Individual State Agency Fiscal Note — SB 5482, Relating to the Margin Tax, Department of Revenue
Summary
Individual State Agency Fiscal Note for SB 5482, whose bill title is AN ACT Relating to the margin tax, from the Department of Revenue. Part I lists estimated expenditures from GF-State of 3,677,300 in Fiscal Year 2024 and 5,029,400 in Fiscal Year 2025. The box for fiscal impact greater than $50,000 per fiscal year is marked X. The narrative describes current law and states that Washington levies its primary business tax, the business and occupation (B&O) tax, on gross income from Washington-based business activity. It also states that a business must report B&O tax if it has more than $100,000 in cumulative gross receipts from Washington, among other nexus thresholds.
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“Individual State Agency Fiscal Note — SB 5482, Relating to the Margin Tax, Department of Revenue.”
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Individual State Agency Fiscal Note
Bill Number: SB 5482 Bill Title: AN ACT Relating to the margin tax Agency: 140
Department of Revenue
Part I: Estimates
[ ] No Fiscal Impact
Estimated Cash Receipts to:
Fund Fiscal Year 2024 Fiscal Year 2025 2023-2025 Total 2025-27 Biennium 2027-29 Biennium
GF-State NEW 1,683,000,000 14,488,600,000
GF-State NEW2 (17,400,000) (88,300,000)
GF-State Business and
(2,853,000,000) (14,715,500,000)
Occupation Tax
Total (1,187,400,000) (315,200,000)
Estimated Expenditures from:
Fiscal Year 2024 Fiscal Year 2025 2023-2025 Total 2025-27 Biennium 2027-29 Biennium
FTE Staff Years 25.23 37.93 31.58 103.5 162.03
Fund
GF-State 001 3,677,300 5,029,400 8,706,700 33,208,900 37,175,900
Total 3,677,300 5,029,400 8,706,700 33,208,900 37,175,900
The revenue and expenditures estimates on this page represent the most likely fiscal impact. Factors impacting the precision of
these estimates, and alternate ranges (if appropriate), are explained in Part II.
Check applicable boxes and follow corresponding instructions:
[X] If fiscal impact is greater than $50,000 per fiscal year in the current biennium or in subsequent
biennia, complete entire fiscal note form Parts I-V.
[ ] If fiscal impact is less than $50,000 per fiscal year in the current biennium or in subsequent biennia,
complete this page only (Part I).
[ ] Capital budget impact, complete Part IV.
[ ] Requires new rule making, complete Part V.
Legislative Contact: JEFF MITCHELL Phone: 360-786-7139 Date: 1/20/2023
Agency Preparation: Stephen Cleverdon Phone: (360) 534-1523 Date: 1/23/2023
Agency Approval Valerie Torres Phone: (360) 534-1521 Date: 1/25/2023
OFM Review: Phone: Date:
OFM Form FN (10/95)
Fiscal Note # 5482-1
Bill # SB 5482
1
Part II: Narrative Explanation
II. A - Brief Description Of What The Measure Does That Has Fiscal Impact
CURRENT LAW:
Washington levies its primary business tax, the business and occupation (B&O) tax, on gross income from Washington-
based business activity. For businesses engaged in manufacturing or extracting, the B&O tax is imposed on the value of
products manufactured or extracted for sale or the taxpayer’s own use.
A business must report B&O tax if the business meets any of the following “nexus” thresholds in the current or prior
calendar year:
- Has more than $100,000 in cumulative gross receipts from Washington.
- Has physical presence in Washington.
- Is organized or commercially domiciled in Washington.
Each legal entity must register and report taxes separately for affiliated entities.
For B&O tax purposes, businesses engaging in apportionable activities in multiple states 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 the workforce education surcharge. The B&O tax also includes approximately 200 tax
preferences in the form of credits, deductions, exclusions, exemptions, and preferential rates.
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 electrical 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.
PROPOSAL:
This proposal modifies Washington’s B&O tax by converting it into a margin tax modeled after Texas’s franchise tax.
