Fiscal Note Summary — 5733 SB, Payment Card Processing/Tax (Multiple Agency, Final 2/14/2023)
Summary
Multiple Agency Fiscal Note Summary for bill number 5733 SB, titled Payment card processing/tax, followed by the Department of Revenue note and a Board of Tax Appeals ten-year analysis. The Department of Revenue note estimates total cash receipts of (208,600,000) and expenditures of 489,400 for 2023-25. It states that the bill creates a new B&O tax classification for merchant discount income received by payment card processing companies, at a tax rate of 3%, and a new deduction for amounts received as interchange fees or network fees. Its retroactive application covers tax periods open for assessment within the statute of limitations.
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“Fiscal Note Summary — 5733 SB, Payment Card Processing/Tax (Multiple Agency, Final 2/14/2023).”
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Multiple Agency Fiscal Note Summary
Bill Number: 5733 SB Title: Payment card processing/tax
Estimated Cash Receipts
Agency Name 2023-25 2025-27 2027-29
GF-State NGF-Outlook Total GF-State NGF-Outlook Total GF-State NGF-Outlook Total
Department of (183,300,000) (208,600,000) (208,600,000) (31,100,000) (53,900,000) (53,900,000) (45,700,000) (75,400,000) (75,400,000)
Revenue
Total $ (183,300,000) (208,600,000) (208,600,000) (31,100,000) (53,900,000) (53,900,000) (45,700,000) (75,400,000) (75,400,000)
Estimated Operating Expenditures
Agency Name 2023-25 2025-27 2027-29
FTEs GF-State NGF-Outlook Total FTEs GF-State NGF-Outlook Total FTEs GF-State NGF-Outlook Total
Department of 1.7 489,400 489,400 489,400 .6 123,400 123,400 123,400 .5 100,600 100,600 100,600
Revenue
Board of Tax .0 0 0 0 .0 0 0 0 .0 0 0 0
Appeals
Total $ 1.7 489,400 489,400 489,400 0.6 123,400 123,400 123,400 0.5 100,600 100,600 100,600
Estimated Capital Budget Expenditures
Agency Name 2023-25 2025-27 2027-29
FTEs Bonds Total FTEs Bonds Total FTEs Bonds Total
Department of Revenue .0 0 0 .0 0 0 .0 0 0
Board of Tax Appeals .0 0 0 .0 0 0 .0 0 0
Total $ 0.0 0 0 0.0 0 0 0.0 0 0
Estimated Capital Budget Breakout
Prepared by: Cheri Keller, OFM Phone: Date Published:
(360) 584-2207 Final 2/14/2023
FNPID 66959
:
FNS029 Multi Agency rollup
Department of Revenue Fiscal Note
Bill Number: 5733 SB Title: Payment card processing/tax Agency: 140-Department of Revenue
Part I: Estimates
No Fiscal Impact
Estimated Cash Receipts to:
Account FY 2024 FY 2025 2023-25 2025-27 2027-29
GF-STATE-State (107,200,000) (9,400,000) (116,600,000) (31,100,000) (45,700,000)
01 - Taxes 05 - Bus and Occup Tax
GF-STATE-State (66,700,000) (66,700,000)
01 - Taxes 75 - Penalties and Intrst
Workforce Education Investment (16,700,000) (8,600,000) (25,300,000) (22,800,000) (29,700,000)
Account-State
01 - Taxes 05 - Bus and Occup Tax
Total $ (190,600,000) (18,000,000) (208,600,000) (53,900,000) (75,400,000)
Estimated Expenditures from:
FY 2024 FY 2025 2023-25 2025-27 2027-29
FTE Staff Years 2.3 1.2 1.7 0.6 0.5
Account
GF-STATE-State 001-1 367,900 121,500 489,400 123,400 100,600
Total $ 367,900 121,500 489,400 123,400 100,600
Estimated Capital Budget Impact:
NONE
The cash receipts and expenditure 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:
If fiscal impact is greater than $50,000 per fiscal year in the current biennium or in subsequent biennia, complete entire fiscal note
X
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: Alia Kennedy Phone:
360-786-7405 Date: 02/09/2023
Agency Preparation: Melissa Howes Phone:
360-534-1518 Date: 02/13/2023
Agency Approval: Valerie Torres Phone:
360-534-1521 Date: 02/13/2023
OFM Review: Cheri Keller Phone:
(360) 584-2207 Date: 02/14/2023
Request # 5733-1-1
Form FN (Rev 1/00) 183,303.00 1 Bill # 5733 SB
FNS062 Department of Revenue Fiscal Note
Part II: Narrative Explanation
II. A - Brief Description Of What The Measure Does That Has Fiscal Impact
Significant provisions of the bill and any related workload or policy assumptions that have revenue or expenditure impact on the responding agency by
section number.
