OLYMPIA – Washington state’s tax code unfairly burdens small businesses and for years Democrats and Republicans have proposed changes. The underlying issue is requiring a business to pay taxes on all of the money the business takes in, with no consideration given for the costs of running a business. This leaves restaurants and other businesses with narrow margins very little ability to expand or hire new staff. A new tax reform proposal from House Finance Chair Rep. Kristine Lytton, D-Anacortes, considers the gross marginal revenue of a business to determine if they should pay the Business & Occupation (B&O) tax at all.

The Small Business Tax Fairness Act (HB 2940) works like this: State law doesn’t allow businesses to deduct things like the cost of goods they sell or employee costs, like salary, wages, and benefits. To help low margin businesses, the state will use a new calculation to determine if they should pay B&O. The calculation starts with the gross receipts, which is what businesses currently pay, and then subtracts the employee costs and costs of goods sold. That is now the “gross marginal revenue” and if it is less than $250,000, the business pays nothing in B&O tax.

If a business has a gross marginal revenue between $250,000 and $1 million, they pay their current B&O rate on their gross receipts, just as they do today with no change whatsoever. For those large businesses that have a gross marginal revenue over $1 million, they pay B&O tax on their gross receipts, like today, with a modest increase to the tax rates. That surcharge applies to all current B&O rates, including preferential rates. While businesses aren’t actually deducting employee cost and other costs, this new calculation makes B&O tax fairer for low margin businesses.

“The Small Business Tax Fairness Act is about exactly what the title says: Fairness. Lawmakers in Olympia need to put people first and one of the best ways we can do that is by giving small business owners a fair chance at building and growing their business,” said Lytton. “Let’s fix our business taxes and stop overburdening entrepreneurs and the middle class.”

Rep. Mike Chapman, D-Port Angeles, is co-sponsoring the legislation and said it’s a key piece of the effort to boost the economy of rural Washington.

“This is the biggest and boldest B&O reform in decades,” Chapman said. “It would make a huge difference for small businesses in timber and farm country. What we’re proposing restores a sense of fairness to an upside-down tax system—and it provides an incentive to hire more people and expand.”

“More than 80 percent of workers in Washington state are employed at small businesses,” added Chapman, who’s leading the Rural Development Caucus of the House Democrats. “That’s why tax fairness is such a priority for us.”

The burden of paperwork is also removed for thousands of small businesses. Businesses usually have to file with the state if their gross receipts are $28,000 or $46,000, depending on their sector. Under the Small Business Tax Fairness Act, that filing requirement threshold is changed to $125,000 for all businesses.

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Washington State House Democrats

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