Should a Margins Tax Replace State’s B&O?

February 14, 2023

Should a Margins Tax Replace State’s B&O?

As the result of a multi-year research and outreach process, legislation has finally been introduced seeking to replace Washington’s Depression-era Business & Occupations (B&O) tax. The state’s Tax Structure Work Group has posted materials explaining the process and proposal, as well as a tax calculator so you can determine how a margins tax might impact your annual tax liability. As most readers know, the B&O is a tax on gross receipts. Profitability and business expenses are not considered when calculating B&O tax liability. Basically, state government gets paid before you or your workers do, and regardless of whether your firm is financially viable. Aside from the Small Business Tax Credit, which exempts firms earning less than $125,000 annually from the tax and provides a declining partial deduction as revenues approach $250,000, most small businesses are generally ineligible for the 200 tax preferences the B&O affords larger, politically powerful industries and firms. To help remedy these concerns, Senate Bill 5482 would replace the state’s existing B&O tax with a Texas-style margins tax on adjusted gross receipts. Here are links to the bill text and a summary of what the bill intends to do. Highlights of the proposed new Margins Tax include:

No tax owed or tax returns required for businesses with gross receipts up to $500,000.
All businesses may elect to take a flat $1 million deduction and pay tax on any revenue above that amount. (This means that businesses earning $1 million or less would not pay the tax, although a tax return would be still need to be filed.)
Instead of the $1 million deduction, businesses could choose any one of the following deductions:– A standard 30% deduction. Tax would be due on the remaining 70% of gross revenue. — Deduct the cost of goods sold. Tax would apply to the remainder. — Deduct compensation costs, capped at $400,000 per employee. Tax would apply to the remainder.
Firms earning less than $5 million could instead elect to file and pay an “EZ rate” of 1.75% of gross with no other deductions.

To make the plan revenue neutral, the new tax rate is expected to be roughly 3.2% of a firm’s adjusted gross revenue. The bill would also eliminate nearly all B&O tax preferences, but create a tax credit for retailers to compensate them for collecting sales taxes for state and local governments. NFIB will take a position based on a forthcoming special member ballot explaining the specifics of the proposal now that a bill has been introduced. We strongly urge members to use the tax calculator to compare their potential tax liability under a new margins tax and the existing B&O tax before voting their special member ballot.