CURRENT LAW:
The state’s primary business activities tax, the business and occupation (B&O) tax, is a gross receipts tax. As a gross
receipts tax, business expenses generally cannot be deducted from the measure of the tax.
The gross income of a payment card processing company from processing credit, debit, and prepaid card transactions is
taxable under the service and other activities B&O tax classification. This includes the gross amount of merchant discount
income with no deduction for the payment card processing company’s expenses, including interchange fees, network fees,
or other such fees. Several payment card processing companies are in litigation with the Department of Revenue
(department) over the department’s position that these companies are subject to B&O tax on interchange fees and network
fees, which are typically retained by the banks that issue payment cards to consumers (issuing banks) and by payment
networks (also known as card associations).
Income taxable under the service and other activities B&O tax classification may also be subject to the additional tax on
specified financial institutions (82.04.29004) or the workforce education investment surcharge (RCW 82.04.299) if a
business is required to pay either tax.
Generally, businesses with total service and other activities income totaling $1 million or more pay tax at the rate of 1.75%.
Of the tax paid at this rate 14.3% is deposited into the workforce education investment account. Businesses with total
service and other activities income totaling less than $1 million, or businesses that pay the workforce education investment
surcharge, pay tax at the rate of 1.5%.
PROPOSAL:
This bill creates a new B&O tax classification for merchant discount income received by payment card processing
companies, including merchant banks, and a new deduction is created for amounts received in the form of interchange fees
or network fees. The tax rate for the new classification is 3%.
If more than one payment card processor receives a portion of the merchant discount, each business reports only the
amount of merchant discount it is entitled to keep.
The income taxable under the new classification may also be subject to the additional tax on specified financial institutions
and the workforce education investment surcharge if the payment card processing company is required to pay either tax.
The retroactive application of this bill applies to tax periods open for assessment within the statute of limitations, including
any disputed assessments pending with the department, Board of Tax Appeals, or any court of law.
If retroactive application results in overpaid tax, no tax, interest, or penalties will be refunded.
If retroactive application results in underpaid tax, the underpaid tax is exempt from penalties and interest and must be paid
within 90 days of this bill's enactment.
"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 sales transaction.
Request # 5733-1-1
Form FN (Rev 1/00) 183,303.00 2 Bill # 5733 SB
FNS062 Department of Revenue Fiscal Note
“Payment card processing company” means a company, including a merchant bank, that acquires, either directly or
indirectly, credit, debit, or prepaid card transactions from merchants, facilitates the submission of those transactions to
payment networks, and facilitates the payment of proceeds of those transactions to merchants.
“Merchant bank” means a bank that is a participant in a payment network(s) that contracts, directly or indirectly, with a
merchant, enabling that merchant to accept a payment network-branded credit, debit, or prepaid card and receive cash
proceeds from the sale.
“Interchange fee” means a fee 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” means 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.
“Payment network,” means an operator of a system or network connecting one or more issuing banks to one or more
merchant banks, facilitating financial transactions through the use of a credit, debit, or prepaid product.
"Issuing bank” means a bank that issues payment network-branded credit, debit, or prepaid cards to cardholders.
