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Should You Be Collecting Leasehold Excise Tax?

A close up of a model of a building against scattered coins, keys, and a calculator,  representing a landlord renting property

Last week I was doing a presentation in Chelan for the Washington Public Treasurers Association annual conference for a class focused on small cities and the myriad items that small city treasurers need to know, including various state and federal reporting deadlines.

To prepare, I decided to use MRSC’s Legal Compliance Calendar for Clerk/Treasurers and Finance Departments as a guide, and one item that was not on the MRSC calendar came to me last minute as I was finishing my presentation slides, so I decided to add it. That item was the quarterly filing of leasehold excise tax with the Washington State Department of Revenue (DOR). Little did I know that this topic would have several people lined up after the presentation asking questions about leasehold excise tax for their particular situations.


Local governments are exempt from paying property taxes under RCW 84.36.010. Many local governments own property or land they lease to individuals, businesses, nonprofits, or other local or state governments.

Chapter 82.29A RCW creates the leasehold excise tax to be paid in lieu of property tax on leases of government property to private parties, and it requires a leasehold excise tax of 12.84% be collected by the lessor. Typically, local governments in Washington State report and remit the leasehold excise tax to the DOR on a quarterly basis, but DOR notifies each agency of their reporting frequency.

Do Nonprofits Leasing Local Government Property Have to Pay Leasehold Excise Tax?

The most common question I received after my training was whether local governments should be charging and collecting leasehold excise tax from nonprofits leasing local government property. The short answer is yes. Nonprofit organizations, while exempt from federal taxes, are generally not exempt from property taxes or leasehold excise taxes.

Certain types of nonprofits can apply for an exemption with the DOR by completing an Application for Property Tax Exemption form and submitting the required documentation. There are over 40 different types of organizations that can receive an exemption. If a nonprofit does qualify for an exemption, DOR will provide documentation to the nonprofit as proof of the exemption. Nonprofits that qualify for a leasehold excise tax exemption are also required to submit an annual renewal by March 31.

What is Considered Taxable Rent?

One might assume calculating leasehold excise tax would be simply taking the rent paid by the lessee and multiplying that by 12.84% to arrive at the amount owed. This is not necessarily so. DOR considers other items in addition to rent paid to determine taxable rent in calculating leasehold excise tax.

Taxable rent can also include improvements to a property where the improvements become property of the lessor or expenditures made on behalf of the lessor. Say, for example, that your agency updates the kitchen in a building leased by a nonprofit childcare provider — the costs to update the kitchen are now part of taxable rent for the purposes of calculating leasehold excise tax for that provider/site.

Note that local governments should be charging fair market value for any of its leases. If a lease was not established through a competitive bid, DOR will consider the following:

  • What are lessees paying for similar properties for similar uses?
  • What is considered a fair rate of return on the market value of the property, less reasonable deductions for restrictions on use or special operating requirements?

If DOR determines that rent paid is below fair market value, it will calculate the leasehold excise tax at the fair market value that must be paid by the lessee.


Local governments should review any leases of property or land that they own to ensure they are in compliance with leasehold excise tax requirements. For more information on leasehold excise tax and other factors that would be included in the definition of taxable rent, I would recommend reviewing WAC Chapter 458-29A and the DOR leasehold excise tax webpage for more resources and contact information for leasehold excise tax assistance.

MRSC is a private nonprofit organization serving local governments in Washington State. Eligible government agencies in Washington State may use our free, one-on-one Ask MRSC service to get answers to legal, policy, or financial questions.

Photo of Eric Lowell

About Eric Lowell

Eric Lowell joined MRSC in December 2020 as a Finance Consultant. He has been involved in local government finance for over 13 years, including working in city government as well as for a special purpose district.

Eric received a B.A. in Secondary Education from Arizona State University and a B.S. in Accounting from Central Washington University.