An $800 million dollar tax increase package has passed the Washington state legislature and is now awaiting Governor Gregoire's signature. Following is a summary of the tax package components:
Temporary B&O tax increase on services
Effective date: 5/1/2010
An increase of 0.3% in the business and occupation (B&O) tax rate on companies reporting revenues at the Service and Other Activities and Games of Chance classifications, as well as real estate brokers. The new rate is 1.8% until 6/30/2013. This rate does not apply to hospitals or revenue from scientific research and development activities.
Small business tax credit increased
Effective date: 5/1/2010
The small business tax credit is increased for taxpayers reporting at least 50% of their taxable amount in classifications subject to the new 1.8% B&O tax rate. The tax return filing threshold for these businesses is increased to $46,667 per year until 6/30/2013. The small business tax credit is unchanged for other activities.
Economic nexus for service and royalty activities
Effective date: 6/1/2010
Businesses performing activities subject to either the Service or Royalties B&O tax classification are taxable in Washington if either the company is located in Washington or if the client receiving the service is located in Washington. Revenue from these activities is now apportioned to Washington based on a single sales factor formula. Out-of-state businesses must meet a minimum threshold of either $50,000 of payroll, $50,000 of property, or $250,000 of sales in Washington before they become subject to the tax. This change does not impact city B&O taxes or apportionment.
Penalty on tax avoidance transactions
Effective date: Retroactive to 1/1/06
Unreported revenue from certain transactions will be subject to an additional 35% penalty. These include: engaging in joint venture arrangements between a construction contractor and land owner or developer; disguising income received from unrelated parties by utilizing an out-of-state entity; and avoiding sales or use tax on the acquisition of tangible personal property through a controlled entity. Also modifies real estate excise tax (REET) provisions related to granting of an option to acquire an interest in real estate, and in circumstances of an entity containing real estate being transferred, extends the liability for REET to either the buyer, seller, or the entity containing real estate.
Extending B&O tax to directors of corporations
Effective date: 7/1/2010
Clarifies that directors of corporations are subject to B&O tax on their compensation received for serving on the board.
Elimination of B&O tax exemption on property management
Effective date: 6/1/2010
The exemption now only applies to non-profit property management companies and amounts received by a property management company from a housing authority.
Modifying the B&O tax deduction for income from loans secured by first mortgages
Effective date: 6/1/2010
Certain types of income related to loans secured by first mortgages on nontransient residential property are now not deductible from B&O tax.
Sales and use tax extended to bottled water and candy
Effective date: 7/1/2010
"Candy" contains sweeteners and other ingredients, is sold in drops, bars, or pieces, but does not include products containing flour or requiring refrigeration. The Department of Revenue is expected to issue specific guidance on which "candy" products are subject to sales tax. A B&O tax credit is available for Washington candy manufacturers. The sales and use tax now imposed on bottled water will expire on 7/1/2013, while the tax on candy has no expiration date.
Temporary tax on carbonated beverages
Effective date: 7/1/2010
An additional tax of two cents per twelve ounces is imposed on sellers of carbonated beverages sold in Washington. This tax does not apply to successive sales of previously taxed beverages if documented that the tax has been paid. This tax does not apply on the first $10 million of sales by a bottler. The tax expires 6/30/2013.
Temporary tax on beer
Effective date: 6/1/2010
Imposes an additional tax on beer sales of 50 cents per gallon. The tax is paid by distributers or breweries until 6/30/2013. This tax does not apply to microbreweries' first 60,000 barrels sold per year.
Expanded liability for collected sales tax
Effective date: 5/1/2010
When an entity fails to remit collected sales tax to the Department of Revenue and is abandoned or insolvent, the Department may seek these taxes, penalties and interest from any or all responsible individuals. Responsible individuals include the CEO, CFO, and any other current or former employee or individual who willfully failed to remit the tax.
Cigarette and tobacco products tax increase
Effective date: 5/1/2010
Increases taxes one dollar per pack on cigarettes and increases the tax on other tobacco products to 95% of the wholesale price (from 75%) with some exceptions.
Bad debts
Effective date: 7/1/2010
Limits the bad debt deduction for reported but uncollectible sales taxes only to the original seller.
Manufacturers of agricultural products
Effective date: 7/1/2010
Narrows the definitions of manufactured meat, fruit and vegetable products eligible for B&O tax incentives.
Electricity sales
Effective date: 5/1/2010
Expands the taxable amount for public utility districts selling electricity.
Direct seller's exemption
Effective date: 5/1/2010
Retroactively clarifies and prospectively repeals the B&O tax exemption for out-of-state manufacturers utilizing direct seller representatives in Washington.
Livestock manure facilities
Effective date: 7/1/2010
Suspends the sales and use tax exemption for livestock nutrient management facilities until 6/30/2013.
Data center
Effective date: 5/1/2010
Expands the employment requirements for the sales and use tax exemption for qualified data centers of more than 20 thousand square feet, located in rural counties and constructed prior to 7/1/2011.
For additional information on any of these taxes, please contact Darcy Kooiker, CPA, Director of State and Local Tax Services (dkooiker@bpcpa.com) or Rachel Roberson, Staff Analyst (rroberson@bpcpa.com) at 425.454.7990. 