EFFECTIVE DATE:
This bill takes effect on October 1, 2023. However, due to the time it will take to program this bill's changes, the department
is unable to implement the bill until January 1, 2024.
II. B - Cash receipts Impact
Cash receipts impact of the legislation on the responding agency with the cash receipts provisions identified by section number and when appropriate,
the detail of the revenue sources. Description of the factual basis of the assumptions and the method by which the cash receipts impact is derived.
Explanation of how workload assumptions translate into estimates. Distinguished between one time and ongoing functions.
ASSUMPTIONS
- Some payment card processing companies are not reporting a portion of the merchant discount representing interchange
and network fees on their excise tax returns, because they are disputing whether they owe B&O tax on these amounts,
which are retained by issuing banks and payment networks. In these instances, taxable amounts have been adjusted to
calculate the amount of deduction that would be available should this bill become law.
- An analysis of audit enforcement activity for the payment card processing industry shows that 72% of businesses audited
underreported interchange and network fees on their excise tax returns by a factor of 3.34. This means that for every $1 in
tax reported, taxpayers should have reported $3.34, resulting in underreporting of $2.34.
- Interchange fees and network fees generally represent 68% of a credit card processor's taxable service and other
activities income subject to B&O tax.
- Under current law, any disputed tax assessments regarding interchange and network fees will be upheld in favor of the
department.
- Under current law, taxpayer education and audit enforcement efforts will continue and the expected revenue from the
payment card processing industry will increase each fiscal year.
- If this bill passes, the retroactive language has an overall negative revenue impact in the first year as follows:
- Any disputed tax assessments will be cancelled resulting in a revenue loss equal to the amount of those assessments.
- Current enforcement efforts will cease and those pending assessments will not be issued resulting in a revenue loss
equal to the estimated amount of those pending assessments.
- Taxpayers will report at the higher rate based on their taxable amount after the new deduction resulting in a revenue
gain.
- If this bill passes, taxpayers will begin reporting in compliance with the bill.
Request # 5733-1-1
Form FN (Rev 1/00) 183,303.00 3 Bill # 5733 SB
FNS062 Department of Revenue Fiscal Note
- For tax that is due for periods preceding the effective date of this bill, where penalties and interest are unknown, they are
estimated to be 32% of the tax due.
- The department implements this legislation effective January 1, 2024.
DATA SOURCES
- Department of Revenue, Excise tax return data
- Department of Revenue, Audit data
- Economic and Revenue Forecast Council, November 2022 forecast
REVENUE ESTIMATES:
This bill decreases state revenues by an estimated $190.6 million in the five months of impacted collections in fiscal year
2024, and by $18 million in fiscal year 2025, the first full year of impacted collections.
TOTAL REVENUE IMPACT:
State Government (cash basis, $000):
FY 2024 - ($ 190,600)
FY 2025 - ($ 18,000)
FY 2026 - ($ 23,800)
FY 2027 - ($ 30,100)
FY 2028 - ($ 36,800)
FY 2029 - ($ 38,600)
Local Government, if applicable (cash basis, $000): None.
II. C - Expenditures
Agency expenditures necessary to implement this legislation (or savings resulting from this legislation), with the provisions of the legislation that result in
the expenditures (or savings) identified by section number. Description of the factual basis of the assumptions and the method by which the expenditure
impact is derived. Explanation of how workload assumptions translate into cost estimates. Distinguished between one time and ongoing functions.
ASSUMPTIONS:
- This legislation will affect approximately 300 payment card processing companies, including merchant banks acting as a
payment card processing company.
- The department is not able to fully implement this proposal until January 1, 2024.
- The department will not be able to receive amended returns for the retroactive portion of this legislation until after January
1, 2024. All amended returns for the retroactive portion of this legislation will be received before June 30, 2024.
- The department will be required to process amended returns using a manual process that will require increased resources
for a limited amount of time.
