Washington State Agents Face Six-Fold Tax Hike

The Washington state legislature could decide as early as next week to enact a law ending a preferential tax rate for travel agents. If it does, agents in the state will end up paying more than six times the current tax rate on their commission income.

The Washington House of Representatives passed legislation (HB2038) last month that would eliminate a preferential tax rate for agents and tour operators, among other changes to the state’s tax laws.

Agents and tour firms currently pay a reduced state business and occupation (B&O) tax rate of 0.275% on parts of their income. Ending the preferential rate, which was enacted in the 1970s, would make agents’ commission income subject to the full general services tax rate of 1.8%.  

Potential big hit for agencies
ASTA estimates that the rate hike would cost Washington state agencies $14.6 million between 2013 and 2015.

ASTA has issued a call to action to its Washington members, urging them to tell state legislators they oppose the bill. So far about 140 messages of protest have been sent, said Eben Peck, ASTA’s vice president of government affairs.

“We are also planning to reach out to NTA and USTOA as it affects tour operators too,” Peck said.

The Washington legislature reconvenes in a special session on May 13 and is expected to decide whether to enact the law sometime after that; the special session could last as long as 40 days, according to Peck.

“The legislature is supposed to craft a state budget during this special session, which will mean that this issue of ending preferential B&O taxes will be on the table,” he said. “It’s possible that it could end up in the state budget, which would then need to be signed by the governor.”

Washington’s preferential tax rate for travel agents’ commission income was enacted in 1975 to reflect the fact that much of the travel that agents arrange for clients is interstate travel; under federal law, states are not allowed to directly tax interstate travel, Peck said.

The tax benefit has been called into question several times over the past few years, including in February by a joint legislative review committee. The committee said that “it is unclear whether the inferred public policy objectives [of the travel agent preferential rate] still apply in light of changes to the industry since the time of enactment.”

Other state tax battles
The Washington tax issue differs from tax issues that have cropped up recently in other states, including in Minnesota, Tennessee and Virginia. They involved proposals for new taxes on gross sale receipts, including those generated by travel agencies, whereas Washington is looking at ending a preferred rate for agents. The tax proposals in Minnesota, Tennessee and Virginia did not go through. (See: Tax Proposals on Travel Agency Sales Thwarted in Three States)

Despite their differences, the various state tax proposals are all part of a drive by states to seek new sources of tax revenue, Peck said.

“Agents should care about this, even if they don’t live in a state where it’s happening,” he said. “There is a growing propensity for states to look at taxing travel – and this is bad for everyone.”