On February 3, 2012, the Washington State Senate Committee on Economic Development, Trade and Innovation voted in favor of Senate Bill 6327[1. SB 6327 has been referred to the Ways and Means Committee, the primary fiscal committee for the Washington State Senate. The Committee has responsibility for developing operating and capital budgets and tax and pension policy.] , which would provide a welcome exemption from business and occupation (“B&O”) tax for new businesses. The pending law, which has yet to be signed into law by Governor Christine Gregiore, would create a new blanket exemption from taxes imposed under RCW 82.04, giving a pro-business break to the greater Seattle start-up community. This proposed tax break represents a clear effort by the Legislature to incentivize new business now.
Effective July 1, 2012, B&O tax would not apply to new businesses. A new business would be exempt from the B&O tax for the first 12 months of operation. In addition, a new business with less than 25 full time employment positions would be exempt from B&O taxes for the first 24 months of operations and then subject to 50 percent of the B&O tax due in the following 12 months.
The newly proposed law would make a singular, yet sweeping change to the way Olympia levies B&O taxes on those starting businesses in Washington. It’s a short-term break calculated to help new business break even. The smaller the business, the bigger the break.
Critical to appreciating the impact of Senate Bill 6327 is understanding two basic concepts “B&O Tax,” and “new business.”
“Business & occupation tax” is Washington’s “major business tax” and is imposed by the Department of Revenue (“DOR”) pursuant to RCW 82.04 against every business “for the act or privilege of engaging in business activities” in Washington. The B&O tax is imposed on the gross receipts of business activities conducted within the state. There are several rate categories, and a business may be subject to more than one B&O tax rate, depending on the types of activities conducted. However, there are many exemptions for specific types of business activities and certain deductions and credits permitted under the B&O tax statutes[2. Exempted activities include wholesale sales of agricultural products by farmers; qualified fundraising activities by qualified nonprofit organizations; state and federally chartered credit unions; and the sale or rental of real estate other than lodging.] . You can learn more about B&O tax here.
With B&O tax, the Legislature is primarily concerned with out-of-state business operating in Washington. Out-of-state businesses, without any physical presence in Washington, can earn significant income from Washington residents and receive significant benefits and opportunities provided by the state. The legislature levies a business and occupation tax on these companies to ensure that they pay their fair share of the cost of services that this state renders and the infrastructure it provides.
Under SB 6327, “new business” would mean a business that obtained or was required to obtain a registration certificate under RCW 82.32.030 for the first time during the calendar year for which exemption is first claimed under this section. You can file to obtain a registration certificate by submitting a Business License Application to the DOR. A new business would need to file an application with the DOR to qualify for the exemption within one year of the time the business was required to obtain a registration certificate under RCW 82.32.030. The exemption from the B&O tax would commence once the application is approved by DOR.
“New business” would not include restructured, reorganized, or transferred businesses, unless the majority of the activities to be conducted after the restructuring, reorganization, or transfer are significantly different from the activities previously conducted. Additionally, “new business” would not include merely the creation of a new branch location or other facility, except by an existing out-of-state entity first doing business in this state. Finally, “new business” would not include any business that is substantially similar to a business currently operated, or operated within the past five years, by the same principals.
Small businesses play a vital role in Washington’s current and future economic health. In SB 6327, the 62nd Legislature has hit a pro-business home run in terms of helping start-ups get off the ground and grow in their first year (or three) of operations. For those thinking about starting a new business in 2012, SB 6327 is very good news. We can only hope that Governor Gregiore agrees.
For those of you interested in starting a new business in 2012, it is important to make sure you promptly and properly file for the B&O tax exemption. We here at CompanyCounsel.net are dedicated to helping keep the Seattle start-up community educated and informed of the advantages and opportunities available to them. Please check back with us in the following weeks to find out more about the pending B&O Tax exemption. Assuming SB 6327 is passed into law, we will be updating the start-up community once again as we learn more about how the DOR will be interpreting and implementing the new law.