SHB 2020
SignedHouse
Payment card processing/tax
Creating a business and occupation tax deduction and increasing the rate for persons conducting payment card processing activities.
How does a bill become law?
- Introduced: The bill is filed and assigned a number.
- Committee: A subject-matter committee holds hearings, takes public testimony, and decides whether to advance the bill.
- Floor Vote: The full chamber (House or Senate) debates and votes on the bill.
- Opposite Chamber: The bill repeats the committee and floor vote process in the other chamber.
- Governor: The Governor reviews the bill and decides whether to sign or veto it.
- Signed: The bill has been signed into law.
AI Analysis
This bill creates a new 3.0% business and occupation (B&O) tax on gross income from payment card processing activities in Washington, while allowing processors to deduct interchange fees, network fees, and certain inter-processor fees. It also clarifies which entities are subject to the new tax and which are excluded, and maintains existing surcharges on large financial institutions and advanced computing businesses that apply to the new tax base.
- Creates a new 3.0% B&O tax on gross income from payment card processing activities, with specific exclusions for processors that also operate the payment network or are the issuer.
- Allows payment card processors to deduct interchange fees, network fees, and portions of fees retained by other processors when calculating their B&O tax liability.
- Defines key terms—such as 'processor', 'issuer', 'acquirer', 'interchange fee', 'network fee', and 'payment network'—to clarify who is subject to the new tax and what costs are deductible.
- Excludes from the 3.0% tax certain payment card processing activities (e.g., where the processor operates the network or is the issuer); those activities instead remain subject to the standard B&O tax rates (1.5% or 1.75%) without the new deductions.
- Maintains existing surcharges: a 1.2% tax on large financial institutions and a 1.22% workforce education investment surcharge on select advanced computing businesses—both now also applied to the new payment card processing tax base.
- Requires the Department of Revenue to verify affiliate status and compliance for tax rate eligibility and surcharge calculations, with penalties for intentional noncompliance.
Who is affected
- Payment card processors — Payment card processors (including acquirers and issuers that process transactions) will be able to deduct interchange fees, network fees, and portions of fees retained by other processors when calculating their B&O tax liability, and will be subject to a new 3.0% tax rate on gross income from payment card processing activities—unless they fall under specific exclusions (e.g., if they operate the payment network or are the issuer).
- Large financial institutions (specified financial institutions) — Financial institutions with consolidated net income of $1 billion or more (as reported on their consolidated financial statements) will continue to pay an additional 1.2% surcharge on income taxed under the B&O tax (including the new payment card processing tax).
- Select advanced computing businesses — Large advanced computing companies (affiliated groups with over $25 billion in worldwide gross revenue) that engage in activities like software/hardware development, cloud computing, or operating online marketplaces, search engines, or social platforms will continue to pay a 1.22% workforce education investment surcharge on their B&O tax liability (including the new payment card processing tax).
- Merchants and consumers — Merchants and consumers may see indirect effects if processors pass on increased compliance or tax costs, though the bill does not directly regulate merchant fees or consumer pricing.
Pro/Con Analysis
Stronger case for benefits
Potential Benefits (5)
Allowing processors to deduct interchange, network, and inter-processor fees from the tax base mitigates double taxation and aligns the tax with net revenue rather than gross volume—reducing the regressive impact on thin-margin processors and helping preserve competition among independent payment processors.
Business & EmploymentPeopleRef: Sec. 2(1); Sec. 4(4)(a)The new 3.0% tax on payment card processing activities is expected to generate new state revenue (deposited into the general fund), which can support public safety services such as law enforcement, emergency response, and crime prevention programs—benefiting communities across Washington, especially those with high reliance on public safety infrastructure.
Public SafetyPeopleRef: Sec. 4(4)(a)Excluding entities that operate the payment network or are the issuer from the 3.0% rate prevents overreach into core network functions, preserving the integrity of payment system infrastructure and avoiding unintended disruption to the national payment system, which supports everyday commerce and financial inclusion.
