Washington Margins Tax: Overview

This article summarizes a draft proposal. It describes what the proposal would do if enacted; it does not describe current Washington law.

What this proposal would do

The proposal would replace Washington's B&O tax with a Texas-style margins tax over a five-year transition period. Beginning in 2028, the margins tax would phase in as the B&O tax phases out, with the transition completed in 2032.

How the margins tax would work

• The tax would apply to all business entity types with substantial nexus in Washington, using the state's current nexus standard.
• For unitary taxpayers, the tax would be calculated on a combined basis.
• The unitary group would generally include foreign affiliates, and intercompany receipts would be eliminated.
• Taxable margin would be calculated under two options:
  • Option 1: the lesser of 70% of total revenue or total revenue minus $1 million.
  • Option 2: total revenue minus the greater of:
    • A $1 million standard deduction; or
    • Either cost inputs, based on federal cost of goods sold, or compensation, capped at $500,000 per employee per year, at the taxpayer's election.
• The taxpayer would pay tax on the lower resulting tax base, referred to as the taxable margin.
• Taxable margin would be apportioned using Washington's current apportionment rules.
• Total tax would equal Washington taxable margin multiplied by 1.75%, or $250, whichever is greater.
• Businesses with less than $5 million in total revenue could use a simplified E-Z calculation.
• Businesses with less than $1 million in total revenue would owe only the $250 minimum tax.

Key features retained from current law

• Washington's current apportionment and sourcing rules would be retained, including single-sales-factor apportionment and market-based sourcing.
• Key surcharges would remain in place, including the Advanced Computing surcharge and the Specified Financial Institutions surcharge.
• Key thresholds would receive inflation adjustments beginning in 2030.

Transition schedule

The table below shows the five-year transition from the B&O tax to the margins tax.

Why this approach

The proposal is structured as a gradual transition: a more administrable shift designed to reduce disruption as the B&O tax phases out and the margins tax phases in.