Workforce Education

Effective October 1, 2025, the business and occupation (B&O) tax has three tax rates under the Service and Other Activities classification. The Service and Other Activities B&O tax classification will have three separate lines on the tax return:

• Service and Other Activities (Less than $1,000,000 in the prior year) – 1.5% tax rate.
• Service and Other Activities ($1,000,000 to $4,999,999.99 in the prior year) – 1.75% tax rate.
• Service and Other Activities ($5 million or more in the prior year) – 2.1% tax rate.

Exceptions to the higher tax rates

The second and third tiers do not apply to the following:

• Hospitals.
• Real estate brokers.
• Select advanced computing businesses.

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, but less than $5 million 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 2024, 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 2026, Sally’s accountant informed her that the taxable income subject to the Service and Other Activities B&O tax classification during the 2025 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 2026 calendar year.

Example 3 – $1 million or more combined with affiliate
Rainforest Inc. operates a social networking platform. In 2025, 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 2025. 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 for calendar year 2026.

Example 4 – Mixed classifications
Mike owns several music schools in Washington. They not only provide one on one instruction on how to play instruments but also sell new and used instruments at retail. In 2025, 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 2026 because the business’s taxable 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 higher tax rates, as provided in the examples above.

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.

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 5 – $1 million or more
In 2025, 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 2026, 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 the Real Estate Commissions B&O tax classification and the Service and Other Activities B&O tax classifications 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.