services rate of 1.5% plus the 0.3% surcharge discussed above. In addition, the new law provides that once an international investment manager no longer meets the employment eligibility requirements, it not only loses the preferential tax rate, but must also pay back to the Department of Revenue an amount equal to the economic benefit of the lower rate for the current year and the preceding nine months (but not for any periods prior to the effective date of this law change).
Graduated Real Estate Excise Tax
Effective January 1, 2020, the real estate excise tax (“REET”) will be imposed at a graduated rate, rather than a flat tax rate for all real estate transactions. The state-level tax (currently 1.28% of the selling price of real property located within the state) will be:
- 1% on the first $500,000 of the selling price;
- 1.28% of the amount in excess of $500,000 but less than $1.5 million;
- 2.75% of the amount between $1.5 million and $3 million; and
- 3% on the amount in excess of $3 million.
The sale of timberland and agricultural land will remain subject to a flat rate of 1.28% of the selling price, and other preexisting REET exemptions will still apply. The new law will allow the Department of Revenue to adjust the above price thresholds for inflation beginning in 2022, expands the measuring period for aggregating transfers of interests in an entity holding Washington real property from 12 to 36 months, and grants the Department of Revenue new authority to disregard the form of transactions and instead impose REET based on the “substance” of transactions.
Other Notable Tax Changes
Other tax-related bills passed by the Washington Legislature in 2019 include:
- B&O tax rate increase on travel agents and tour operators whose annual taxable revenues exceed $250K;
- Simplifying the municipal B&O tax apportionment sourcing rules;
- Modifying the substantial nexus receipts threshold for B&O and sales tax;
- Clarifications of sales tax collection and reporting requirements applicable to marketplace and remote sellers;
- Replacing the sales tax exemption for residents of non-sales tax states with a remittance program.
Please contact a member of Clark Nuber’s State and Local Tax practice or your tax professional for advice on how these legislative changes may apply to your specific operations and activities within Washington.
Nicole Lyons, CMI, is a manager in Clark Nuber’s State and Local Tax Group.
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