Washington Senate Bill Report SB 5482 (Jan. 25, 2023)
- Issuer
- Congressional materials
- Document type
- Report
- Date
- 2023-01-26
- Case
- 2023 01 26 A30527 D249621 Bill Report 5482 Sba Bfgt 23
Summary
A Senate Bill Report on SB 5482, an act relating to the margin tax, prepared by staff of the Washington Senate Committee on Business, Financial Services, Gaming & Trade as of January 25, 2023, with committee activity listed for 1/26/23. The background section describes Washington's business and occupation (B&O) tax, estimated to generate approximately $12.5 billion in the 2021-23 biennium, and the Texas franchise tax. The summary of the bill states that beginning in calendar year 2027 the B&O tax is replaced with a margin tax modeled after the Texas franchise tax, at a 3.1966 percent rate, with an easy computation at 1.75 percent for taxpayers with gross income of not more than $5,000,000. It also lists annual filing, quarterly estimated payments and a retail sales tax credit, and gives an effective date of January 1, 2027.
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Full text
SENATE BILL REPORT
SB 5482
As of January 25, 2023
Title: An act relating to the margin tax.
Brief Description: Concerning the margin tax.
Sponsors: Senators Frame, Wagoner, Wellman, Nguyen, Dhingra, Fortunato, Hunt, Keiser,
Kuderer, Lovelett, MacEwen, Saldaña and Stanford.
Brief History:
Committee Activity: Business, Financial Services, Gaming & Trade: 1/26/23.
Brief Summary of Bill
• Replaces Washington State's business and occupation tax with a margin
tax.
SENATE COMMITTEE ON BUSINESS, FINANCIAL SERVICES, GAMING & TRADE
Staff: Jeffrey Mitchell (786-7438)
Background: Washington Business and Occupation Tax. Washington levies its primary
business tax, the business and occupation (B&O) tax, on gross income from Washington-
based business activity.
A business must report B&O tax if the business meets any of the following thresholds in the
current or prior calendar year:
• has more than $100,000 in combined gross receipts sourced or attributed to
Washington;
• has physical presence nexus in Washington; and
• is organized or commercially domiciled in Washington.
Each legal entity must register and report taxes separately for affiliated entities.
This analysis was prepared by non-partisan legislative staff for the use of legislative
members in their deliberations. This analysis is not part of the legislation nor does it
constitute a statement of legislative intent.
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For B&O tax purposes, businesses engaging in apportionable activities may apportion their
income to determine the amount subject to B&O tax. The formula for apportionment is
Washington gross apportionable receipts divided by worldwide gross apportionable receipts
for the taxing period.
The B&O tax includes a flat rate structure with different rates by activity. There are several
surcharges on certain industries and activities, including surcharges on advanced computing
and certain services for Workforce Education, timber or timber products manufacturing,
specified financial institutions, and contests of chance. The B&O tax also includes
approximately 200 tax preferences in the form of credits, deductions, exclusions,
exemptions, and preferential rates.
Taxpayers engaging in business as a manufacturer or extractor are subject to state B&O tax
regardless of whether the product manufactured or extracted is sold within or outside the
state. If a taxpayer sells the manufactured or extracted product within the state, the taxpayer
is subject to retailing or wholesaling B&O tax as well. State law provides a multiple
activities tax credit to prevent the same product from being taxed twice.
While most businesses with activity in Washington are subject to the B&O tax, some
businesses are instead subject to the public utility tax. The public utility tax is a tax on
public service businesses, including businesses that engage in transportation, and the supply
of energy, natural gas, and water. This tax is in lieu of the B&O tax, meaning that
businesses would pay one or the other, but not both taxes on the same activity.
Approximately 49 cities impose local B&O taxes.
For the 2021-23 biennium, the state B&O tax is estimated to generate approximately $12.5
billion and constitutes approximately 20 percent of near general fund revenue.
