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District of Columbia Tax Changes Take Effect October 1

Monday, August 26, 2019
New provisions include sales and use, individual income, corporate franchise, real property, and recordation and transfer taxes. There is also a tax rate increase on cigarettes.

Washington, DC – The District of Columbia Office of Tax and Revenue (OTR) reminds tax professionals, taxpayers, tax software providers, businesses, and others about tax changes that will take effect Tuesday, October 1, 2019 unless otherwise noted.

The changes were enacted in the Fiscal Year 2020 Budget Support Emergency Amendment Act of 2019 for the following tax types: 

Sales and Use Taxes

  • Soft Drinks: The sale of or charge for soft drinks are subject to 8 percent sales and use tax. Sales or charges for soft drinks sold for immediate consumption will remain subject to a 10 percent sales tax. Further, the definition of “soft drink” is expanded to include beverages with natural or artificial sweeteners that contains less than 100 percent juice, less than 50 percent milk, soy, rice or similar milk substitutes or coffee substitutes, coffee, cocoa or tea. (See D.C. Official Code § 47-1803.02.)
  • Diapers: The sale of or charge for diapers is exempt from sales and use tax. "Diaper" is defined by statute as "an absorbent incontinence product that is washable or disposable and worn by a person, regardless of age or sex, who cannot control bladder or bowel movements." (See D.C. Official Code § 47-2005(39).)
  • Qualified High Technology Companies (QHTC): Sales of certain property by QHTCs and sales to QHTCs of computer software, or hardware are NO LONGER exempt from sales and use tax. (See D.C. Official Code §§ 47-2001(n)(2)(G) and 47-2005(31).) All QHTC Exempt Purchases Certificates issued before October 1, 2019 are terminated as of that date.

Individual Income Taxes

  • Schedule H Credit: Beginning with tax year 2019, the maximum Schedule H credit is increased from $1,025 to $1,200. The income eligibility limits are increased to $55,000 for non-seniors and $75,000 for seniors. For purposes of calculating the credit, a third tier of 5 percent is added for federal adjusted gross incomes of $52,000-$55,000 for non-seniors. Dependent income is no longer included in the federal adjusted gross income of the tax filing unit. (See D.C. Official Code § 47-1806.06.

    Further, beginning with tax filing season 2021, taxpayers who are not required to file a Form D-40 with OTR will be able to file a “stand alone” Schedule H electronically in a manner prescribed by OTR. (See D.C. Official Code § 47-1806.06(s).)
  • Keeping Childcare Affordable Tax Credit (formerly known as the Early Learning Tax Credit): Beginning with tax year 2019, the income eligibility limit is reduced from $750,000 to $150,000 (from $375,000 to $75,000 for married filing separately). (See D.C. Official Code § 47-1806.15.)
  • Safe at Home Grant Program: Beginning with tax year 2019, amounts received by a taxpayer pursuant to the Safe at Home Grant Program are excluded from DC gross income. (See D.C. Official Code 47-1803.02(a)(CC).)

Corporation Franchise Taxes

Qualified High Technology Companies (QHTC): Beginning with tax year 2020, except as otherwise provided under D.C. Official Code § 47–1817.06(a)(2), QHTCs will be subject to the regular franchise tax rate imposed on corporations. Beginning with tax year 2020, QHTCs are, instead, allowed a new credit that is equal to the lesser of $250,000 or the difference between the applicable corporation franchise tax rate (currently 8.25 percent) and 6 percent. The credit is allowed for a period of 5 taxable years from the later of December 31, 2019 or the last year the QHTC is eligible to receive the “0 percent rate” under D.C. Official Code § 47–1817.06(a)(2). (See D.C. Official Code § 47–1817.06.)

Further, beginning with tax year 2020, the amount of credits a QHTC can claim for wages paid to qualified employees is reduced. Beginning with tax year 2020, a credit is allowed for 5 percent of wages paid to a qualified employee hired after December 31, 2017 and paid during the first 24 calendar months of employment and is capped at $3,000 per qualified employee. (See D.C.  Official Code § 47–1817.03(a-1).) Further, no carryforward will be allowed for credits obtained for wages paid to a qualified employee hired on or after October 1, 2019. (See D.C. Official Code § 47–1817.03(c).)

Real Property Taxes

  • Senior/Disabled Residents Real Property Tax Cap Credit: The portion of a cooperative receiving both the homestead and senior/disabled tax deduction will receive the 105 percent assessment cap credit beginning with tax year 2019 (October 1, 2018). (See D.C. Official Code § 47-864.)
  • Commercial Property Rate: For real property whose assessed value is greater than $10 million, the commercial property (Class 2) tax rate of $1.89 for each $100 of assessed value will no longer be subject to reduction for sales tax revenue receipts collected from remote sellers. (See D.C. Official Code § 47-812(b-9)(2).)
  • Nonprofit Workforce Housing Property: Rental properties owned by a nonprofit organization can qualify for a real property tax exemption where at least 50 percent of the tenants have household income that does not exceed 80 percent of area median income (AMI), and the household income of the remaining tenants does not exceed 120 percent of AMI. Other requirements also must be met. Compliance with the eligibility requirements will be certified to OTR by an independent compliance monitor. (See D.C. Official Code § 47-1005.03.)
  • Performing Arts Venues Credit: A rebate of up to $15,000 of real property tax paid as required by a lease is available to a business hosting live entertainment a minimum of 48 hours per month and that has a seating capacity of less than 300 seats. Qualified businesses must apply by September 15 of the tax year. The application must include the following:
    • Copy of the lease
    • Documentation that the real property tax was paid
    • Documentation that the business hosts live performances for a minimum of 48 hours per month, and
    • The venue has a capacity under 300 seats.  

(See D.C. Official Code § 47-869.)

Recordation and Transfer Taxes

  • Commercial Property Rate Increase: The combined recordation and transfer tax rate for class 2 property will increase from 2.9 percent to 5 percent if the consideration is $2 million or more. The tax rate for transfers of economic interests in such property will increase to 5 percent. The recordation tax rate on security interest instruments for debt of $2 million or more secured by such Class 2 property will be 2.5 percent. Transfers are subject to the increased rate if any portion of the building is Class 2 property and there is majority common ownership between the interest transferred and the commercial portion of the property. This provision sunsets on September 30, 2023. (See D.C. Official Code §§ 42-1103 and 47-903.)
  • Nonprofit Workforce Housing Property: Deeds to housing properties eligible for the workforce housing real property tax exemption discussed above and for which the required certification as to both the property and the nonprofit owner have been made are exempt from recordation tax. Transfers of a workforce housing property by a nonprofit owner for which the required certification has been made are exempt from transfer tax. (See D.C. Official Code § 47-1005.03(e).)

Additional Changes Effective October 1

Cigarette Tax

Cigarettes: The fixed tax remains $4.50 per package of 20 cigarettes. However, the surtax is increased from $.44 cents to $.48 cents per package of 20 cigarettes. As a result, the combined cigarette excise tax per package of 20 cigarettes is $4.98.

OTR will not administer a floor tax in connection with this increase in the cigarette tax, nor will the cigarette stamps currently in use be changed when the tax increases on October 1. Cigarette stamps purchased on or after October 1 will be sold at the new tax rate. Sales of cigarettes at retail are not subject to the DC sales tax.

Other Tobacco: The tax rate on other tobacco products is decreased from 96 percent to 91 percent of wholesale sales of other tobacco products.

For additional information, contact OTR’s Customer Service Center at (202) 727-4TAX (4829).