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BP Blast: Washington Legislation Update


Washington’s legislature concluded its 2019 session with some significant changes that will impact many businesses. In this blast, we’ll be focusing on two bills currently awaiting the Governor’s signature: ESSB 5998 and ESSHB 2158.

New to this session, the legislature has drastically tilted the bias towards taxation and against businesses. This will result in additional tax, penalties and interest (“tax traps”) for those caught unaware. As a consequence, companies will need to focus on risk management and planning if they are conducting business in Washington.

Graduated Real Estate Excise Tax (REET)

REET applies to the sale of real property or to certain transactions involving entity ownership changes (controlling interests) in entities that own real property. There are both state and local tax rates.

Beginning January 1, 2020, REET will be implemented at a graduated rate based on the sale price of the property. These rates reflect the state portion of the tax only; local REET will still apply. Timberland and agricultural land remain taxable at the current rate of 1.28%. Important to note: These apply to the portion of the sale price in the relevant bracket and may be adjusted for inflation under certain circumstances.

These rates also apply to transfers of a controlling interest in an entity owning real property which are deemed to be a sale of the underlying real property and subject to REET if the controlling interest change occurs within 3 years (previously one year). Any purchase option agreements can extend this review period.

Further, the Department of Revenue will apply the tax avoidance rules to REET structured transactions which may result in additional penalties of 35%. Additional reporting is required with the Secretary of State regarding ownership changes for visibility purposes; failure to comply can result in evasion penalties of 50%.

Rate (state only)  Sales range
1.10%  $1 – $500,000
1.28%  $500,001 – $1,500,000
2.75%  $1,500,001 – $3,000,000
3.00%  $3,000,001 +

 

Service Business and Occupation (B&O) Surcharge

Beginning January 1, 2020 there will be an additional surcharge on Service B&O that applies to industries that benefit from an educated workforce. The funds will be used to further post-secondary education opportunities. Numerous industries will be affected, including high tech, medical, professional, financial and investment services. The surcharge applies to revenues reported under the Service and Other Activities B&O classification only.

The surcharge is 20% for most businesses, which results in an overall Service B&O rate of 1.8%. However, for large businesses the surcharge increases if worldwide gross annual revenues from all affiliated companies are greater than $25 billion.

This bill contains aggressive language in terms of how it is to be applied. Any ambiguity as to whether the tax applies is interpreted in favor of taxation by both the Department of Revenue as well as the courts. Additionally, if the Department determines that the tax applies, the taxpayer must prove by “clear, cogent, and convincing evidence” that it does not apply in order to refute the taxable presumption. This refers to a legal standard of evidence and is among the higher evidentiary standards. Businesses not paying the surcharge should have well documented evidence that it does not apply as part of their files.

Capital Gains Tax

The silver lining from this session is that despite proposals from the Governor and the Democratic majorities in both the House and Senate, there was no capital gains tax included in the final budget bills. However, this has been a theme in several previous sessions so we may see more proposals in the next legislative session, especially if there are any court challenges to the recently passed tax legislation.

If you have questions about the Washington State taxes, please reach out to Rachel Roberson, CPA at rroberson@bpcpa.com. We’re here to help!