Many consider a margin tax a modified gross receipts tax.
Businesses pay taxes on their margin. Most businesses calculate their margin by subtracting from their gross income the
greater of these four deductions:
- Cost inputs,
- Compensation paid,
- A fixed percentage (30%) of gross income, or
- A standard deduction, which is initially set at $1 million.
For businesses that engage in manufacturing or extracting in this state, they calculate their margin on this activity by
subtracting one of the following amounts from the value of products that they manufactured or extracted in this state:
- Cost inputs,
- A fixed percentage (30%) of the value of products manufactured or extracted in this state, or
- A standard deduction, which is initially set at $1 million.
Manufacturers and extractors are taxed on all products they manufacture or extract in this state, whether or not the
products are sold in this state. They are also subject to margin tax on the sale in this state of their manufactured or
OFM Form FN (10/95)
Fiscal Note # 5482-1
Bill # SB 5482
2
extracted products. However, the bill provides credits so that manufacturers and extractors do not pay margin tax more
than once with respect to the same end products.
For most taxpayers, cost inputs are the costs of goods sold properly reportable to the Internal Revenue Service for federal
income tax purposes. For taxpayers who are not subject to federal income tax, cost inputs are the cost of goods sold that
would be properly reportable for federal income tax purposes if the taxpayer were subject to federal income tax. For the
margin tax on manufacturing and extracting, the cost inputs are limited to the costs of goods sold for products
manufactured or extracted in Washington.
The compensation paid deduction equals the total compensation paid to the taxpayer’s employees during the tax year, less
any compensation over the compensation cap, which is initially set at $400,000. Compensation is Medicare wages
properly reportable on box 5 of Internal Revenue Service Form W-2. The compensation cap is adjusted for inflation every
two years starting January 1, 2029.
The fixed percentage deduction is equal to 30% of worldwide gross income and for businesses that engage in
manufacturing or extracting, 30% of the value of products manufactured or extracted in this state.
The standard deduction equals $1,000,000 and is adjusted for inflation every two years starting January 1, 2029.
For a taxpayer engaging in business both within and outside of Washington, after subtracting all deductible amounts from
its gross income, the taxpayer uses a single-factor sales apportionment method to determine the amount of its worldwide
margin subject to the Washington margin tax. For combined groups, if any member of the combined group has nexus in
Washington, then all members of the group are included in the apportionment calculation.
This proposal imposes the margin tax on the same types of entities subject to B&O tax, including corporations,
partnerships, limited liability companies, sole proprietorships, municipal corporations, 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 the existing B&O tax surcharges imposed on certain industries and activities. It also maintains the
current registration and nexus thresholds.
This bill requires combined reporting for affiliated groups engaged in a unitary business.
The margin tax rate is 3.1966%.
This bill includes an option for taxpayers with gross income of $5,000,000 or less to calculate their tax due using gross
income and a lower tax rate of 1.75%. Entities selecting this option may not claim any of the four elective deductions
available to taxpayers that choose to pay the margin tax at the higher rate (cost inputs, compensation paid, 30% of gross
income, or the standard deduction).
Tax credits earned under the B&O tax with a carry forward provision can carry forward and be claimed as a credit against
the margin tax for a limited time. These carryforward credits may not exceed the amount of margin tax due. Taxpayers
may claim these unused B&O tax credits through tax year 2031 or the latest tax year that the taxpayer could have used the
credits under current law as existing on December 31, 2026, whichever is earlier.
Margin tax returns are reported on an annual basis and are due by April 15th of the year following the end of the tax year
covered by the return. The bill requires estimated quarterly payments for a tax year when the taxpayer owes $20,000 or
more in tax. Estimated payments are due by the last day of the month following the end of the calendar quarter. For
taxpayers engaged in business in Washington during the entire preceding tax year, quarterly payments equal 25% of the
taxpayer’s prior year tax liability. Taxpayers with gross income over $500,000 must file an annual return, even if they do
not have a tax liability.