Business & EmploymentLean peopleRef: Sec. 4(4)(b)(i)(A) & (B); Sec. 4(4)(c)(i)The workforce education investment surcharge (1.22%) on select advanced computing businesses—now extended to the new payment card processing tax base—continues funding for the workforce education investment account, supporting vocational training, apprenticeships, and STEM education programs that benefit Washington’s youth and workforce development goals.
EducationPeopleRef: Sec. 5(1)(a); Sec. 5(3)Clear statutory definitions of 'processor', 'issuer', 'acquirer', 'network fee', and 'payment network' reduce regulatory ambiguity and help small-to-mid-sized payment processors understand their obligations, lowering compliance risk and encouraging formal sector participation in the digital payments ecosystem.
Business & EmploymentPeopleRef: Sec. 4(4)(c)(v); Sec. 4(4)(c)(vi); Sec. 2(f)
Potential Concerns (5)
The new 3.0% B&O tax on payment card processors increases compliance and administrative complexity for firms in this sector, potentially leading to operational restructuring or reduced hiring in mid-sized processing firms. While the bill allows deductions for interchange, network, and inter-processor fees, the net effect is a higher effective tax burden on gross revenue, which may dampen investment in new technology or workforce expansion in the payment processing industry.
Business & EmploymentRef: Sec. 2(1); Sec. 4(4)(a)The exclusion from the 3.0% tax for entities that operate the payment network or act as the issuer (e.g., Visa, Mastercard, or large banks that issue cards *and* process transactions) creates a structural advantage for vertically integrated financial institutions, potentially distorting market competition and favoring large incumbents over independent processors. This carve-out may reduce incentives for innovation among independent processors who cannot match the tax treatment of integrated players.
Business & EmploymentRef: Sec. 4(4)(b)(i)(A) & (B); Sec. 4(4)(c)(vi)The definition of 'processor' includes both acquirers and issuers that route transactions, which may inadvertently capture some hybrid or vertically integrated firms under the 3.0% tax, even when their processing function is marginal to their overall business model. This could lead to misclassification and compliance costs for firms whose core business is not payment processing.
Business & EmploymentRef: Sec. 4(4)(c)(vi); Sec. 2(f)The bill’s narrow exclusion of payment network functions (authorization, clearance, settlement) from 'payment card processing activities' may cause ambiguity in how network-level services are classified—especially for firms that provide both network and processing services—potentially leading to inconsistent enforcement or costly disputes with the Department of Revenue.
Business & EmploymentRef: Sec. 4(4)(c)(vi); Sec. 4(4)(c)(v)The 'affiliated' definition (borrowed from RCW 82.04.299) and the requirement to exclude transactions where the processor is affiliated with the network operator or issuer introduces complexity in determining tax liability for large financial holding companies with multiple subsidiaries. This increases legal and accounting costs for compliance, disproportionately affecting mid-sized firms without in-house tax expertise.
Business & EmploymentRef: Sec. 4(4)(b)(i)(A)(II); Sec. 4(4)(c)(i)
Who Is Most Affected
Independent payment processors (e.g., Fiserv, Fiserv spin-offs, regional acquirers) may benefit from the deduction structure and lower effective tax on net revenue, but face higher compliance costs and competitive pressure from vertically integrated players who avoid the 3% rate. Mixed impact due to structural advantages for large incumbents.
Large financial institutions (>$1B net income) continue to pay the 1.2% surcharge, but the expansion of the tax base to include payment card processing increases their liability—though they can absorb it more easily than smaller firms. Negative impact due to higher tax burden and compliance costs.
Select advanced computing firms (>$25B global revenue) face an additional 1.22% surcharge on the new payment processing tax base. While this applies to only a handful of global tech giants, it increases their tax liability without significantly altering their business model. Negative impact due to higher costs passed to consumers or investors.
Merchants and consumers may indirectly bear costs if processors raise service fees to offset tax compliance or liability. However, the bill does not cap or regulate merchant discount rates, so the risk is modest and not guaranteed. Mixed/neutral impact with low certainty.
The state and general fund benefit from new revenue (from the 3% tax and surcharges), supporting public services. However, the revenue is modest relative to overall state budget and depends on accurate classification and enforcement. Positive impact for public services, but not transformative.