City of Seattle City Council approves the payroll expense tax

Overview

On July 6, 2020, the City of Seattle City Council approved the JumpStart Seattle Plan, Council Bill 119810 (CB 119810)¹, which imposes a payroll expense tax on persons engaging in business within Seattle. The JumpStart Seattle Plan focuses on the COVID-19 crisis and Seattle’s long-term economic revitalization by investing in affordable housing and other essential city services.

The new legislation imposes a payroll expense tax of up to 2.4 percent on compensation paid in Seattle to employees during the period of January 1, 2021 through December 31, 2040. Certain businesses are exempt from this tax.

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Imposing payroll expense tax for persons engaging in business within Seattle

For all periods from January 1, 2021 through December 31, 2040, a payroll expense tax is imposed on persons² engaging in business within Seattle. The payroll expense tax is not imposed on the taxpayer’s customer; the payroll expense tax is “a part of the businesses’ operating overhead or cost of doing business.”³ The payroll expense tax applies graduated rates:⁴

• For businesses with payroll expense of up to $99,999,999.99, the rate is:
  • 0.7 percent of the payroll expense of employees with annual compensation of $150,000 to $399,999.99, and
  • 1.7 percent of the payroll expense of employees with annual compensation of $400,000 or more.
• For businesses with payroll expense of $100 million to $999,999,999.99, the rate is:
  • 0.7 percent of the payroll expense of employees with annual compensation of $150,000 to $399,999.99, and
  • 1.9 percent of the payroll expense of employees with annual compensation of $400,000 or more.
• For businesses with payroll expense of $1 billion or greater, the rate is:
  • 1.4 percent of the payroll expense of employees with annual compensation of $150,000 to $399,999.99, and
  • 2.4 percent of the payroll expense of employees with annual compensation of $400,000 or more.

“Payroll expense” means the compensation paid in Seattle to employees.⁵ Compensation is paid in Seattle to an employee if:

• The employee is primarily assigned within Seattle,
• The employee is not primarily assigned to any place of business for the tax period and the employee performs 50 percent or more of his or her service for the tax period in Seattle, or
• The employee is not primarily assigned to any place of business for the tax period, and the employee does not perform 50 percent or more of his or her service in any city, and the employee resides in Seattle.⁶

“Primarily assigned” means the business location of the taxpayer where the employee performs the employee’s duties.⁷ The terms, “compensation” and “primarily assigned”, are identically defined in the payroll apportionment factor for the City of Seattle business license tax under Rev. Code Wash. (RCW) § 35.102.130. Taxpayers doing business in Seattle may already be familiar with the “primarily assigned” standard as that standard is used to calculate the payroll factor for the apportionment of the City of Seattle business license tax.⁸

The JumpStart Seattle Plan exempts the following businesses from the payroll expense tax:

• Any business having a payroll expense of less than $7 million in the most recent calendar year.⁹
• Any business engaged in business in Seattle as a grocery business.¹⁰
• Any individual who is an independent contractor for purposes of the business license tax and whose compensation is included in the payroll expense of another business subject to the payroll expense tax.¹¹
• Businesses that are preempted from taxation by cities pursuant to federal or state law, such as
  • Insurance businesses and their agents
  • Businesses that only sell, manufacture, or distribute motor vehicle fuel
  • Businesses that only distribute or sell liquor
  • Federal and state government agencies and any local government entity¹²
    

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Considerations

Businesses doing business within Seattle and with payroll expense of at least $7 million should be aware of the payroll expense tax. The payroll expense tax takes effect on January 1, 2021, and will be due and payable on a quarterly basis.¹³ The payroll expense tax for 2021 will be due on the same date as the business license tax payment for the fourth quarter of 2021.¹⁴

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The Multistate Tax alert archive includes external tax alerts issued by Deloitte Tax LLP's Multistate Tax practice during the last three years. These external alerts highlight selected developments involving state tax legislative, judicial, and administrative matters. The alerts provide a brief summary of specific multistate developments relevant to taxpayers, tax professionals, and other interested persons.

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