FIRST YEAR COSTS:
The department will incur total costs of $367,900 in fiscal year 2024. These costs include:
Labor Costs - Time and effort equate to 2.25 FTEs.
- Set up, program, and test computer systems to add one new B&O tax line code for payment card processing activities
and one new deduction code for interchange and network fees under the new line code.
- Update the combined excise tax return in all systems.
- Update apportionment reconciliation to include the new reporting line code.
- Create or update taxpayer notifications.
- Create a Special Notice to inform affected taxpayers of the reporting change.
- Update or create publications in print and information on the department’s website.
- Respond to tax ruling requests and email inquiries.
Request # 5733-1-1
Form FN (Rev 1/00) 183,303.00 4 Bill # 5733 SB
FNS062 Department of Revenue Fiscal Note
- Process returns, payments, and all associated work items, including issuing assessments for return errors and
underpayments.
- Assist taxpayers with reporting questions and respond to inquiries via email, web message, and paper correspondence.
- Examine accounts and make corrections as necessary.
- Process accounts with retroactive changes and interest and penalty waivers using a manual process and system
adjustments.
- Amend one excise tax advisory.
Object Costs - $107,800.
- Contract computer system programming.
SECOND YEAR COSTS:
The department will incur total costs of $121,500 in fiscal year 2025. These costs include:
Labor Costs - Time and effort equate to 1.2 FTEs.
- Respond to tax ruling requests and email inquiries.
- Process returns, payments, and all associated work items, including issuing assessments for return errors and
underpayments.
- Assist taxpayers with reporting questions and respond to inquiries via email, web message, and paper correspondence.
- Examine accounts and make corrections as necessary.
- Process accounts with retroactive changes and interest and penalty waivers using a manual process and system
adjustments.
ONGOING COSTS:
Ongoing costs for the 2025-27 biennium equal $123,400 and include similar activities described in the second-year costs. Time
and effort equate to 0.6 FTE.
Part III: Expenditure Detail
III. A - Expenditures by Object Or Purpose
FY 2024 FY 2025 2023-25 2025-27 2027-29
FTE Staff Years 2.3 1.2 1.7 0.6 0.5
A-Salaries and Wages 158,300 79,000 237,300 80,200 65,400
B-Employee Benefits 52,300 26,100 78,400 26,400 21,600
C-Professional Service Contracts 107,800 107,800
E-Goods and Other Services 34,000 12,700 46,700 13,000 10,600
J-Capital Outlays 15,500 3,700 19,200 3,800 3,000
Total $ $367,900 $121,500 $489,400 $123,400 $100,600
Request # 5733-1-1
Form FN (Rev 1/00) 183,303.00 5 Bill # 5733 SB
FNS062 Department of Revenue Fiscal Note
III. B - Detail: FTEs listed by classification and corresponding annual compensation. Totals agree with total FTEs in Part I and Part IIIA.
Job Classification Salary FY 2024 FY 2025 2023-25 2025-27 2027-29
EMS BAND 4 126,619 0.0 0.0
EMS BAND 5 147,919 0.0 0.0
EXCISE TAX EX 2 55,872 0.1 0.1 0.1 0.1 0.1
EXCISE TAX EX 3 61,632 0.7 0.7 0.7 0.2 0.2
IT SYS ADM-JOURNEY 92,844 0.2 0.1
MGMT ANALYST4 73,260 0.7 0.2 0.5 0.2 0.1
MGMT ANALYST5 80,952 0.1 0.1 0.1
TAX POLICY SP 2 75,120 0.4 0.1 0.3 0.1 0.1
TAX POLICY SP 3 85,020 0.0 0.0
TAX POLICY SP 4 91,524 0.0 0.0
WMS BAND 3 107,685 0.0 0.0
Total FTEs 2.3 1.2 1.8 0.6 0.5
III. C - Expenditures By Program (optional)
NONE
Part IV: Capital Budget Impact
IV. A - Capital Budget Expenditures
NONE
IV. B - Expenditures by Object Or Purpose
NONE
IV. C - Capital Budget Breakout
Acquisition and construction costs not reflected elsewhere on the fiscal note and description of potential financing methods.
