March 2010
Practice Group(s):
Tax
Tax-Exempt/Nonprofit
Institutions
Private Clients,
Trusts & Estates
Corporate
New B&O Tax Legislation on Investment
Income: Businesses, Foundations,
Investment Funds, Financial Advisors,
Insurance Companies, and Family
Office/Partnerships – “Heads Up”
A bill introduced and passed yesterday by the Washington State House Finance
Committee (“Committee”) would impose the Business and Occupation (“B&O”) tax on investment
income of all nonfinancial businesses in Washington. This would be a dramatic expansion of the B&O
tax and could, by its terms, impose the B&O tax on the investment income of not only typical B&O
tax filers but, potentially foundations, and other charitable organizations with significant investments
(e.g., endowments), investment funds, insurance companies, and family office/partnerships at a rate of
1.5 percent.
With only 8 days left in the regular legislative session, Washington B&O taxpayers should urgently
consider the ramifications of Sections 2101 and 2102 of House Bill 3191.
This bill would be a major change; nonfinancial institutions currently do not pay B&O tax on their
investment income. The Committee held a public hearing on HB 3191 on March 2nd and adopted the
bill on the same day. There has been virtually no press coverage or explanation from the Legislature
as to the intent or purpose of the proposal other than to raise revenue. Section 2101 simply states that
it is the intent of the Legislature to “use revenue generated from repealing the business and operations
exemption on investment earnings from nonfinancial firms to support basic education.”
HB 3191 is drafted so broadly that a wide variety of entities could find themselves paying B&O tax on
their investment income. For this purpose, investment income includes interest, dividends and capital
gains. Also “dividends” include distributions from related entities – e.g. distributions from
subsidiaries.
Currently, investment income earned by a business in Washington is deductible from the base for the
B&O tax, provided that the business is not engaged in banking, loan, security, or other financial
business.1 HB 3191 proposes to cap the investment earnings deduction at $250,000 per year per
nonfinancial business.2 Consequently, any investment income in excess of $250,000 would be subject
to B&O tax at a rate of 1.5 percent. Again, this would include dividends from subsidiaries as well as
dividends, interest and capital gains from investments. Entities holding significant investment assets,
whether held as treasury assets, reserves, or endowments, could owe substantial taxes and the potential
application to your entity and impact should be reviewed carefully and immediately.
By policy, the Washington State Department of Revenue has not historically applied the B&O tax to
passive investment vehicles such as investment funds. However, the language in the bill is very broad
and does not exempt such entities on its face.
New B&O Tax Legislation on Investment Income
As there would no longer be a general status exemption for nonfinancial institutions, the application to
foundations, colleges, and other federally tax-exempt entities with substantial investment income as
well as family offices/partnerships is unclear. If such entities are otherwise engaged in business it
appears the investment income will be taxed.
HB 3191 is moving quickly through the legislative process in Olympia. However, until enacted into
law, it is subject to change and/or amendment.
If you have any questions or concerns about HB 3191 and how it could impact your operations, you
can:
1. Call the legislative hotline at 1-800-562-6000 and tell the operator you want your representative
and senator know that you have concerns about the impacts of Sections 2101 and 2102 of House
Bill 3191 on your entity.
2. Send an email to your representative and senator to let them know that you have concerns about
the impacts of Sections 2102 and 2102 of House Bill 3191 on your entity.
If you are a tax-exempt organization and have any questions about the implications of the federal tax
rules regarding lobbying with respect to the above recommendations, call your K&L Gates attorney.
If you have any questions about this alert, please contact any of the lawyers noted below.
Stephanie Anderson
Email: stephanie.anderson@klgates.com
Direct Dial: (206) 370-6615
Charles Purcell
Email: charles.purcell@klgates.com
Direct Dial: (206) 370-8369
Andrew Zuccotti
Email: andrew.zuccotti@klgates.com
Direct Dial: (206) 370-6680
Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice
contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose
of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any
transaction or matter addressed herein.
Authors:
Stephanie D. Anderson
Stephanie.anderson@klgates.com
+1.206.370.6615
Charles H. Purcell
Charles.purcell@klgates.com
+1.206.370.8369
Andrew H. Zuccotti
Andrew.zuccotti@klgates.com
+1.206.370.6680
2
New B&O Tax Legislation on Investment Income
3