D.C. Enacts New Retailer Tax Credit, Higher Sales Tax Rates and More

August 6, 2018

On July 30, 2018, the District of Columbia enacted emergency budget legislation, B22-0901, for the fiscal year 2019, which included a number of key tax provisions. Notable tax-related items included in the legislation include:

  1. A new refundable credit franchise tax credit for retail businesses for rent or property taxes paid.
  2. Clarification that the District will not conform to the new 20 percent deduction from qualified business income for pass-through entities under IRC Sec. 199A.
  3. Increases to a number of sales and use tax rates.

For tax years beginning on or after January 1, 2018, the District will allow certain retail businesses to claim a refundable credit against their corporation or unincorporated business franchise tax liability. For retailers that rent the primary place where they conduct a retail business, the credit is equal to the lesser of 10% of the total rent paid by the business or $5,000. For retailers that own the primary place where they conduct a retail business, the credit is equal to the lesser of the total Class 2 real property taxes paid by the or $5,000. To qualify for the credit, a business must meet three criteria:

  1. Be engaged in the business of making sales at retail and file a sales tax return for its sales.
  2. Have less than $2.5 million in federal gross receipts or sales.
  3. Be current on all District taxes.

The credit was enacted to provide property tax relief to District retailers. The refundable nature of the credit will allow a business to benefit from the incentive regardless of whether it has net income or loss.  Retailers that are operating in property that is already exempt from, or receiving other tax credits against, real property tax will not be eligible for the new franchise tax credit.

The District also enacted clarifying legislation in response to the new 20% federal income tax deduction from qualified business income for pass-through entities, which was enacted by the Tax Cuts and Jobs Act. The District’s budget legislation added a new section to the deduction provision providing that in the case of an individual, estate, or trust, no deduction will be allowed under IRC Sec. 199A for income tax purposes. It seems that the District wanted to go out of its way to make it clear that the 20% pass-through entity deduction was not allowed for its residents. Even without the addition of the clarifying provision, the law would not have allowed the deduction. The District would have needed to affirmatively provide the deduction under its income tax statute.

Finally, a number of the District’s sales and use tax rates have been increased. The District imposes a general sales tax on most taxable sales, but also imposes special rates that apply to certain types of sales. The general sales tax rate has been increased from 5.75% to 6.0%.  Other notable rate increases include

  1. The rate for the basic transient accommodations tax, which is imposed on charges for any room or accommodations provided by hotels or others places where or accommodations are regularly furnished, increasing from 10.20% to 10.25%.
  2. An increase from 10.0% to 10.25% for sales of alcohol sold for consumption off the premises (i.e., not alcohol sold at bars and restaurants, which have a separate rate).
  3. The vehicle rental rate increase from 9.0% to 9.25%.

The general sales tax rate in the District has been consistently at 5.75% since October 1, 2013. The increase provided for in the budget legislation is a return to the 6.0% imposed prior that date and will take effect on October 1, 2018.

Other tax-related provisions in the District’s budget legislation include an individual income tax credit for 2018 for child care expense, a sales tax exemption for feminine hygiene products, and an almost doubling of the tax imposed on cigarette sales. The emergency legislation expires on October 28, 2018.  The enactment of an emergency bill is common for the District.  The permanent budget support act B22-0753, which is virtually identical to the emergency act, is currently being reviewed by the D.C. Council.

If you have questions regarding District of Columbia taxes, please contact Michael Colavito or one of our tax advisors at 301.231.6200.