New Law Expands Property Management B&O Tax Exemption

JULY 18, 2011

Purpose Beginning August 24, 2011, the existing business and occupation (B&O) tax exemption

for property management companies (RCW 82.04.394) is repealed and replaced with

a similar, broader deduction. (Senate Bill 5289, Chapter 26, Laws of 2011, 1st Special

Session)

Under the new law, a deduction is available for gross wages, beneﬁts, and payroll taxes

paid to, or for, “personnel performing on-site functions” when received by:

• Nonproﬁt property management companies,

• For-proﬁt property management companies working for a housing authority,

• For-proﬁt property management companies working for a limited liability company

(LLC) or Limited partnership (LP) if the sole managing member or sole general partner

of the LLC or LP is a housing authority.

Under the repealed exemption, only nonproﬁt property management companies and

for-proﬁt property management companies working for a city or county housing authority

were eligible.

Note: It is no longer required for the money to be paid from a property management

trust fund account.

The bill also modiﬁed the deﬁnition of a “nonproﬁt property management company,”

which had been deﬁned to mean a property management company exempt from federal

income tax under section 501(c) of the Internal Revenue Code. Under the new law the

term means:

• A property management company that is a public corporation established under RCW

35.21.730.

• A property management company exempt from federal income tax under section

501(c) of the Internal Revenue Code but only when it is providing property

management services for low-income housing that has qualiﬁed for

a property tax exemption under RCW 84.36.560.

The new deduction also allows for personnel to centrally perform on-site functions for the

owner’s property in addition to performing on-site functions at the owner’s property. The

following are examples of on-site functions that can be performed from a central location:

• Collecting rent

• Coordinating subcontractors

• Property leasing

Continued...

Property Management B&O Tax Exemption Special Notice - Page 2

History

How do I report?

Deﬁnitions

June 1, 2010 – August 23, 2011 – RCW 82.04.394 provides an exemption from B&O

tax for gross wages and beneﬁts paid directly to, or on behalf of, on-site personnel if

the money is paid from a property management trust account required to be maintained

under RCW 18.85.310 and the amounts are received by a:

• “Nonproﬁt property management company” from the owner of a property, or

• A property management company from a “housing authority.”

Before June 1, 2010, Washington law provided a B&O tax exemption for property

management companies for amounts received from a property owner that are used to

pay the wages and beneﬁts of on-site personnel if the money is paid from a property

management trust account required to be maintained under RCW 18.85.310.

For the exemption to apply, the on-site personnel must work under a written property

management agreement where:

• Compensation of the on-site personnel is the ultimate obligation of the property owner

and not the property manager.

• The property manager is liable for payment only as agent of the owner.

• The property manager is the agent of the owner with respect to the onsite personnel

and all actions, including, but not limited to, hiring, ﬁring, compensation, and conditions

of employment, taken by the property manager with respect to the on-site personnel

are subject to the approval of the property owner.

• The on-site personnel works primarily at the owner’s property.

• The on-site personnel’s duties include leasing property units, maintaining the property,

collecting rents, or similar activities.

Gross income for providing property management services is subject to B&O tax under

the service and other activities classiﬁcation. For qualifying amounts received, an “other”

deduction may be taken with the following explanation: “Property management

deduction – SB 5289.”

Personnel performing on-site functions (new) - are persons who meets all of the

following conditions:

• The person works at the owner’s property or centrally performs on-site functions for

the property;

• The person’s duties include leasing property units, maintaining the property, preparing

tenant income certiﬁcation paperwork or other compliance documents required to

lease the unit, collecting rents, recording rents, or performing similar activities; and

• The property management company, for which the personnel performing on-site

functions works, operates under a written property management agreement.

Continued...

Property Management B&O Tax Exemption Special Notice - Page 3

Nonproﬁt property management company (new) – is a property management

company that:

• Provides property management services for low-income housing that has qualiﬁed for

the property tax exemption under RCW 84.36.560, and is exempt from the tax

under 26 U.S.C. Sec. 501(c) of the federal internal revenue code, as it exists on

January 1, 2010.

• Is a public corporation established under RCW 35.21.730.

Housing authority (existing) - a housing authority created pursuant to chapter 35.82

RCW.

For more Contact the Department’s Telephone Information Center at 1-800-647-7706.

information