Seattle voters have approved Proposition 2, the “Seattle Shield Initiative,” ushering in a major overhaul of the city’s business and occupation (B&O) tax regime. The measure increases overall revenue to address a budget shortfall by increasing rates and the no-tax-due threshold for businesses with less than $2 million in Seattle revenue.
Key Changes Effective January 1, 2026
Increased Rates
For tax years 2026-2032, specified classifications with a 0.222% rate (such as retail sales, wholesaling, and manufacturing) will be subject to a new rate of 0.342%. Classifications with a 0.427% rate (such as service and other business activities classification) will be subject to a new rate of 0.658%. Beginning in tax year 2033, those rates will decrease to 0.273% and 0.526%, respectively.
Increased No-Tax-Due Threshold
The no-tax-due threshold will rise from $100,000 to $2 million in annual gross receipts. If a business has annual Seattle gross receipts of $2 million or less, it will owe no B&O tax. The threshold is determined based on total gross receipts before applying any deductions.
New Standard Deduction
Prop 2 includes a new standard deduction for businesses with gross receipts above $2 million, under which only the amount exceeding $2 million will be subject to B&O tax at the new rates. For example, a business with $3 million in gross receipts would pay B&O tax on only $1 million of those receipts.
Targeted Tax Credits
The changes also include offsetting tax credits for comprehensive cancer centers and pediatric hospitals.
Revenue Impact and Use
Seattle projects that Prop 2 will generate additional annual revenue of $80 million to $81 million to support the city’s general fund.
Seattle and Washington’s Evolving Tax Landscape
Proposition 2 is part of a broader trend in Seattle’s tax policy to shift local tax burdens to larger businesses. It follows recent measures such as the JumpStart payroll expense tax (2021) and the social housing payroll expense tax (2025) (see our prior Alert on the social housing initiative). Seattle-based businesses and residents are also contending with numerous tax changes at the state level (see our prior Alert: Washington Governor Signs Biennial Operating Budget and Transportation Funding Bills to Make Important Tax Changes to B&O, Sales and Use, Capital Gains, and Estate Taxation).
BDO Insights
Seattle businesses should take at least three steps to prepare for the changes implemented by Prop 2, as outlined below.
- Assess Gross Receipts: Businesses should determine whether their annual Seattle gross receipts will fall above or below the new $2 million no-tax-due threshold (pre-deduction) for 2026 and beyond.
- Confirm City Sourcing: It is important for taxpayers to examine whether their revenue sourcing reflects Seattle’s shift to market-based sourcing for service income beginning in 2020. Income is generally sourced to Seattle if the customer ordered the service from within Seattle. Taxpayers also should evaluate the payroll factor to ensure Seattle payroll takes into account the implications of remote work.
- Evaluate Tax Liability: Businesses above the threshold should calculate their projected B&O tax liabilities after applying the $2 million standard deduction and increased rates to evaluate budget effects.
Please visit BDO’s State & Local Tax Services page for more information on how BDO can help.