It was only last April that the Workforce Education Investment Act was enacted to fund workforce education initiatives. It was supposed to do this through three tiers of tax surcharges on most businesses in the “service and other activities” business and occupation (B&O) classification.
The tiers were:
- 20 percent (a B&O rate increase of 0.3 percent)
- 33.3 percent (increase of 0.5 percent)
- 66.66 percent (increase of 1.0 percent)
Resistance to the Three-Tier System
The surcharges began on Jan. 1, 2020. After the bill passed, many raised concerns about ambiguity in the law and application of the three-tier system. The Washington Department of Revenue (DOR) stated it could lead to a significant number of appeals and/or litigation by taxpayers.
So it was no surprise on Feb. 11, less than 45 days after surcharges began, that Governor Jay Inslee signed S.B. 6492. This bill nixed the three-tier formula and completely overhauled the tax increase implementation. Set to take effect April 1, 2020, nearly all businesses reporting under the “service and other activities” classification once again will be impacted by the new law.
Originally, the Workforce Education Investment Act subjected 43 business activities to a 0.3 percent surcharge. Higher rates of 0.5 percent and 1.0 percent only applied to advanced computing businesses when their revenues exceed $25 billion or $100 billion respectively.
This meant the B&O rate for most “service and other activity” businesses now went from 1.5 percent to 1.8 percent. Larger tech companies were potentially subject to 2.0 percent or 2.5 percent B&O tax rates.
Revisions to the Workforce Education Surcharge
The surcharge to the 43 business activities was removed during the recently enacted revisions to the Workforce Education Surcharge. Instead, the base B&O rate for the “service and other activities” category was increased to 1.75 percent.
However, the new bill also adds a lower 1.5 percent rate for hospitals, select advanced computing businesses, and businesses with less than $1 million in yearly gross income. This is a great benefit and big win for smaller taxpayers as they can revert back to the previous 1.5 percent rate they are familiar with.
Unfortunately, businesses in excess of $1 million might not benefit from the effective 1.75 percent B&O rate (versus 1.8 percent) if they were not among the originally referenced 43 business activities subjected to the surcharge.
Additionally, the two-tiered surcharge for advanced computing businesses has been replaced with a single surcharge rate of 1.22 percent applicable to “select advanced computing businesses”— which are those in excess of $25 billion in gross income per calendar year.
This means advanced computing businesses under $25 billion are subject to the 1.75 percent rate while those above are subject to an effective 2.72 percent (1.5 percent plus 1.22 percent) combined B&O tax rate.
Professional Thoughts on the Revisions
The revisions aim to simplify the application and administration of the increase while also reducing the compliance burden for small businesses. As a CPA and tax advisor, I believe they have done so.
The surcharge was complex from the beginning. For those under the “service and other activities” classification, it was effectively a B&O rate increase under the guise of a surcharge.
I think the change to a higher base rate provides more transparency for taxpayers and eases the burden of compliance, particularly in a state and local tax landscape that is evolving more rapidly than ever.
Professional Help with State and Local Tax Compliance
Professional, knowledgeable assistance is vital. If you have any questions regarding these revisions, the business and occupation tax, or any other state and local tax compliance, we are happy to assist.
Please call Shannon & Associates LLP at (253) 852-8500, or contact us and we’ll be in touch.
By Kevin Klinkman