Senate Bill Report SB 5733 — Business and occupation tax deduction for payment card processing activities

Summary

Senate Bill Report on SB 5733, as of February 10, 2023, prepared for the Senate Committee on Business, Financial Services, Gaming & Trade. The bill would create a business and occupation (B&O) tax deduction for amounts a payment card processing company receives as interchange fees or network fees, and establish a B&O tax rate of 3 percent for certain contracted payment card processing activities. The report states that the deduction is permanent and not subject to tax preference performance review. It says the bill applies prospectively and retroactively to penalties or interest on delinquent taxes, and that tax not previously paid must be paid within 90 days of the effective date without penalties or interest. The bill takes effect on October 1, 2023.

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Issuer: Congressional materials
Document type: Report
Date: 2023-02-14
Case: 2023 02 14 A30798 D253035 Bill Report 5733 Sba Bfgt 23

Cite this document

“Senate Bill Report SB 5733 — Business and occupation tax deduction for payment card processing activities.” Original at app.leg.wa.gov, dated 2023-02-14. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/2023-02-14-2023-02-14-a30798-d253035-bill-report-5733-sba-bfgt-23/, SHA-256 95c66f1cad177eae2239c170999d4e1729c86558974afcb2b62bfce92622509d.

Full text

SENATE BILL REPORT
SB 5733

As of February 10, 2023

Title: An act relating to creating a business and occupation tax deduction and increasing the tax
rate for persons conducting payment card processing activities.

Brief Description: Creating a business and occupation tax deduction and increasing the tax rate
for persons conducting payment card processing activities.

Sponsors: Senators Mullet, Wilson, L. and Gildon.

Brief History:
Committee Activity: Business, Financial Services, Gaming & Trade: 2/14/23.

Brief Summary of Bill
• Creates a business and occupation (B&O) tax deduction for amounts
received by a payment card processing company in the form of
interchange fees or network fees.
• Establishes a B&O tax rate of 3 percent for certain contracted payment
card processing activities.

SENATE COMMITTEE ON BUSINESS, FINANCIAL SERVICES, GAMING & TRADE

Staff: Alia Kennedy (786-7405)

Background: Business and Occupation Tax. The state business and occupation (B&O) tax
is Washington's primary business tax. It is a gross receipts tax measured on the value of
products, gross proceeds of sale, or gross income of the business. There are no deductions
from the B&O tax for labor, materials, taxes, or other costs of doing business. The B&O tax
rate varies by classification (activity). The major rates are: 0.471 percent for retailing
activities, 0.484 percent for manufacturing and wholesaling activities, and for service and
other activities, either 1.5 percent or 1.75 percent, depending upon the amount of annual

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.

Senate Bill Report -1- SB 5733
gross income of the business. The state B&O tax includes a number of preferential tax rates,
credits, exemptions, and deductions as well as several increased rates or surcharges.

Workforce Education Funding. Since April 1, 2020, the B&O tax has two rates under the
service and other activities classification. The tax rates replace the Workforce Education
Investment Surcharge that was created in 2019. Service and other activities of $1 million or
more in the prior calendar year are taxed at a B&O rate of 1.75 percent. A portion of the
revenue generated from the 1.75 percent B&O rate is deposited into the Workforce
Education Investment Account to support higher education programs, state-funded student
aid, and workforce development. Activities below the gross receipts threshold are subject to
a B&O tax rate of 1.5 percent.

Business and Occupation Surcharge on Financial Institutions. Since January 1, 2020, a
surcharge is imposed on financial institutions with an annual net income of at least $1
billion for the previous calendar year. The surcharge is 1.2 percent and applies to the
business’ income subject to the B&O tax under the service and other activities tax
classification. All receipts from the surcharge are deposited into the state general fund.

Tax Preferences. State law provides for a range of tax preferences that confer reduced tax
liability upon a designated class of taxpayer. Tax preferences include tax exclusions,
deductions, exemptions, preferential tax rates, deferrals, and credits. Washington has over
700 tax preferences, including a variety of sales and use tax exemptions. Legislation that
establishes or expands a tax preference must include a tax preference performance statement
that identifies the public policy objective of the preference, as well as specific metrics the
Joint Legislative Audit and Review Committee can use to evaluate the effectiveness of the
preference. All new tax preferences automatically expire after ten years unless an
alternative expiration date is provided.

Summary of Bill: Busniess and Occupation Tax Deduction for Certain Credit Card
Processing Fees. A B&O tax deduction is allowed for amounts received by payment card
processing companies in the form of interchange fees or network fees.

Interchange fees are fees set by a payment network, or by agreement between an issuing
bank and a merchant or merchant bank, that an issuing bank retains from the amounts
settled to the merchant as compensation for the services the issuing bank provides in issuing
a credit, debit, or prepaid card to a cardholder, advancing proceeds to settle a credit, debit,
or prepaid card transaction, and incurring a portion of the risks relating to the transaction.

Network fees are fees a payment network charges and receives as compensation for its
services, including for facilitating the payment of a credit, debit, or prepaid card transaction
from cardholders to a merchant through its network.

Business and Occupation Tax Rate on Payment Card Processing Activities. Payment card
processing activities are subject to a B&O tax rate of 3 percent. The new B&O tax rate

Senate Bill Report -2- SB 5733
applies to any gross income derived from the merchant discount of those merchants with
which the payment card processing company has directly or indirectly contracted to perform
payment card processing activities.

Payment card processing activities subject to the new B&O tax rate of 3 percent are also
subject to the surcharge on financial institutions and the a workforce education investment
surcharge.

For payment card processing activities in which more than one payment card processing
company receives a portion of the merchant discount, each company is required to include
in its gross income the portion of the merchant discount it is entitled to retain.

"Merchant discount" means the aggregate fee, or negotiated discount, incurred by a
merchant for the processing of payment card transactions under its contract with a payment
card processing company when it accepts a payment network-branded credit, debit, or
prepaid card in a sale transaction.

"Payment card processing activities" means acquiring, either directly or indirectly, credit,
debit, or prepaid card transactions from merchants, facilitating the submission of those
transactions to payment networks, and facilitating the payment of proceeds of those
transactions to merchants.

Tax Preference Performance Requirements. The B&O tax deduction for amounts received
by payment card processing companies in the form of interchange fees or network fees is
permanent and not subject to tax preference performance review.

Retroactivity Clause. The bill applies prospectively and retroactively to any penalties or
interest assessed on delinquent taxes, including any disputed assessments pending before
the Department of Revenue, Board of Tax Appeals, or any court of law. Any tax not
previously paid must be paid within 90 days of the effective date of the act, but is not
subject to penalties or interest.

Appropriation: None.

Fiscal Note: Requested on February 9, 2023.

Creates Committee/Commission/Task Force that includes Legislative members: No.

Effective Date: The bill takes effect on October 1, 2023.

Senate Bill Report -3- SB 5733

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