The Washington State Department of Revenue (“Department”) has announced that it is not implementing certain industry-targeted Business and Occupation (“B&O”) tax surcharges that went into effect on January 1, 2020 until further notice. Pending legislation would repeal the surcharges and replace them with higher rates targeting larger companies across all industries.

On January 30, 2020, the Department updated its website and Special Notice for the Workforce Education Investment Surcharge to announce that the surcharge is not being implemented because of “pending legislation.” In fact, the surcharge line will not appear on the January 2020 Combined Excise Tax Return. This means that even though monthly filers are required by statute to pay the surcharge by the February 25 filing deadline, the Department is not providing a mechanism for businesses to report the tax.


On May 21, 2019, Governor Jay Inslee signed Engrossed Second Substitute House Bill 2158 into law. The bill enacted a B&O tax surcharge on the service receipts of taxpayers primarily engaged in any combination of 43 specified business activities, effective January 1, 2020. For taxpayers subject to the surcharge, the Service and Other Activities B&O tax rate was effectively increased from 1.5% to 1.8%.

In order to help taxpayers navigate the labyrinth of business activities subject to the surcharge, the Department issued a “Workforce Education Workbook” that divided the 43 specified business activities into 13 different “industry groups” subject to the additional tax. Those industry groups are:

  1. Electric power;
  2. Aerospace manufacturing;
  3. Professional and commercial wholesalers;
  4. Business-to-business electronic markets;
  5. Non-store retailers;
  6. Information services;
  7. Finance and insurance;
  8. Intangible assets;
  9. Professional, scientific, and technical services;
  10. Management of companies;
  11. Healthcare;
  12. Business, professional, labor, political, and similar organizations; and
  13. Government.

The law also imposes a separate surcharge on affiliated groups engaged in a “select advanced computing business.”1 Advanced computing businesses are subject to an effective rate of 2.0% if worldwide gross revenue exceeds $25 billion, or 2.5% if worldwide gross revenue exceeds $100 billion.2 Advanced computing businesses are also subject to a minimum surcharge of $4 million and a maximum surcharge of $7 million.3

These surcharges were enacted separately from (and are imposed in addition to) the 1.2% B&O tax imposed upon financial institutions with at least $1 billion of net income that was also enacted on May 21, 2019 with an effective date of January 1, 2020.4 (That bill is currently being challenged on grounds that it violates procedural requirements in Washington’s constitution and that it violates the Commerce Clause of the U.S. Constitution because only out-of-state banks are subject to the surcharge.) Neither the surtax on specified financial institutions nor the pending litigation are addressed by the Department’s announcement or the current versions of the pending legislation cited by the Department.

Pending Legislation

Though multiple bills that modify the Workforce Education Investment Surcharge have been introduced in the current legislative session, Senate Bill 6492 has gained the most traction. If enacted, the bill would retroactively eliminate the new B&O tax surcharges and instead increase the Service and Other Activities rate to 1.75% for all businesses with gross income in excess of $1 million—irrespective of their industry.

After it was introduced, the bill was amended to replace the tiered advanced computing surcharge with a single surcharge of 1.22% on select advanced computing businesses with worldwide gross income of more than $25 billion (up to a maximum surcharge of $9 million per year). Companies subject to the surcharge also remain subject to the 1.5% tax on receipts from Service and Other Activities, resulting in an effective tax rate of 2.72%.5

Notably, financial institutions are explicitly excluded from the definition of “select advanced computing businesses” under the proposed law.6 Instead, those businesses will be subject to the general rate increase to 1.75% (or 2.95% for financial institutions with at least $1 billion of net income).7 Under current law, this exclusion is not explicit.

In sum, taxpayers are affected by the current law and pending legislation as follows:

On January 30, 2020, the Senate passed the amended version of the bill by a vote of 28-21. As of publication, the bill is pending in the House. If passed as currently drafted, the current surcharges would be repealed effective January 1, 2020 and the new changes would be imposed effective April 1, 2020.

What’s Next?

For the 10,400 taxpayers that the Department of Revenue estimates are already subject to the surcharge on specified business activities, these developments are good news. Not only would the rate be reduced slightly from 1.8% to 1.75%, but the effective date of the increased tax would be April 1 instead of January 1.

For the estimated 4,400 taxpayers that are subject to the Service and Other Activities rate but not already captured by the surcharge, the changes represent a tax rate increase from 1.5% to 1.75%. Likewise, taxpayers engaged in advanced computing businesses will see their Service and Other Activities B&O tax rates increase significantly.

If the pending legislation is enacted and the surcharge repealed, the result will be a far more administrable tax structure for the Department and taxpayers alike, because it will eliminate the need to determine whether a taxpayer falls within one of the 13 industry groups subject to the surcharge. If the legislation is not enacted, the Department’s actions may create even more uncertainty as it attempts to address both the uncertainty in the application of the surcharge and its decision not to implement it in accordance with the statutory effective date.