- The Washington Business & Occupation (B&O) Tax and sales tax were expanded to broaden the definition of services subject to tax.
- The Washington B&O tax rate and surcharges were increased.
- Certain B&O preferences were allowed to sunset.
Background
States, and Washington in particular, are being hit with a trifecta of problems resulting in revenue shortfalls. The uncertainty that surrounded the extension of the Tax Cuts and Jobs Act, the loss of financial support from various federal programs, and the federal government’s reduction in spending have all created an even greater need for states to find ways to increase revenue. Washington is facing a 10-billion-dollar funding deficit. As a result, Governor Bob Ferguson has signed a package of bills into law to mitigate this loss.
The B&O Tax
The Washington B&O tax is a gross receipts tax with rates that vary by business classification. Gross receipts taxes are imposed upon gross revenue of businesses without a deduction for business expenses. The B&O tax does allow limited statutory credits. To address the state’s budget shortfall, the governor has signed into law the largest tax increase in the state’s history.
Forvis Mazars Insight: Businesses not previously subject to the B&O tax will face a compliance challenge and will have to update their systems to account for potential new tax obligations. Additionally, since this is a new tax with respect to these service providers, it will require time and energy on their part to understand what compliance with the law entails. Conceivably, additional staffing will be needed to monitor and remain in compliance, and additional investment in technology such as sales tax engines to capture and remit the tax.
New Services Subject to the B&O and Sales Tax and Certain B&O Preferences Allowed to Sunset
Washington’s governor signed approximately eleven tax-related bills into law, several of which had companion legislation. Collectively, these measures impact various taxes, with several directly affecting the B&O tax, and the taxes of businesses exceeding $250,000,000 in taxable income. The legislation creates a 3.1% B&O tax rate for payment card processors and is set to go into effect January 1, 2026. Additionally, it expanded the sales tax base to include the following:
- Custom software and customization of prewritten computer software.
- Information technology (IT) consulting, training, and support.
- Custom website development.
- Data processing and data entry.
- Advertising services, defined as "all digital and nondigital services related to the creation, preparation, production, or dissemination of advertisements including … online referrals, search engine marketing, and lead generation optimization, web campaign planning, the acquisition of advertising space in the internet media, and the monitoring and evaluation of website traffic … ." Advertising services do not include web hosting services and domain name registration, and advertising services rendered in respect newspapers, print, radio, television, and out-of-home advertising such as billboards and other place-based advertising.
- Security and investigation services.
- Temporary staffing services, except when provided to licensed hospitals.
- Live presentations both in-person and via electronic means.
- Any service that primarily involves the seller's application of human effort.
- Data processing services.
- Advertising services; and
- Live interactive online presentations.
A tax preference refers to any exemption, exclusion, deduction, credit, deferral, or preferential treatment under state tax law. As part of its broader effort to expand the tax base and address budgetary needs, Washington State has enacted legislation which eliminates several business and occupation (B&O) tax preferences effective January 1, 2026.
The repealed preferences include:
- The preferential B&O tax rate for title insurance agents.
- Tax benefits for credit unions that merge with banks.
- The exemption for sales of precious metals and bullion.
- Certain credits for contributions by gas and power companies; and,
- The credit for employment in investment services.
Forvis Mazars Insight: The increase in the B&O tax for businesses with Washington taxable income exceeding $250,000,000 could be effective in shifting tax burdens to larger corporations who are better able to bear it.
B&O Tax Rate and Surcharge Increase
Businesses are less likely to locate in a state if they must realize a substantial tax liability to do business there. Although the B&O cannot be passed along to the customer, customers still feel the impact because this additional overhead is factored into the prices that businesses charge for their goods and services. By boosting the B&O tax rate and surcharge on business, consumers are significantly impacted price increases and potentially restricted employment opportunities if businesses avoid the state entirely.
Forvis Mazars Insight: The B&O tax offered credits and exemptions related to certain state-chartered credit unions and renting or leasing individual storage space at self-service storage facilities but has allowed such credits and exemptions to expire to further boost the tax base and subject previously unimpacted industries to the B&O tax.
How Forvis Mazars Can Help
The introduction of such sweeping changes within a relatively short time frame impacts businesses and individuals in a multitude of ways and can make it difficult for them to keep up. At Forvis Mazars we can help businesses comply with, and prepare for, such changes using technology and identifying ways to mitigate risk and by doing so in an efficient manner.