Washington has created an additional Business & Occupation (B&O) tax rate under the Service and Other Activities classification to fund Workforce Education. Effective April 1, 2020, the B&O tax will be imposed at two separate rates under the Service and Other Activities classification. If a taxpayer had taxable income of $1 million or more in the prior calendar year, they will be subject to a 1.75% B&O tax rate. If a taxpayer had taxable income of less than $1 million in the prior calendar year, they remain subject to the 1.5% B&O tax rate. If a taxpayer is a member of an affiliated group, the taxable income includes taxable income subject to the Service and Other Activities classification for all affiliated group members. The Service and Other Activities classification will have two separate lines on the tax return to reflect the different tax rates.
If a taxpayer (or affiliated group) had $1 million or greater of taxable income subject to the Scientific Research and Development classification in the prior calendar year, they are subject to the 1.75% tax rate. The taxable income should be reported under the Service and Other Activities ($1 million or greater in prior year) classification. If a taxpayer (or affiliated group) had less than $1 million of taxable income in the prior calendar year, the 1.5% tax rate applies and they may report the taxable income under the Scientific Research and Development classification.
There are several exceptions for specific industries. For real estate brokers, income from commissions continues to be reportable on the excise tax return under the 1.5% rate of the Service and Other Activities classification, even if commissions earned exceed $1 million in the prior calendar year. For hospitals, income from activities subject to service and other activities B&O tax is reported on the excise tax return under the 1.5% rate, even if amounts earned are $1 million or more in the prior calendar year. For additional guidance, visit the Washington DOR’s Workforce Education webpage.
Note that the Washington DOR had previously attempted to impose a three-tiered Business & Occupation (B&O) tax surcharge (called the Workforce Education Investment Surcharge) but delayed the implementation. To see our previous news item regarding the funding of Workforce Education, see Washington Enacts B&O Tax Surcharge on Services and Increases B&O Tax Rate on Financial Institutions. (Special Notice, Washington Department of Revenue, March 13, 2020; Workforce Education webpage, Washington Department of Revenue website)