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Fiscal Note # 5482-1
Bill # SB 5482
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The B&O tax surcharges are reported on the combined excise tax return either monthly, quarterly, or annually, as under
current law.
This bill repeals the preferential B&O tax rates and most B&O tax deductions, exclusions, and exemptions, except those
legally required or necessary for efficient tax administration.
This bill allows a credit against retail sales tax for taxpayers that collect and timely remit retail sales tax to the department.
The credit equals 0.2528% of the total amount of the general state retail sales tax properly collected and remitted to the
department.
EFFECTIVE DATE:
This bill eliminates the B&O tax starting January 1, 2027, and the margin tax begins for gross income earned in 2027. The
first quarterly estimated payments are due April 30, 2027. The annual tax return for 2027 is due April 15, 2028.
II. B - Revenue Impact
ASSUMPTIONS:
- Taxpayer affiliated groups that file a consolidated federal income tax return will file a combined margin tax return.
- Nexus applies to a combined group if one or more companies within the group have substantial nexus in Washington
(RCW 82.04.067).
- The percentage of a business's worldwide taxable margin apportioned to Washington under the margin tax equals the
percentage of the business's worldwide taxable gross receipts apportioned to Washington under the B&O tax.
- Taxpayers with a negative margin in a given fiscal year have no tax liability for that fiscal year. These taxpayers do not
accrue a deduction or credit against the margin tax for future years.
- The growth of the income and deduction components of the taxable margin follows the growth of before-tax corporate
profit forecasts from the Bureau of Labor Statistics (BLS) with an adjustment to account for the higher forecast of
Washington employment vs. U.S. employment.
- Because of this significant change in Washington's business tax, a compliance factor of 90% applies to the first year of
collections and 95% for each subsequent year.
DATA SOURCES:
- Economic and Revenue Forecast Council, November 2022 forecast
- Internal Revenue Service, Form 1120, Form 1120S, and Form 1065 returns
- Internal Revenue Service, W2 wage data
- Washington State Department of Revenue, excise tax data
- Bureau of Economic Analysis (BEA), Before-tax corporate profits with inventory value adjustment (IVA) and capital
consumption
- Economic and Revenue Forecast Council, nonfarm payroll employment
REVENUE ESTIMATES:
This bill decreases state revenues by an estimated $1.2 billion in the 2025-27 Biennium and by $315 million in the 2027-
29 Biennium.
TOTAL REVENUE IMPACT:
State Government (cash basis, $000):
FY 2024 - $ 0
FY 2025 - $ 0
FY 2026 - $ 0
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Fiscal Note # 5482-1
Bill # SB 5482
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FY 2027 - ($ 1,187,400)
FY 2028 - ($ 316,500)
FY 2029 - $ 1,300
Local Government, if applicable (cash basis, $000): None
II. C - Expenditure Impact
ASSUMPTIONS:
The department will receive the first quarterly estimated payments in April 2027.
FIRST YEAR COSTS:
The department will incur total costs of $3,677,300 in Fiscal Year 2024. These costs include:
Labor Costs - Time and effort equate to 25.23 FTEs.
- Amend and adopt 213 administrative rules and advisories.
- Provide technical advice, interpretation, and analysis for internal use during the implementation process.
- Increase in payroll, human resources, and administrative functions to service new employees.
- Additional staff for system administration, service desk, network, and telephony.
- Meet with each tribe with a revenue-sharing compact entered under SHB 2803 (2020) to discuss changes in the
compact or the authorizing legislation that might be appropriate to preserve the intended benefits of the negotiated
compact.
- Integration of rulemaking impacts on system programming.
Object Costs - $334,500.
- Contract computer system preparation.
- Travel expenses for meetings with compacting tribes.
- Software.
SECOND YEAR COSTS:
The department will incur total costs of $5,029,400 in Fiscal Year 2025. These costs include:
Labor Costs - Time and effort equate to 37.93 FTEs.