NONE
Part V: New Rule Making Required
Request # 5733-1-1
Form FN (Rev 1/00) 183,303.00 6 Bill # 5733 SB
FNS062 Department of Revenue Fiscal Note
Summary of SB 5733 Total State Revenue Impact
FY2024 FY2025 FY2026 FY2027 FY2028 FY2029
Forecasted ongoing impact from this legislation ($5,300,000) ($18,000,000) ($23,800,000) ($30,100,000) ($36,800,000) ($38,600,000)
Retroactive impact from this legislation (Section 7) ($185,400,000)
Total State Revenue Impact ($190,700,000) ($18,000,000) ($23,800,000) ($30,100,000) ($36,800,000) ($38,600,000)
Forecasted ongoing impact from this legislation
Current Law ($22,800,000) ($61,800,000) ($69,700,000) ($78,300,000) ($87,000,000) ($91,000,000)
Proposed Law $17,500,000 $43,800,000 $45,900,000 $48,200,000 $50,200,000 $52,400,000
($5,300,000) ($18,000,000) ($23,800,000) ($30,100,000) ($36,800,000) ($38,600,000)
Retroactive impact from this legislation (Section 7)
Loss of current law tax ($241,500,000)
New tax $56,100,000
($185,400,000) $0 $0 $0 $0 $0
Summary of SB 5733 Revenue Impact by Fund
FY2024 FY2025 FY2026 FY2027 FY2028 FY2029
General Fund
Forecasted ongoing tax collections (2,400,000) (9,400,000) (13,400,000) (17,700,000) (22,300,000) (23,400,000)
Retroactive tax collections - tax amounts (104,800,000) - - - - -
Retroactive tax collections - penalties and interest (66,700,000) - - - - -
(173,900,000) (9,400,000) (13,400,000) (17,700,000) (22,300,000) (23,400,000)
WEIA
Forecasted ongoing tax collections (2,900,000) (8,600,000) (10,400,000) (12,400,000) (14,500,000) (15,200,000)
Retroactive tax collections (13,800,000) - - - - -
(16,700,000) (8,600,000) (10,400,000) (12,400,000) (14,500,000) (15,200,000)
Individual State Agency Fiscal Note
Bill Number: 5733 SB Title: Payment card processing/tax Agency: 142-Board of Tax Appeals
Part I: Estimates
X No Fiscal Impact
Estimated Cash Receipts to:
NONE
Estimated Operating Expenditures from:
NONE
Estimated Capital Budget Impact:
NONE
The cash receipts and expenditure 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:
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: Alia Kennedy Phone: 360-786-7405 Date: 02/09/2023
Agency Preparation: Bret Skipworth Phone: 3608906657 Date: 02/14/2023
Agency Approval: Bret Skipworth Phone: 3608906657 Date: 02/14/2023
OFM Review: Amy Hatfield Phone: (360) 280-7584 Date: 02/14/2023
Form FN (Rev 1/00) 182,786.00 Request # 5733SB-1-1
FNS063 Individual State Agency Fiscal Note 1 Bill # 5733 SB
Part II: Narrative Explanation
II. A - Brief Description Of What The Measure Does That Has Fiscal Impact
Significant provisions of the bill and any related workload or policy assumptions that have revenue or expenditure impact on the responding agency by
section number.
Section 7 applies this act retroactively to periods open for assessment under RCW 82.32.050 including disputed
assessments pending before the Department of Revenue (DOR), Board of Tax Appeals (BTA), or any court of law.
The BTA does not collect, administer, or set taxes or fees.
The BTA has determined that applying the changes of this bill to existing cases will have no fiscal impact on the agency.
