Washington Business and Occupation Tax
The Washington business and occupation (“B&O”) tax is imposed broadly on people, corporations and other organizations that conduct business in the state. Unlike many other states, Washington does not impose a
corporate or entity-level income tax on businesses, so the B&O tax can be
thought of as Washington’s alternative to a corporate income tax. However, there
is a significant difference. The B&O tax is generally imposed on gross receipts, rather than net income, as a corporate income tax
would be.The B&O tax measure and tax rate vary significantly according to the specific classification into which the taxpayer’s activities fall. Although there are about 30 different B&O tax classifications, most businesses are taxed under the four broadest classifications: manufacturing, wholesaling, retailing, and the “service and other activities” classification, which includes any business activities that are not taxed under another classification or specifically exempt from B&O tax.
The manufacturing B&O tax is imposed on every person or business conducting manufacturing activities within the state. The tax is calculated by multiplying the value of products manufactured in Washington (normally measured by sales price) by the 0.484 percent tax rate. As the act of manufacturing is the activity being taxed, the B&O tax is imposed on all products manufactured within Washington, regardless of where the products are ultimately sold or used by the company’s customers. For example, consider Company A, which has a manufacturing plant in Washington. If Company A sells $100 million per year of products manufactured in Washington, it will pay $484,000 per year of manufacturing B&O tax, even if nearly all of its customers are located outside of Washington.[1]
The retailing B&O tax is imposed on people or businesses that make sales to Washington consumers of tangible property (such as machinery, transportation equipment, consumer goods and raw materials), computer software, digital products, and certain specific types of services. To fall under the retailing classification, the sale must be to the end user, not a sale to a reseller. Retailing B&O tax is imposed only on those transactions that are subject to Washington sales tax (discussed below). The tax rate is 0.471 percent, and the tax is imposed only on sales in which the taxable product or service is delivered to customers within Washington. Thus, if Company B imports $100 million per year of products to its Washington distribution center, but ultimately sells and delivers $90 million of those products to customers outside of Washington and only $10 million per year of products to Washington customers, the retailing B&O tax due from the company will be $47,100 per year.
Wholesaling B&O tax is similar to the retailing tax, but is imposed on sales other than to the end user (i.e. sales for resale). This includes both sales of items that will be resold in the same form as they were purchased, as well as sales of raw materials and component parts that will be incorporated into a product that will ultimately be sold at retail. The wholesaling B&O tax rate is 0.484 percent. Like the retailing tax, it is imposed only on sales in which the taxable product or service is delivered to the customer within Washington. For example, Company C imports and sells $100 million of automotive components per year from its Washington location, all of which are shipped to its customers’ manufacturing plants in other states. Because only those wholesale sales where receipt of the product or service occurs in Washington are subject to the B&O tax, none of the wholesaler’s receipts would be taxable in the state.
The “service and other activities” classification applies to receipts from services that do not fall within the definition of a “retail sale” (which are instead taxable under the retailing B&O tax classification). Services taxed under this classification include professional services (such as medical, legal, financial, accounting and technology consulting), personal services (such as hairdressing, beauty services, interior decorating and event planning) and a variety of other miscellaneous services. Receipts that do not fall within any of the other specific B&O tax classification are also included in this classification. The tax rate for the services classification is 1.5 percent, significantly higher than the other major classifications.
Receipts in the services classification are subject to B&O tax if the customer receives the benefit of the service in Washington. If the benefit of the service is received in multiple states, the corresponding receipts may be sourced to the state where the benefit was primarily received, or if that cannot be determined then to the location from which the customer ordered the service. Receipts from services primarily received outside of Washington are generally not subject to B&O tax. However, the law contains a “throwout” provision, which can cause some service receipts that would otherwise be attributed to locations outside of Washington to be subject to B&O tax if the company does not have a sufficient business presence in the customer’s location.
As an example, Company D provides management consulting services from its office in Washington. Some services are provided in person at the client’s location, but many are provided remotely from the Washington office and some are subcontracted to an affiliate outside the state. Company D is paid $10 million per year for its services by each of three clients, one of which has operations only within Washington, one of which has operations only outside of Washington, and one of which has half of its operations within Washington and half outside of Washington. The entire $10 million of receipts from the first client are subject to B&O tax, none of the receipts from the second client are taxable, and half ($5 million) of the receipts from the third client are taxable. Thus, Company D would pay $225,000 of B&O tax per year ($15 million multiplied by the 1.5 percent tax rate).
Although most business activities conducted in Washington are subject to B&O tax, there are a few important exclusions from the tax. First, employees are exempted from B&O tax on wages, benefits and other compensation received from their employer. Individuals generally only pay B&O tax on occupational income if they work as an independent contractor rather than as an employee. Second, receipts from the sale or rental of real estate (land or buildings) are generally exempted from B&O tax. Thus, rental income of property owners and income from the sale of land, buildings and other facilities will not incur B&O tax liability. Third, there is also a B&O tax exemption for investment income (including gains from trading in stocks, bonds and other marketable securities, as well as dividends and capital gains from equity investments in other businesses). This exemption does not generally apply to interest income, however, and it does not apply at all if the company receiving the income is considered a “banking, lending or security business.”