Texas Franchise Tax. The Texas franchise tax is a privilege tax imposed on each taxable
entity formed or organized in Texas or doing business in Texas. Unless a taxable entity
qualifies and chooses to file using the EZ Computation, the tax base is the taxable entity’s
margin, and is computed in one of the following ways:
• total revenue times 70 percent;
• total revenue minus cost of goods sold (COGS);
• total revenue minus compensation—capped at $400,000 per employee; or
• total revenue minus $1.23 million.
If a taxable entity's annual revenue is $20 million or less, the business can use the EZ
Computation method to file its tax return. This method applies a tax rate of 0.331 percent to
all Texas-based earnings.
Total revenue is determined from revenue amounts reported for federal income tax minus
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statutory exclusions. The COGS generally includes costs related to the acquisition and
production of tangible personal property and real property. The compensation deduction
includes the following: W-2 wages and cash compensation paid to officers, directors,
owners, partners and employees, subject to an inflation-adjusted per person wage and cash
compensation limitation; and benefits provided to all personnel to the extent deductible for
federal income tax purposes, including workers’ compensation, health care and retirement
benefits.
Margin is apportioned to Texas using a single-factor apportionment formula based on gross
receipts.
The tax rates are:
• 0.375 percent for retailing and wholesaling;
• 0.75 percent for activities other than retailing and wholesaling; and
• 0.331 percent for the EZ Computation.
The franchise tax constitutes a little over 5 percent of Texas' general fund revenue.
Summary of Bill: Beginning in calendar year 2027, Washington’s B&O tax is replaced
with a margin tax modeled after Texas’s franchise tax. A margin tax is often considered a
modified gross receipts tax.
Under this margin tax proposal, businesses are taxed on their margin, which is calculated as
worldwide gross income minus the greater of four deductions:
• cost of inputs, for example cost of goods sold;
• compensation paid—capped at $400,000 per employee;
• 30 percent of gross receipts; or
• a flat amount of $1 million.
Unlike Texas’s franchise tax, for this margin tax proposal the compensation and cost of
goods sold deductions are based on federal reporting.
After the deduction amount is subtracted, a single-factor sales apportionment method is
used to determine the amount of the business's worldwide margin attributable to
Washington. For combined groups, each member of the group is included for purposes of
attributing Washington income, if any member of the combined group has nexus in
Washington. The amount attributable to Washington is multiplied by a 3.1966 percent tax
rate to determine the tax due.
A taxpayer subject to the margin tax with gross income of not more than $5,000,000 may
elect to pay the tax based on an easy computation. The easy computation is a business's
gross income attributable to Washington multiplied by a rate of 1.75 percent.
Under this proposal, the margin tax is imposed on the same entities subject to B&O tax,
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including corporations, partnerships, limited liability companies, sole proprietorships, and
nonprofits. Activities subject to public utility tax under current law remain subject to public
utility tax, and are excluded from the margin tax. This proposal maintains Washington’s
surcharges which are imposed on certain industries and activities. It also maintains
Washington’s current registration and nexus thresholds. Local B&O taxes are maintained.
Similar to state B&O taxes, manufacturers and extractors would potentially owe the margin
tax regardless of whether products are sold within or outside the state.
Washington’s definition of gross income is unchanged. Most of Texas’s exclusions from
total revenue are not qualified exclusions from gross income under this proposal, with the
exception of bad debts, and cash and trade discounts.
This margin tax proposal also:
• changes the filing frequency for all entities to an annual return due of April 15th;
• requires entities with gross income over $500,000 to file an annual return;
• requires quarterly estimated payments;
• requires combined reporting for corporations required to file consolidated federal
returns;
• eliminates all preferential rates;
• eliminates most deductions, exclusions, and exemptions except those necessary for
legal compliance or practical administration;
• allows businesses to carryover earned but unused B&O tax credits to be credited from
margin tax due for a limited amount of time; and
• compensates retailers by creating a retail sales tax credit.
Appropriation: None.
Fiscal Note: Available.
Creates Committee/Commission/Task Force that includes Legislative members: No.
Effective Date: The bill takes effect on January 1, 2027.
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