Workforce Education

Effective April 1, 2020, the business and occupation (B&O) tax has two tax rates under the Service and Other Activities classification. The Service and Other Classification will have two separate lines on the tax return:

• Service and Other Activities ($1 million or greater in prior year) – 1.75% tax rate.
• Service and Other Activities – 1.5% tax rate.

Other affected businesses include:

• Scientific Research and Development.
• Real estate brokers.
• Hospitals.

Below, we discuss reporting in more detail with examples. For businesses or affiliated groups that are engaged in advanced computing, please see our Select Advanced Computing Business webpage.

Service and Other Activities changes

If you (or your affiliated group) had taxable income of $1 million or more subject to the Service and Other Activities classification in the prior calendar year, you are subject to the 1.75% tax rate in the current calendar year. If you (or your affiliated group) had less than $1 million of taxable income in the prior calendar year, then the 1.5% tax rate applies for the current calendar year.

Example 1 – under $1 million
Sally started a consulting business in 2018. In 2019, the business had gross receipts of $1.1 million. After claiming an apportionment deduction for $800,000, her business was subject to WA Service and Other Activities B&O tax on $300,000 taxable income. Sally will report at the 1.5% rate beginning April 1, 2020.

Example 2 – over $1 million
In 2021, Sally’s accountant informs her the taxable income subject to the Service and Other Activities classification during the 2020 calendar totaled $1.2 million, after claiming an apportionment deduction. Sally must report her consulting income at the 1.75% rate for the entire 2021 calendar year.

Example 3 – over $1 million combined with affiliate
Rainforest Inc. is operating a social networking platform. In 2019, Rainforest Inc. had $800,000 in taxable service income reportable to WA. Rainforest Inc. checks with its affiliate and finds they have taxable service income to report to WA in the amount of $400,000. Because their combined total is over $1 million, Rainforest Inc. and their affiliate will both report their service income under the 1.75% rate beginning with their April 2020 return.

Example 4 – mixed classifications
Mike owns several music schools across town. They not only provide instruction on how to play instruments, but also sell new and used instruments at retail. In 2019, the music school’s income was $1.1 million. However, $200,000 of it was in retail sales. Mike’s music school will continue to report under the 1.5% rate for all of 2020 because his service taxable income was less than $1 million ($900,000).

Scientific Research and Development

If you (or your affiliated group) had $1 million or greater of taxable income subject to the Scientific Research and Development classification in the prior calendar year, you are subject to the 1.75% tax rate. You will report your taxable income under the Service and Other Activities ($1 million or greater in prior year) classification in the current calendar year.

If you (or your affiliated group) had less than $1 million of taxable income in the prior calendar year, the 1.5% tax rate applies and you may report your taxable income under the Scientific Research and Development classification in the current calendar year.

Example 5 – under $1 million
Smith R&D had taxable gross receipts of $3.9 million in 2019. $3 million of the receipts were apportioned to California, leaving $900,000 in taxable income for Washington. Smith R&D will report under the Scientific Research and Development line for all of 2020.

Example 6 – over $1 million
Smith R&D had taxable income attributed to WA during the 2020 calendar year totaling $1.5 million. Smith R&D must report the taxable income under the Service and Other Activities ($1 million or greater in prior year) line at the 1.75% tax rate for the entire 2021 calendar year.

Example 7 – over $1 million combined with affiliate
Jones R&D had $800,000 in taxable income in 2019. Jones R&D checks with its affiliate and finds they had $500,000 of taxable income subject to the Service and Other Activities classification in 2019. Because their combined total is over $1 million, Jones R&D and their affiliate will both report under the Service and Other Activities ($1 million or greater in the prior year) line at the 1.75% tax rate beginning April 1, 2020.

Example 8 – mixed classifications
Lopez R&D provides both research and development services and sells scientific equipment at wholesale. In 2019, the Lopez R&D taxable income was $1.4 million. However, $500,000 of receipts were from wholesale sales. Lopez R&D reports the research development services income under the Scientific Research and Development line at the 1.5% tax rate for the entire 2020 calendar year because the research and development services taxable income was less than $1 million ($900,000).

Real estate broker commissions

Commissions earned by real estate brokers from sales of real estate continue to be subject to the Service and Other Activities classification at a 1.5% tax rate, even if the commissions are $1 million or more in the prior calendar year.

Real estate brokers that have income (other than real estate commissions taxable under RCW 82.04.255) subject to the Service and Other Activities classification are subject to the 1.75% rate, if this income exceeded $1 million in the prior calendar year.

Example 9 – under $1 million
Red Brick Realty earned $600,000 in commissions from real estate sales in 2019. In 2020, commissions from real estate sales are reported under the Service and Other Activities line at the 1.5% tax rate.

Example 10 – over $1 million
Red Brick Realty earned $1.2 million in commissions from real estate sales in 2020. In 2021, commissions from the real estate sales are reported under the Service and Other Activities line at the 1.5% tax rate. It is immaterial that commissions were $1 million or more in the prior calendar year.

Example 11 – mixed classifications
In 2019, White Brick Realty earned $2 million in commissions from real estate sales in 2019, and $4 million in fees from property management services. Beginning April 1, 2020, White Brick Realty reports the commissions under the Service and Other Activities classification at the 1.5% tax rate, and they report the property management fees under the Service and Other Activities ($1 million or greater in prior year) line at the 1.75% tax rate.

Hospitals

Hospitals as defined in RCW 70.41.020 continue to report income from providing services to patients and clients under the For Profit Hospital or Public/Non-profit Hospitals B&O tax classifications. Any income from activities subject to Service and Other Activities B&O tax is reported on the excise tax return under the 1.5% rate, even if amounts earned are $1 million or more in the prior calendar year.

Example 12 – over $1 million
In 2019, Community Hospital had taxable income from providing service to patients of $12 million and income from activities subject to service and other activities B&O tax of $2.5 million. In 2020, income subject to the Service and Other Activities classification is reported under the Service and Other Activities line at the 1.5% tax rate. It is immaterial the taxable income is $1 million or more in the prior calendar year.

Definitions

Affiliate and affiliated means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with another person.

Control means the possession, directly or indirectly, of more than 80% of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting shares, by contract, or otherwise.

Affiliated group means a group of two or more persons that are affiliated with each other.

Apportionment

Income subject to Service and Other Activities classification and Scientific Research and Development is considered “apportionable income.” Income apportioned to Washington is considered taxable income. See WAC 458-20-19402 for more information about apportioning income.

Other information

Where do the funds go?

14.3% of the revenue collected from the 1.75% rate will be deposited into the Workforce Education Investment Account. Funds are used for higher education programs, operations, compensation and state-funded aid programs. During the 2019-2021 biennium, funds may be used for kindergarten through twelfth grade if used for career-connected learning.

Questions and information

• If you have any questions, please call our telephone information center at 360-705-6705.
• You may also request a tax ruling.