- Continue to amend and adopt 213 administrative rules and advisories.
- Provide technical advice, interpretation, and analysis for internal use during the implementation process.
- Increase in payroll, human resources, and administrative functions to service new employees.
- Additional staff for system administration, service desk, network, and telephony.
- Continue to meet with each tribe.
- Integration of rulemaking impacts on system programming.
Object Costs - $327,500.
- Contract computer system preparation.
- Travel expenses for meetings with compacting tribes.
- Software.
THIRD YEAR COSTS:
The department will incur total costs of $14,553,500 in Fiscal Year 2026. These costs include:
Labor Costs - Time and effort equate to 67.33 FTEs.
- Continue to amend and adopt 213 administrative rules and advisories.
- Provide technical advice, interpretation, and analysis for internal use during the implementation process.
- Increase in payroll, human resources, and administrative functions to service new employees.
OFM Form FN (10/95)
Fiscal Note # 5482-1
Bill # SB 5482
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- Additional staff for system administration, service desk, network, and telephony.
- Continue to meet with each tribe.
- Setup, program, and test computer system changes.
Object Costs - $6,278,400.
- Contract computer system programming.
- Media campaign and translation services.
- Travel expenses for meetings with compacting tribes.
- Software.
FOURTH YEAR COSTS:
The department will incur total costs of $18,655,400 in Fiscal Year 2027. These costs include:
Labor Costs - Time and effort equate to 139.65 FTEs.
- Continue to amend and adopt 213 administrative rules and advisories.
- Assist taxpayers with reporting questions and respond to inquiries via email, web message, and paper
correspondence.
- Process returns, payments and all associated work items, including issuing assessments for return errors and
underpayments.
- Examine accounts and make corrections as necessary.
- Increase in payroll, human resources, and administrative functions to service new employees.
- Additional staff for system administration, service desk, network, and telephony.
Object Costs - $3,092,500.
- Contract computer system programming.
- Continue media campaign.
- Travel expenses for meetings with compacting tribes.
- Software.
- Acquire additional agent seat licenses at the Telephone Information Center.
- Print and mail notices, correspondence and returns to taxpayers who do not file returns electronically.
ONGOING COSTS:
Ongoing costs for the 2027-29 Biennium equal $37,175,900 and include similar activities described in the fourth-year
costs. Time and effort equate to 162.03 FTEs.
Part III: Expenditure Detail
III. A - Expenditures by Object or Purpose:
Fiscal Year 2024 Fiscal Year 2025 2023-2025 Total 2025-27 Biennium 2027-29 Biennium
Salaries and Wages 2,088,900 3,049,100 5,138,000 14,924,500 21,207,100
Benefits 689,300 1,006,300 1,695,600 4,925,200 6,998,300
Personal Service Contracts 275,000 275,000 550,000 7,125,000 500,000
Supplies & Material 435,800 511,400 947,200 4,965,600 6,770,900
Travel 11,700 16,500 28,200 162,800 400,400
Office Equipment 176,600 171,100 347,700 1,105,800 1,299,200
Total 3,677,300 5,029,400 8,706,700 33,208,900 37,175,900