II. B - Cash receipts Impact
Cash receipts impact of the legislation on the responding agency with the cash receipts provisions identified by section number and when appropriate, the
detail of the revenue sources. Description of the factual basis of the assumptions and the method by which the cash receipts impact is derived. Explanation
of how workload assumptions translate into estimates. Distinguished between one time and ongoing functions.
II. C - Expenditures
Agency expenditures necessary to implement this legislation (or savings resulting from this legislation), with the provisions of the legislation that result in
the expenditures (or savings) identified by section number. Description of the factual basis of the assumptions and the method by which the expenditure
impact is derived. Explanation of how workload assumptions translate into cost estimates. Distinguished between one time and ongoing functions.
Part III: Expenditure Detail
III. A - Operating Budget Expenditures
NONE
III. B - Expenditures by Object Or Purpose
NONE
III. C - Operating FTE Detail: FTEs listed by classification and corresponding annual compensation. Totals agree with total FTEs in Part I
and Part IIIA.
NONE
III. D - Expenditures By Program (optional)
NONE
Part IV: Capital Budget Impact
IV. A - Capital Budget Expenditures
NONE
IV. B - Expenditures by Object Or Purpose
NONE
IV. C - Capital Budget Breakout
Acquisition and construction costs not reflected elsewhere on the fiscal note and description of potential financing methods.
NONE
Payment card processing/tax 142-Board of Tax Appeals
Form FN (Rev 1/00) 182,786.00 Request # 5733SB-1-1
FNS063 Individual State Agency Fiscal Note 2 Bill # 5733 SB
IV. D - Capital FTE Detail: FTEs listed by classification and corresponding annual compensation. Totals agree with total FTEs in Part IVB.
NONE
Part V: New Rule Making Required
Provisions of the bill that require the agency to adopt new administrative rules or repeal/revise existing rules.
Payment card processing/tax 142-Board of Tax Appeals
Form FN (Rev 1/00) 182,786.00 Request # 5733SB-1-1
FNS063 Individual State Agency Fiscal Note 3 Bill # 5733 SB
Multiple Agency Ten-Year Analysis Summary
Bill Number Title
5733 SB Payment card processing/tax
This ten-year analysis is limited to the estimated cash receipts associated with the proposed tax or fee increases.
Estimated Cash Receipts
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year 2024-33
2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 TOTAL
Department of Revenue 40,900,000 43,800,000 45,900,000 48,100,000 50,100,000 52,500,000 55,000,000 57,500,000 60,000,000 62,800,000 516,600,000
Board of Tax Appeals 0 0 0 0 0 0 0 0 0 0 0
Total 40,900,000 43,800,000 45,900,000 48,100,000 50,100,000 52,500,000 55,000,000 57,500,000 60,000,000 62,800,000 516,600,000
FNS067 Multiple Agency Ten-Year Analysis Summary 1
Ten-Year Analysis
Bill Number Title Agency
5733 SB Payment card processing/tax 140 Department of Revenue
This ten-year analysis is limited to agency estimated cash receipts associated with the proposed tax or fee increases. The Office of Financial Management
ten-year projection can be found at http://www.ofm.wa.gov/tax/default.asp .
Estimates
No Cash Receipts Partially Indeterminate Cash Receipts Indeterminate Cash Receipts
Estimated Cash Receipts
Name of Tax or Fee Acct Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year 2024-33
Code 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 TOTAL
Business and occupation tax 001 40,800,000 43,700,000 45,800,000 48,000,000 50,000,000 52,400,000 54,800,000 57,300,000 59,800,000 62,600,000 515,200,000
Business and occupation tax 24j 100,000 100,000 100,000 100,000 100,000 100,000 200,000 200,000 200,000 200,000 1,400,000
Total 40,900,000 43,800,000 45,900,000 48,100,000 50,100,000 52,500,000 55,000,000 57,500,000 60,000,000 62,800,000 516,600,000
Biennial Totals 84,700,000 94,000,000 102,600,000 112,500,000 122,800,000 516,600,000
Narrative Explanation (Required for Indeterminate Cash Receipts)
CURRENT LAW:
The state’s primary business activities tax, the business and occupation (B&O) tax, is a gross receipts tax. As a gross receipts tax, business expenses generally cannot
be deducted from the measure of the tax.
