On Thursday, Jan. 26, the Senate Business, Financial Services, Gaming & Trade Committee will hold a hearing on SB 5482, a bipartisan bill to reform Washington state’s business tax system recommended by the state Tax Structure Work Group.

The bill, sponsored by work group co-chairs Sen. Noel Frame (D-Seattle) and Sen. Keith Wagoner (R-Sedro Woolley), would replace Washington’s current business and occupation (B&O) tax with a margin tax, modeled after Texas’ franchise tax.

“This tax reform proposal is the culmination of years of hard work, analysis, and public input,” said Frame. “Thank you to the thousands of Washington residents and business owners who shared their feedback on how to improve the state’s tax structure. This bill is the result of a thoughtful and bipartisan process to make much-needed changes to Washington’s taxes.”

“We greatly appreciate the valuable input received from the public in considering a variety of ideas for the full Legislature to consider during its 2023 session,” said Wagoner. “While not everyone will agree with the final recommendations, I personally want to thank my fellow work group members for working in a bipartisan and collaborative manner and to commend the Department of Revenue for their hard work.”

The Tax Structure Work Group’s recommendation for the margin tax resulted from five years of studies and community engagement. The group conducted 14 town hall events, six focus groups held in Spanish, Vietnamese, Korean, Russian, Cantonese, and Mandarin, and connected with more than 5,000 Washingtonians for their feedback and input. The group examined many alternatives to make the state’s taxes more transparent, stable, and fair in a revenue neutral manner.

The proposed margin tax would replace Washington State’s current B&O tax, which is calculated using businesses’ gross receipts. Previous economic studies found that the B&O tax can disadvantage small, start-up, and low-margin companies like restaurants and grocery stores.

To address these disadvantages and other issues with the B&O tax, the Work Group recommended that the Legislature consider replacing the B&O tax with a modified gross receipts tax called a “margin tax,” modeled after the Texas franchise tax. In the margin tax, a business starts with its gross receipts and then subtracts the greatest of four possible deductions:

  • Cost of goods sold,
  • Compensation paid,
  • A fixed percentage of gross receipts (30%), or
  • A flat amount ($1 million).

The remaining “margin” is then taxed at a single rate for all taxpayers. As specified in SB 5693, proposals from the Tax Structure Work Group must be revenue neutral. The margin tax rate to achieve revenue neutrality is 3.1966%.

During public outreach for the work group, some business owners provided feedback that a replacement for the B&O should be fairer than the current system, but also keep simplicity in mind. Recognizing that changing a system that has been in place for nearly 90 years might be complex, the margin tax proposal also provides an “EZ rate” option for businesses with gross revenue of $5 million or less annually to essentially stick with the B&O model. An eligible business can elect to pay the margin tax on its gross revenue, with no standard deductions allowed, at a lower “EZ rate” of 1.75%.

The proposal would eliminate the B&O starting January 1, 2027, and the margin tax would begin for gross revenue earned in 2027.

Businesses who are interested in the impact of replacing the B&O tax with a margin tax on their own tax payments can use the Tax Structure Work Group’s tax calculator to compare their current B&O tax to what they would pay under a potential margin tax. The tax calculator is for discussion purposes only and inputted information is not shared or stored. More detail on the margin tax proposal is available on the Tax Structure Work Group’s website.

The committee hearing will be Thursday, Jan. 26, at 10:30 a.m. It can be viewed live and for replay on TVW here. Interested members of the public can find instructions on how to contact their legislators here, can send their comments specifically on the bill through this portal, or can testify to committee electronically here.