Will the McCleary Decision Result in a New Sales Tax on Homes in Washington?

Analysis by SEATTLE KingCounty REALTORS® staff

In the McCleary decision, the State Supreme Court found that our state government is not meeting its duty to provide basic education for the children in our State. A large portion of the Supreme Court’s decision concerned the Legislature’s failure to provide ample funding for basic education, which amounts to about $3 billion.

In the face of the financial challenges that confront the state legislature following the McCleary ruling, there will be tremendous political pressure to impose new state and local taxes on professional services, including your real estate brokerage services. Governor Inslee stated in the Seattle Times, September 5, that it was time to close business tax exemptions in order to fund schools.

Real estate brokers currently pay 1.5% in state B&O tax on their gross receipts. However, real estate brokerage is not subject to a “sales tax” on professional services. These services are given a specific exemption from the application of Washington State sales tax. Is this a tax exemption the Governor believes should be eliminated? It appears so.

The current average “sales tax rate” in Washington, (both state and local sales tax combined) is 8.87%. In some areas of King County, the combined tax is nearly 10%. If a sales tax on real estate brokerage services were to be imposed, the amount of the new tax would be based on the value of the professional services you provide. In essence, the amount of this new sales tax on professional services would be based on the total amount of the brokerage commissions paid in every real estate transaction.

Who would pay this tax? The broker? The consumer of real estate services? In the end, such a change would be a new tax on the sale of homes.

The following is an analysis by the Seattle KingCounty REALTORS® of the impact of the sales tax on real estate transactions based on the 2013 average sales prices of single family homes and condos in King County, according to NWMLS.

A conservative estimate of a new sales tax levied on the brokerage services provided for the sale of an average King County home ranges from $1640 to $2200. This tax would be in addition to the REET paid by every seller of $7387.00 on average.

If a broker is closing 12 “transaction-sides” per year at these market prices, and earning typical commissions on those transactions, the imposition of a new 8.87% sales tax on professional real brokerage services would add a new tax burden on real estate transactions that would be equal to $9,820 to $13,150 per broker, per year. This is an additional sales tax on homes.

REALTORS® support schools because we know the importance of strong schools for healthy neighborhoods.  For the last decade SEATTLE KingCounty REALTORS® have had an outstanding record in the business community for stepping-up to support local school levies and bonds. We will continue to support strong schools. But it makes no sense to unnecessarily pit education for children, against homes for those children, and their families, to live in.

As we work hard to support schools, we will also work equally hard to protect your business. The real estate market is still very tough for buyers and their REALTORS®. We will continue to try to ensure the entire community shares the burden of funding schools, instead of allowing the Legislature to simply target your real estate transactions.