The gross income of a payment card processing company from processing credit, debit, and prepaid card transactions is taxable under the service and other activities B&O
tax classification. This includes the gross amount of merchant discount income with no deduction for the payment card processing company’s expenses, including
interchange fees, network fees, or other such fees. Several payment card processing companies are in litigation with the Department of Revenue (department) over the
department’s position that these companies are subject to B&O tax on interchange fees and network fees, which are typically retained by the banks that issue payment
cards to consumers (issuing banks) and by payment networks (also known as card associations).
Income taxable under the service and other activities B&O tax classification may also be subject to the additional tax on specified financial institutions (82.04.29004) or the
workforce education investment surcharge (RCW 82.04.299) if a business is required to pay either tax.
FNS066 Ten-Year Analysis 1
Ten-Year Analysis
Bill Number Title Agency
5733 SB Payment card processing/tax 140 Department of Revenue
This ten-year analysis is limited to agency estimated cash receipts associated with the proposed tax or fee increases. The Office of Financial Management
ten-year projection can be found at http://www.ofm.wa.gov/tax/default.asp .
Narrative Explanation (Required for Indeterminate Cash Receipts)
Generally, businesses with total service and other activities income totaling $1 million or more pay tax at the rate of 1.75%. Of the tax paid at this rate 14.3% is deposited
into the workforce education investment account. Businesses with total service and other activities income totaling less than $1 million, or businesses that pay the workforce
education investment surcharge, pay tax at the rate of 1.5%.
PROPOSAL:
This bill creates a new B&O tax classification for merchant discount income received by payment card processing companies, including merchant banks, and a new
deduction is created for amounts received in the form of interchange fees or network fees. The tax rate for the new classification is 3%.
If more than one payment card processor receives a portion of the merchant discount, each business reports only the amount of merchant discount it is entitled to keep.
The income taxable under the new classification may also be subject to the additional tax on specified financial institutions and the workforce education investment
surcharge if the payment card processing company is required to pay either tax.
The retroactive application of this bill applies to tax periods open for assessment within the statute of limitations, including any disputed assessments pending with the
department, Board of Tax Appeals, or any court of law.
If retroactive application results in overpaid tax, no tax, interest, or penalties will be refunded.
If retroactive application results in underpaid tax, the underpaid tax is exempt from penalties and interest and must be paid within 90 days of this bill's enactment.
"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 sales transaction.
“Payment card processing company” means a company, including a merchant bank, that acquires, either directly or indirectly, credit, debit, or prepaid card transactions
from merchants, facilitates the submission of those transactions to payment networks, and facilitates the payment of proceeds of those transactions to merchants.
“Merchant bank” means a bank that is a participant in a payment network(s) that contracts, directly or indirectly, with a merchant, enabling that merchant to accept a
payment network-branded credit, debit, or prepaid card and receive cash proceeds from the sale.
“Interchange fee” means a fee 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
FNS066 Ten-Year Analysis 2
Ten-Year Analysis
Bill Number Title Agency
5733 SB Payment card processing/tax 140 Department of Revenue
This ten-year analysis is limited to agency estimated cash receipts associated with the proposed tax or fee increases. The Office of Financial Management
ten-year projection can be found at http://www.ofm.wa.gov/tax/default.asp .
Narrative Explanation (Required for Indeterminate Cash Receipts)
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” means 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.
“Payment network,” means an operator of a system or network connecting one or more issuing banks to one or more merchant banks, facilitating financial transactions
through the use of a credit, debit, or prepaid product.
"Issuing bank” means a bank that issues payment network-branded credit, debit, or prepaid cards to cardholders.
EFFECTIVE DATE:
This bill takes effect on October 1, 2023. However, due to the time it will take to program this bill's changes, the department is unable to implement the bill until January 1,
2024.
