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 Activities B&O tax 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 B&O tax changes

If you (or your affiliated group) had taxable income of $1 million or more subject to the Service and Other Activities B&O tax 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, 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, the business was subject to 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 – $1 million or more
In 2021, Sally’s accountant informed her that the taxable income subject to the Service and Other Activities B&O tax classification during the 2020 calendar year totaled $1.2 million after claiming an apportionment deduction. Sally must report her consulting income at the 1.75% B&O tax rate for the entire 2021 calendar year.

Example 3 – $1 million or more combined with affiliate
Rainforest Inc. operates a social networking platform. In 2019, Rainforest Inc. had $800,000 in taxable service income reportable to Washington. In addition, Rainforest Inc.’s affiliate had $400,000 in taxable service income reportable to Washington in 2019. Because the combined income of Rainforest Inc. and its affiliate is equal to or greater than $1 million, Rainforest Inc. and its affiliate must report their service income under the 1.75% B&O tax rate beginning with their April 2020 return.

Example 4 – Mixed classifications
Mike owns several music schools in Washington. 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, including $900,000 in gross income from instructional services and $200,000 in retail sales. All of the income from instructional services was apportionable to Washington, and all retail sales were sourced to Washington. Mike’s music school will continue to report under the 1.5% rate for all of 2020 because the business’s taxable service 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 B&O tax 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) B&O tax 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 B&O tax classification in the current calendar year.

Example 5 – Under $1 million
Smith R&D provides scientific research and development services. In 2019, Smith R&D had gross income of $3.9 million. $3 million of the gross income was apportioned to California, and $900,000 was apportionable to Washington. Smith R&D will report under the Scientific Research and Development B&O tax classification for all of 2020.

Example 6 – $1 million or more
Smith R&D had taxable income attributed to Washington 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) B&O tax classification at the 1.75% tax rate for the entire 2021 calendar year.

Example 7 – $1 million or more combined with affiliate
Jones R&D provides scientific research and development services. In 2019, Jones R&D had $800,000 in taxable income attributed to Washington. In addition, Jones R&D’s affiliate had $500,000 in taxable income subject to the Service and Other Activities B&O tax classification in 2019. Because the combined income of Jones R&D and its’ affiliate is equal to or greater than $1 million, Jones R&D and its affiliate must report their income under the 1.75% B&O tax rate beginning with their April 2020 return.

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 had taxable income of $1.4 million, including $900,000 in gross income from research and development services and $500,000 in gross income from wholesale sales. All of the income from research and development services was apportionable to Washington and all of the wholesale sales were sourced to Washington. Lopez R&D will report the research and development services income under the Scientific Research and Development B&O tax classification at the 1.5% tax rate for the entire 2020 calendar year because the business’s taxable research and development service income was less than $1 million ($900,000).

Real estate commissions

Beginning in 2025, the department changed the way real estate commissions are reported on the excise tax return. It is not a change in the tax rate. See our Special Notice for more information.

2025 forward
Beginning in 2025, real estate commissions are subject to B&O tax under the Real Estate Commissions classification, a new line on the excise tax return.

Real estate brokers and firms that have income (other than real estate commissions taxable under RCW 82.04.255) subject to the Service and Other Activities B&O tax classification are subject to the 1.75% rate, if this income is equal to or greater than $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 2024 (all apportionable to Washington). In 2025, Red Brick Realty’s commissions from real estate sales are reported under the Real Estate Commissions B&O tax classification at the 1.5% tax rate.

Example 10 – $1 million or more
Red Brick Realty earned $1.2 million in commissions from real estate sales in 2025 (all apportionable to Washington). In 2026, Red Brick Realty’s commissions from real estate sales are reported under the Real Estate Commissions B&O tax classification at the 1.5% tax rate. It is immaterial that Red Brick Realty’s commissions were $1 million or more in the prior calendar year.

Example 11 – Mixed classifications
In 2024, White Brick Realty earned $2 million in commissions from real estate sales, and $4 million in fees from property management services (commissions and fees all apportionable to Washington). Beginning January 1, 2025, White Brick Realty reports the commissions under the Real Estate Commission B&O tax classification at the 1.5% tax rate, and the property management service fees under the Service and Other Activities ($1 million or greater in prior year) B&O tax classification at the 1.75% tax rate.

Before 2025
From April 1, 2020 through December 31, 2024, real estate commissions were reported under the Service and Other Activities classification at the 1.5% rate.

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

Example 12 – Under $1 million
Red Brick Realty earned $600,000 in commissions from real estate sales in 2019 (all apportionable to Washington). In 2020, Red Brick Realty’s commissions from real estate sales are reported under the Service and Other Activities line B&O tax classification at the 1.5% tax rate.

Example 13 – $1 million or more
Red Brick Realty earned $1.2 million in commissions from real estate sales in 2020 (all apportionable to Washington). In 2021, Red Brick Realty’s commissions from the real estate sales are reported under the Service and Other Activities line B&O tax classification at the 1.5% tax rate. It is immaterial that Red Brick Realty’s commissions were $1 million or more in the prior calendar year.

Example 14 – 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 (commissions and fees all apportionable to Washington). Beginning April 1, 2020, White Brick Realty must reports the its’s commissions from real estate sales under the Service and Other Activities B&O tax 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 B&O tax classification 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 at the 1.5% tax rate, even if amounts earned are $1 million or more in the prior calendar year.

Example 15 – $1 million or more
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 B&O tax classification at the 1.5% tax rate. It is irrelevant that 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 Real Estate Commissions B&O tax classification, Service and Other Activities B&O tax 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