III. B - FTE Detail:
Job Classification Salary FY 2024 FTEs FY 2025 FTEs 2023 - 2025 Total 2025 - 2027 2027 - 2029
ADM ASST 3 44,808 .2 .9
COMMUNICATIONS CNSLT 4 66,420 2 1 2
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Fiscal Note # 5482-1
Bill # SB 5482
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COMMUNICATIONS CNSLT 5 77,028 1 1 1 1 1
EMS BAND 4 126,619 .05 .05 .05 .05 .01
EMS BAND 5 147,919 .12 .12 .12 .12 .01
EXCISE TAX EX 1 44,808 1.05 1.2
EXCISE TAX EX 2 55,872 4.45 26.65
EXCISE TAX EX 3 61,632 2.35 10.7
EXCISE TAX EX 4 68,076 1 .5 1 1
FINANCIAL EX 3 85,020 .5 1
FISCAL ANALYST 1 44,808 .05 .1
FISCAL ANALYST 2 49,404 .2 .3 .25 .85 1.35
FISCAL ANALYST 3 57,324 .05 .1
FORMS AND RECORDS 46,980
.05 .1
ANALYST 2
HUM RES CNSLT 1 51,888 1.5 1.5
HUM RES CNSLT 3 64,788 .5
HUM RES CNSLT 4 71,520 1.5 1.5
IT APP DEV-ENTRY 82,260 1
IT B A-JOURNEY 88,428 .3 .3 .3 1.75 .1
IT CUST SUP-ENTRY 66,228 .5 1
IT PROJ MGT-JOURNEY 92,844 .3 .3 .3 1 .5
IT QA-JOURNEY 88,428 4 1
IT SYS ADM-JOURNEY 92,844 .3 .15
MGMT ANALYST4 73,260 3.21 10.71 6.96 26.76 9.77
MGMT ANALYST5 80,952 3.6 4.6 4.1 6.1 5.3
PROCUREMENT AND SUPPLY 50,592
.1 .1 .1 .4 .6
SP 2
REVENUE AGENT 2 57,324 5.75 12.45
REVENUE AGENT 4 66,420 .5 1
REVENUE AUDITOR 2 61,632 5.5 22
REVENUE AUDITOR 3 68,076 6.5 23
TAX INFO SPEC 1 44,808 4.5 10.5
TAX INFO SPEC 2 48,156 1 1.5
TAX INFO SPEC 3 58,704 .5 .75
TAX POLICY SP 2 75,120 3.12 2.12 2.62 1.27 1.57
TAX POLICY SP 3 85,020 9.34 9.34 9.34 13.07 18.34
TAX POLICY SP 4 91,524 3.02 3.22 3.12 3.32 3.53
WMS BAND 2 94,669 .5 2 1.25 2.4 2
WMS BAND 3 107,685 .37 .47 .42 .47 .01
Total 25.23 37.93 31.58 103.51 162.04
III. C - Expenditures by Program (optional):
Fiscal Year 2024 Fiscal Year 2025 2023-2025 Total 2025-27 Biennium 2027-29 Biennium
Total
Part IV: Capital Budget Impact
OFM Form FN (10/95)
Fiscal Note # 5482-1
Bill # SB 5482
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None.
Part V: New Rule Making Required
Should this legislation become law, the department will use the standard process to create 20 new rules, use the expedited
process to amend 122 rules, and will update approximately 71 excise tax advisories.
Persons affected by this rulemaking will include all persons subject to the B&O tax under current law or subject to the
margin tax.
OFM Form FN (10/95)
Fiscal Note # 5482-1
Bill # SB 5482
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Revenue Impact Detail
First Biennium Second Biennium Third Biennium
FUND SOURCE CODE 1st YEAR 2nd YEAR 3rd YEAR 4th YEAR 5th YEAR 6th YEAR
GF-State NEW 0000 1,683,000,000 6,919,600,000 7,569,000,000
GF-State NEW2 0001 (17,400,000) (43,300,000) (45,000,000)
(2,853,000,000 (7,192,800,000 (7,522,700,000
GF-State Business and Occupation Tax 0105 ) ) )
(1,187,400,000
Total ) (316,500,000) 1,300,000
OTHER
Total
(1,187,400,000
Net ) (316,500,000) 1,300,000
Revenue Impact - by Biennium
FUND SOURCE CODE 1st Biennium 2nd Biennium 3rd Biennium
GF-State NEW 0000 1,683,000,000 14,488,600,000
GF-State NEW2 0001 (17,400,000) (88,300,000)
GF-State Business and Occupation Tax 0105 (2,853,000,000) (14,715,500,000)
Total (1,187,400,000) (315,200,000)
OTHER
Total
Net (1,187,400,000) (315,200,000)
OFM Form FN (10/95)
Fiscal Note # 5482-1
Bill # SB 5482
9
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