ASSUMPTIONS
- Some payment card processing companies are not reporting a portion of the merchant discount representing interchange and network fees on their excise tax returns,
because they are disputing whether they owe B&O tax on these amounts, which are retained by issuing banks and payment networks. In these instances, taxable amounts
have been adjusted to calculate the amount of deduction that would be available should this bill become law.
- An analysis of audit enforcement activity for the payment card processing industry shows that 72% of businesses audited underreported interchange and network fees on
their excise tax returns by a factor of 3.34. This means that for every $1 in tax reported, taxpayers should have reported $3.34, resulting in underreporting of $2.34.
- Interchange fees and network fees generally represent 68% of a credit card processor's taxable service and other activities income subject to B&O tax.
- Under current law, any disputed tax assessments regarding interchange and network fees will be upheld in favor of the department.
- Under current law, taxpayer education and audit enforcement efforts will continue and the expected revenue from the payment card processing industry will increase each
fiscal year.
- If this bill passes, the retroactive language has an overall negative revenue impact in the first year as follows:
- Any disputed tax assessments will be cancelled resulting in a revenue loss equal to the amount of those assessments.
- Current enforcement efforts will cease and those pending assessments will not be issued resulting in a revenue loss equal to the estimated amount of those pending
assessments.
- Taxpayers will report at the higher rate based on their taxable amount after the new deduction resulting in a revenue gain.
FNS066 Ten-Year Analysis 3
Ten-Year Analysis
Bill Number Title Agency
5733 SB Payment card processing/tax 140 Department of Revenue
This ten-year analysis is limited to agency estimated cash receipts associated with the proposed tax or fee increases. The Office of Financial Management
ten-year projection can be found at http://www.ofm.wa.gov/tax/default.asp .
Narrative Explanation (Required for Indeterminate Cash Receipts)
- If this bill passes, taxpayers will begin reporting in compliance with the bill.
- For tax that is due for periods preceding the effective date of this bill, where penalties and interest are unknown, they are estimated to be 32% of the tax due.
- The department implements this legislation effective January 1, 2024.
DATA SOURCES
- Department of Revenue, Excise tax return data
- Department of Revenue, Audit data
- Economic and Revenue Forecast Council, November 2022 forecast
REVENUE ESTIMATES:
This bill decreases state revenues by an estimated $190.6 million in the five months of impacted collections in fiscal year 2024, and by $18 million in fiscal year 2025, the
first full year of impacted collections.
TOTAL REVENUE IMPACT:
State Government (cash basis, $000):
FY 2024 - ($ 190,600)
FY 2025 - ($ 18,000)
FY 2026 - ($ 23,800)
FY 2027 - ($ 30,100)
FY 2028 - ($ 36,800)
FY 2029 - ($ 38,600)
Local Government, if applicable (cash basis, $000): None.
Agency Preparation: Melissa Howes Phone: 360-534-1518 Date: 2/13/2023 6:38:01 pm
Agency Approval: Valerie Torres Phone: 360-534-1521 Date: 2/13/2023 6:38:01 pm
OFM Review: Phone: Date:
FNS066 Ten-Year Analysis 4
Ten-Year Analysis
Bill Number Title Agency
5733 SB Payment card processing/tax 142 Board of Tax Appeals
This ten-year analysis is limited to agency estimated cash receipts associated with the proposed tax or fee increases. The Office of Financial Management
ten-year projection can be found at http://www.ofm.wa.gov/tax/default.asp .
Estimates
X No Cash Receipts Partially Indeterminate Cash Receipts Indeterminate Cash Receipts
Name of Tax or Fee Acct
Code
Agency Preparation: Bret Skipworth Phone: 3608906657 Date: 2/14/2023 8:01:28 am
Agency Approval: Bret Skipworth Phone: 3608906657 Date: 2/14/2023 8:01:28 am
OFM Review: Phone: Date:
FNS066 Ten-Year Analysis 1
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