Reduced B&O tax rates and B&O tax credits are available to companies conducting research and development activities in Washington and to businesses in certain industries, such as aerospace, semiconductor manufacturing, aluminum smelting, farming, food manufacturing, biofuels, and international investment management. For many other companies, the B&O tax is a significant, but consistent and predictable cost of doing business in the state.
[1] Washington manufacturers with a substantial customer base outside of Washington may, however, be able to reduce the manufacturing B&O tax due by using a captive sales subsidiary to purchase and resell products to their non-Washington customers.
The manufacturing B&O tax is imposed on every person or business conducting manufacturing activities within the state. The tax is calculated by multiplying the value of products manufactured in Washington (normally measured by sales price) by the 0.484 percent tax rate. As the act of manufacturing is the activity being taxed, the B&O tax is imposed on all products manufactured within Washington, regardless of where the products are ultimately sold or used by the company’s customers. For example, consider Company A, which has a manufacturing plant in Washington. If Company A sells $100 million per year of products manufactured in Washington, it will pay $484,000 per year of manufacturing B&O tax, even if nearly all of its customers are located outside of Washington.[1]
The retailing B&O tax is imposed on people or businesses that make sales to Washington consumers of tangible property (such as machinery, transportation equipment, consumer goods and raw materials), computer software, digital products, and certain specific types of services. To fall under the retailing classification, the sale must be to the end user, not a sale to a reseller. Retailing B&O tax is imposed only on those transactions that are subject to Washington sales tax (discussed below). The tax rate is 0.471 percent, and the tax is imposed only on sales in which the taxable product or service is delivered to customers within Washington. Thus, if Company B imports $100 million per year of products to its Washington distribution center, but ultimately sells and delivers $90 million of those products to customers outside of Washington and only $10 million per year of products to Washington customers, the retailing B&O tax due from the company will be $47,100 per year.
Wholesaling B&O tax is similar to the retailing tax, but is imposed on sales other than to the end user (i.e. sales for resale). This includes both sales of items that will be resold in the same form as they were purchased, as well as sales of raw materials and component parts that will be incorporated into a product that will ultimately be sold at retail. The wholesaling B&O tax rate is 0.484 percent. Like the retailing tax, it is imposed only on sales in which the taxable product or service is delivered to the customer within Washington. For example, Company C imports and sells $100 million of automotive components per year from its Washington location, all of which are shipped to its customers’ manufacturing plants in other states. Because only those wholesale sales where receipt of the product or service occurs in Washington are subject to the B&O tax, none of the wholesaler’s receipts would be taxable in the state.
The “service and other activities” classification applies to receipts from services that do not fall within the definition of a “retail sale” (which are instead taxable under the retailing B&O tax classification). Services taxed under this classification include professional services (such as medical, legal, financial, accounting and technology consulting), personal services (such as hairdressing, beauty services, interior decorating and event planning) and a variety of other miscellaneous services. Receipts that do not fall within any of the other specific B&O tax classification are also included in this classification. The tax rate for the services classification is 1.5 percent, significantly higher than the other major classifications.
Receipts in the services classification are subject to B&O tax if the customer receives the benefit of the service in Washington. If the benefit of the service is received in multiple states, the corresponding receipts may be sourced to the state where the benefit was primarily received, or if that cannot be determined then to the location from which the customer ordered the service. Receipts from services primarily received outside of Washington are generally not subject to B&O tax. However, the law contains a “throwout” provision, which can cause some service receipts that would otherwise be attributed to locations outside of Washington to be subject to B&O tax if the company does not have a sufficient business presence in the customer’s location.
As an example, Company D provides management consulting services from its office in Washington. Some services are provided in person at the client’s location, but many are provided remotely from the Washington office and some are subcontracted to an affiliate outside the state. Company D is paid $10 million per year for its services by each of three clients, one of which has operations only within Washington, one of which has operations only outside of Washington, and one of which has half of its operations within Washington and half outside of Washington. The entire $10 million of receipts from the first client are subject to B&O tax, none of the receipts from the second client are taxable, and half ($5 million) of the receipts from the third client are taxable. Thus, Company D would pay $225,000 of B&O tax per year ($15 million multiplied by the 1.5 percent tax rate).
Although most business activities conducted in Washington are subject to B&O tax, there are a few important exclusions from the tax. First, employees are exempted from B&O tax on wages, benefits and other compensation received from their employer. Individuals generally only pay B&O tax on occupational income if they work as an independent contractor rather than as an employee. Second, receipts from the sale or rental of real estate (land or buildings) are generally exempted from B&O tax. Thus, rental income of property owners and income from the sale of land, buildings and other facilities will not incur B&O tax liability. Third, there is also a B&O tax exemption for investment income (including gains from trading in stocks, bonds and other marketable securities, as well as dividends and capital gains from equity investments in other businesses). This exemption does not generally apply to interest income, however, and it does not apply at all if the company receiving the income is considered a “banking, lending or security business.”
Reduced B&O tax rates and B&O tax credits are available to companies conducting research and development activities in Washington and to businesses in certain industries, such as aerospace, semiconductor manufacturing, aluminum smelting, farming, food manufacturing, biofuels, and international investment management. For many other companies, the B&O tax is a significant, but consistent and predictable cost of doing business in the state.
[1] Washington manufacturers with a substantial customer base outside of Washington may, however, be able to reduce the manufacturing B&O tax due by using a captive sales subsidiary to purchase and resell products to their non-Washington customers.