SB 5766
In CommitteeSenate
Passive investment vehicles
Clarifying the business and occupation tax treatment of the investment income of passive investment vehicles managed by a person subject to business and occupation tax under RCW 82.04.290(1).
This status may be delayed. See Action History below for the latest updates.
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 clarifies that passive investment vehicles can deduct certain investment income—including dividends, intercompany loan interest (up to 5% of gross receipts), and income from managed investments—from their business and occupation (B&O) tax base. It responds to court rulings that created uncertainty about the deductibility of such income and aims to restore stability and fairness for taxpayers.
- Clarifies that investment income—including dividends, interest on intercompany loans (if total investment/loan income is less than 5% of gross receipts), and other qualifying investments—is deductible from the business and occupation tax (B&O) measure.
- Expands the definition of 'investment' to explicitly include securities, bonds, derivatives (e.g., options, swaps), and commodities.
- Adds a new deductible category: investment income derived from an investment management or advisory agreement with a person already subject to B&O tax under RCW 82.04.290(1).
- Excludes from the deduction: income from loans (except intercompany loans meeting the 5% threshold), credit extensions, installment sales, and income from banking, lending, or security businesses.
- Defines key terms like 'banking business', 'lending business', and 'security business' to clarify which entities are excluded from the investment income deduction.
- Makes the law effective retroactively to ensure consistency with prior practice, but explicitly no refunds are allowed for taxes paid before the effective date.
Who is affected
- Passive investment vehicles — Passive investment vehicles (e.g., holding companies or investment funds) that earn income from investments, interest on intercompany loans, or dividends from subsidiaries—especially those managed by licensed investment advisors or managers subject to B&O tax under RCW 82.04.290(1).
- Investment managers and advisors — Businesses that manage investments as a primary activity and are already subject to B&O tax under RCW 82.04.290(1), such as registered investment advisors.
- Corporate parent-subsidiary groups — Parent companies and their subsidiaries that engage in intercompany lending or receive dividends, particularly where investment and loan income is less than 5% of total gross receipts.
- Banks and lenders — Banks, credit unions, and other financial institutions that make loans or extend credit—these entities are explicitly excluded from the investment income deduction.
Pro/Con Analysis
Stronger case for concerns
Potential Benefits (4)
The bill reduces uncertainty for passive investment vehicles by codifying long-standing administrative practice — restoring stability for taxpayers and preventing disruptive tax reassessments that could trigger costly litigation or forced restructuring. This stability supports long-term planning for small-to-mid-sized holding companies and family investment groups, many of whom rely on predictable tax treatment to sustain intergenerational wealth.
FinancialLean peopleRef: Sec. 2(1)(a), (b), (c), (d); Sec. 3 (retroactivity without refund)By allowing deductions for investment income arising from management agreements with B&O-taxed advisors, the bill supports the viability of licensed investment advisory firms — many of which are small-to-mid-sized businesses — by ensuring their clients (who may be local retirement funds, nonprofits, or small institutions) can treat such income as deductible, encouraging continued use of local advisory services.
Business & EmploymentLean peopleRef: Sec. 2(1)(d)Explicitly including bonds, derivatives, and commodities in the definition of 'investment' aligns the statute with modern financial practice, reducing the risk that routine portfolio management triggers unexpected B&O liability — which could otherwise discourage investment activity in Washington-based funds and asset managers.
Business & EmploymentLean peopleRef: Sec. 2(3)(b) (broad definition of 'investment')The retroactive application (effective May 16, 2025) aims to prevent inconsistent enforcement across counties and industries, promoting uniformity in tax administration — though the lack of refunds limits full relief, the clarity benefits all taxpayers subject to the B&O in the short term.
FinancialRef: Sec. 3 (retroactivity clause)
Potential Concerns (5)
The bill expands the definition of 'investment' to include derivatives, commodities, and other complex financial instruments, and allows passive investment vehicles to deduct income from these sources — but explicitly excludes banks, lenders, and security businesses from the deduction. This creates a two-tiered system where non-financial passive investors (often wealthy individuals or holding companies) gain tax relief, while regulated financial institutions (which are already taxed under a separate B&O classification) remain excluded. This differential treatment benefits concentrated financial interests that are not subject to the same regulatory constraints as banks, while reducing state revenue without compensating public investment.
FinancialIndustryRef: Sec. 2(1)(a), (d); Sec. 2(2)(b)The 5% gross receipts cap on intercompany loan interest deductions disproportionately benefits large, multi-entity corporate groups with complex internal financing structures — such as real estate holding conglomerates or private equity-backed portfolios — while excluding sole proprietors, small businesses, and most family farms that do not operate at scale. The threshold is easily met by large entities but inaccessible to smaller operations, making the benefit concentrated among high-wealth taxpayers.
FinancialIndustryRef: Sec. 2(1)(c) (5% gross receipts threshold); Sec. 2(2)(a)The new deduction for investment income derived under management agreements with B&O-taxed advisors creates a carve-out for high-net-worth individuals and institutional investors who use licensed advisors — a group that typically earns well above state median income. The provision does not extend to individuals managing their own investments or using unregistered advisors, limiting access to those with the means to hire professional, B&O-taxable advisors.
FinancialIndustryRef: Sec. 2(1)(d); Sec. 2(1)(a)While the bill clarifies deductibility retroactively to ensure consistency with prior practice, it explicitly bars refunds for taxes paid before the effective date — meaning past overpayments are not recovered. This protects state revenue but denies relief to taxpayers who may have overpaid under prior interpretations, disproportionately impacting those who lacked resources to litigate or appeal earlier rulings.
FinancialLean industryRef: Sec. 3 (no refund clause); Sec. 2(1)(a), (b), (c), (d)The bill’s definitions of 'banking business', 'lending business', and 'security business' create regulatory ambiguity for hybrid financial firms — e.g., fintech platforms or credit unions offering investment services — that may fall just outside the statutory thresholds. This could increase compliance costs for mid-sized financial institutions trying to determine eligibility, while large, well-resourced firms can absorb such costs more easily.
Business & EmploymentLean industryRef: Sec. 2(3)(a), (b), (c)
Who Is Most Affected
Large holding companies, private equity-backed real estate portfolios, and family investment vehicles with gross receipts >$20M and complex intercompany lending structures will benefit significantly — they can now deduct more investment income, reducing effective B&O tax rates. However, they must still comply with the 5% cap and exclusion rules, so gains are capped but meaningful.
Registered investment advisors (RIAs) and licensed financial advisors who are already subject to B&O tax under RCW 82.04.290(1) may see increased client demand — clients will prefer to invest through entities that can deduct advisory-related income. This supports small advisory firms but does not directly reduce their own tax burden.
Banks, credit unions, and lenders are explicitly excluded from the deduction and face no offsetting relief — they continue to pay B&O on all income, including investment income from securities holdings. This increases their relative tax burden compared to non-bank investment vehicles.
Small businesses and sole proprietors who invest personally or through simple LLCs (without licensed advisors or intercompany loans) gain little — the 5% gross receipts cap and requirement for formal advisory agreements exclude most non-institutional investors. They face no harm but also no direct benefit.
The state loses modest B&O revenue (estimated in fiscal notes as 'slight'), which could reduce funds available for public services. However, the legislature explicitly chose not to refund prior taxes, limiting fiscal impact and preserving some revenue stability.