D.C. Tax Code Revamp Would Help Small and Black-Owned Businesses

The DC Tax Revision Commission, or TRC, on Jan. 5 released an audacious list of 39 recommended changes to Washington, D.C.’s tax code. The proposals, designed to be revenue-neutral, would deeply affect individuals and businesses—both large and small.

The TRC’s overall recommendations offer a broad spectrum of tax relief to advance economic competitiveness, entrepreneurship, and job creation—especially among small and Black-owned businesses—by removing barriers to entry and some tax payments.

However, a proposed business activity tax would increase the number and types of entities being taxed—some of which were previously exempt. This might spur some businesses to close their operations in D.C. to avoid a new tax and relocate to a lower-tax jurisdiction.

Proposals include enacting a $1,000 per-child refundable child tax credit, doubling the child and dependent care tax credit, and making seniors and young adults eligible for childless worker earned-income tax credit benefits. Another provision would expand the income range eligibility and increase the property tax credit for both homeowners and renters.

The first group of recommendations for businesses include repealing the personal property tax on business equipment, the basic business license fees, and the unincorporated business franchise tax, or UBFT.

These repeals appear designed to ease burdens to entry for those wanting to start a small business. This includes tradespeople and service providers, such as barbers and beauty technicians for example, who might not know they have to obtain a business license (which starts at $99) and the type of license they need and is required, or whether they’re able to afford the fees.

Even the TRC described the fee schedule as “antiquated and obsolete,” as seen on the DC Business Licensing website, which includes a dizzying list of fees that vary depending on type of license.

Small-business owners might not realize they’re subjected to a minimum UBFT of $250 on gross receipts over $12,000—even if the business sustains a net loss. The D.C. Office of Tax and Revenue charges a penalty of 5% per month for failure to file a return or pay any tax due and interest of 10% per year, compounded daily, on a late payment. Unpaid taxes of $1,000 can lead to penalties and accrued interest, creating a barrier to the businesses’ continued existence.

Altogether, the proposed repeals and reductions would reduce revenue by $275 million.

The TRC is optimistic it can offset the revenue reductions by raising an equivalent $275 million from the proposed business activity tax—a value-added tax of approximately 1.4% that would be imposed on gross receipts, not net income. It would resemble a typical corporate income tax and apply to a wider range of business entities and activities that aren’t subject to the corporate franchise tax, or CFT.

This would include most large partnerships, including law and lobbying firms. Current law forbids the city of Washington from taxing partnerships if the owners aren’t district residents. Affected businesses might want to consider consulting their tax consultants to help them navigate potential options.

The business activity tax’s practical implication is that a partnership with low rent payments and minimal capital expenditures can face a high liability, as shown in the example that the TRC created under the following assumptions:

A very profitable corporation with a large corporate franchise tax liability could end up paying a smaller total tax because the business activity tax is fully creditable against the D.C. corporate franchise tax and individual income tax. A corporation with no corporate franchise tax liability might now have to pay the business activity tax because they have no corporate franchise tax liability to credit it against.

Unsurprisingly, the business activity tax is expected to generate the greatest controversy because of the scenarios outlined above.

Another provision that has garnered opposition is the data excise tax, which would be imposed on “businesses that are extracting data from over 50,000 D.C. residents, at a rate of $4/participant/year.” That could result in a minimum tax of $200,000 per study for each affected entity.

This provision has brought the ire of the Insights Association, the leading nonprofit trade association for the market research and data analytic industry. According to the association, the new tax would hurt small businesses—especially insights service providers—and “increase the cost of planning and decision-making, disincentivizing the insights essential to economic growth and bouncing back from crises.”

D.C. should carefully note the years-long legal challenges that Maryland’s digital advertising tax, enacted in 2021, is still embroiled in, and craft its legislation to withstand legal challenges.

D.C. currently uses the Joyce method of combined reporting, by only taxing profits proportionally to sales made within the city. The TRC proposes adopting the Finnigan rule, which treats the combined group as a single taxpayer, and all members of the combined group would be included in the D.C. apportionment formula regardless of each member’s nexus.

More states are adopting the Finnigan method—most recently New Jersey in 2023—on the basis that it reduces opportunities for combined groups to avoid taxes and more accurately assesses taxes by reducing the group’s ability to avoid taxes by creating profitable out-of-state subsidiaries.

The TRC’s recommendations contain laudable individual income tax reduction provisions to alleviate the tax burden on Washington residents—most notably on families with children and seniors, many who are Black and Latino and face the greatest economic challenges. It plans to release more comprehensive recommendations in the coming weeks.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jean Wells is an attorney, CPA, and associate professor at Howard University School of Business.

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