On May 20, the governor of Washington State signed into law HB 2020 which amends the state’s tax laws to exclude interchange fees from the business and occupation tax. The legislation stemmed from a lawsuit where a company sued the state’s Department of Revenue, arguing that interchange and network fees were “phantom income” that the company neither collects nor retains, and thus should not be added to gross receipts subject to taxation.

The business and occupations tax rate for processors will increase from 1.5 to 3.1 percent. The legislation specifies that a processor, defined as a person who processes electronic transactions, may deduct interchange fees, network fees, and portions of fees from the amount of tax to pay. The law is set to take effect on January 1, 2026.

The company had previously succeeded in trial court by contending these fees should be considered gross receipts. Under the new law, the business and occupations tax apply only to processing fees, allowing payment processors to deduct interchange fees, network fees, and other fees retained by banks and card associations from their taxable gross receipts.