Here’s what changed on January 1, 2026: Seattle’s business and occupation tax rates went up, the exemption threshold shifted, and the math on your tenants’ operating costs changed with it.
What Proposition 2 actually changed
Voters passed Proposition 2 in November 2025, restructuring Seattle’s B&O tax. The key changes: Seattle businesses with less than $2 million in gross receipts no longer owe any B&O tax. Businesses with gross receipts over $2 million pay taxes only on the amount above that threshold, creating a new standard deduction of $2 million. Tax rates increased for businesses above the threshold. Moss Adams published a detailed breakdown of the rate changes and filing timelines.
The Seattle B&O tax is a gross receipts tax imposed on the privilege of doing business in the city. It is measured by the value of products, gross proceeds of sales, or gross income. It is separate from the Washington state B&O tax and must be filed separately. Many business owners and commercial tenants are subject to both, and the combined burden is part of the total cost of operating in Seattle.
Why this matters for commercial landlords
Commercial landlords do not typically pay the B&O tax directly on rental income. But what matters is whether your tenants can sustain their business at the rent you need. If a tenant’s margins shrink because of tax changes, then that affects your vacancy risk, your negotiating position at renewal, and your property’s income stream.
A tenant who was profitable at current rent last year may have thinner margins this year. And a tenant with thinner margins is a tenant who pushes harder at renewal, requests concessions, or does not renew at all. That is the connection between a tax your tenant pays and a problem that lands on your desk.
The split in your tenant base
The $2 million threshold creates a clear dividing line. Tenants under that number are better off than before, with zero city B&O obligation. A small neighborhood coffee shop, a local boutique, a service business with modest gross receipts: those tenants got a break.
Tenants over $2 million face higher rates. A restaurant group operating multiple locations through a single entity, a high-volume retail business, a professional services tenant with substantial gross receipts: those tenants may be absorbing a real cost increase. The structure of their business entity matters too, because a tenant operating three locations under one LLC hits the threshold differently than one operating three separate entities.
The practical question for landlords: do you know which side of that line your tenants fall on? If you have a retail tenant generating over $2 million in gross receipts, their B&O obligation just shifted. If you have a smaller tenant under the new threshold, they may be in better shape than before. The mix in your property determines your exposure.
This also affects prospecting. If you are trying to fill a vacancy, understanding the B&O threshold helps you evaluate which types of tenants can afford your space. A high-volume tenant absorbing higher B&O rates may negotiate harder on rent. A smaller tenant newly exempt from the tax may have more budget flexibility than they did a year ago.
Lease provisions that account for operating cost shifts
Most commercial leases do not explicitly address the tenant’s B&O tax obligation. The tax is the tenant’s responsibility as a business, not a property-level cost passed through the lease. But lease negotiations happen in the context of the tenant’s total cost of occupancy, which includes rent, pass-through expenses, and the tax burden of operating in Seattle.
When you negotiate a new lease or a renewal, understanding whether your tenant’s tax burden just went up or down helps you set realistic expectations for both sides. A tenant whose B&O obligation dropped to zero has more room in their budget than they did last year. A tenant whose rates went up has less. Your approach to rent escalation, improvement allowances, and term length should reflect that context.
Attorneys who handle commercial leasing in Seattle can help you structure lease terms that reflect current market realities, including the tax environment your tenants operate in.
K&S Canon assists Seattle commercial landlords and business tenants with lease review, structuring, and commercial real estate transactions. Contact K&S Canon today. Call us at (206) 507-4009 or visit www.kscanon.com.
This article provides general information about Seattle’s B&O tax changes under Proposition 2 and should not be considered legal advice. Every situation is different. For guidance specific to your circumstances, consult an attorney.