Seattle JumpStart Tax

Thoughtware Alert Aug 04, 2020
Glasses, calculator, pencil and paper lying on desk

In response to a multiyear series of events detailing a power struggle within the local government and the political balancing of big business versus social services, Seattle has passed the “JumpStart Tax.”  

JumpStart Tax

Effective January 1, 2021, through December 31, 2040, Seattle will impose a payroll expense tax, aka the JumpStart Tax, as specified in the newly enacted Chapter 5.38 of the Seattle Municipal Code. The tax applies to businesses with more than $7 million of annual payroll expense, but only for highly compensated employees earning $150,000 or more annually as sourced to the city. The tax rate buckets are as follows:

Seattle JumpState Tax Image

“Compensation” is defined the same as in Revised Code of Washington Section 50A.05.010 for purposes of the state’s Family and Medical Leave Act. This broad definition generally includes compensation of all types, including commissions, bonuses, net distributions, incentive payments, and guaranteed payments. However, compensation does not include payments to an owner of a pass-through entity that are not earned for services rendered or work performed, such as return of capital, investment income, or other income from passive activities. 

The ordinance provides an exemption for certain entities, including groceries and businesses excluded by federal or state preemption from municipal-level taxes (which include insurance companies and governmental entities). Note that for January 1, 2021, through December 31, 2023, nonprofit healthcare entities are only subject to tax on the payroll expense of employees with annual compensation of $400,000 or more.

The tax will be due quarterly, with returns and taxes filed/paid on or before the last day of the next month following the end of the quarter covered by the return. The initial tax due for 2021 shall be payable on the same date the tax payment for the fourth quarter of 2021 is due.

Legislative Process

The JumpStart Tax contained in Seattle Council Bill 119810 was a rebirth and revision of the proposed employee headcount tax from 2018. The 2018 tax would have imposed a $275 per full-time employee tax on companies reporting $20 million or greater in annual “taxable gross receipts.” While it was initially passed, due to intense pressure from the business sector, the tax was repealed by city council prior to its implementation date.
 
On July 6, 2020, the Seattle City Council voted 7-2 to pass the new JumpStart Tax. Mayor Jenny Durkan returned the bill unsigned, but not vetoed, allowing it to passively become law given the council’s veto-proof majority and grassroots backing from the community. Durkan took the same approach for the council’s spending plan. Durkan cited potential job losses, as companies might look elsewhere to run their operations, which represented a philosophical difference to council member Teresa Mosqueda (primary sponsor of the bill), who indicated the Seattle economy was so bad that they “cannot afford to wait for the feds or the state to step in.”

Economic Effects

Per a city council staff analysis, the new tax will affect more than 700 businesses in the city and raise $214 million per year in new revenues. The bulk of the tax raised ($174 million) annually will be from companies in the $7 million to $1 billion tier, with much of the remainder to rest on companies in the $1 billion tier, which would include Amazon with its roughly 50,000 employees in the city.

Below is the anticipated use of funds from the JumpStart Tax according to the spending plan:

  • 62 percent for affordable housing, homeownership programs, and community investment funds
  • 15 percent for small business assistance to ensure economic recovery and resiliency
  • 9 percent for funding of the Green New Deal Advisory Committee and invest in communities most impacted by climate change
  • 9 percent for community-initiated projects that fight displacement and build community wealth
  • 5 percent for administrative costs

To learn more about this development and how it could affect your organization or for assistance with this new tax, contact your BKD Trusted Advisor™ or submit the Contact Us form below.

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