What is Washington B&O tax
Gross receipt tax is the practice of taxing a business’s gross income gained through business activities instead of applying unique taxes on separate business functions.
Washington’s business and occupation (B&O) tax is a good example of this. B&O tax is defined as a tax on the total value of products plus a business’s gross income or gross sales proceeds.
B&O tax nexus is determined by the same physical presence and economic activity rules as sales tax, after which businesses are required to register with the Washington Department of Revenue.
It’s important to note that B&O tax does not preclude sales tax. B&O tax is used instead of income tax, but the collection and remittance of sales tax is still applicable if you have a nexus in Washington.
Key Components of Business & Occupation Tax
B&O taxes can be split into three primary parts:
The taxable event
Which can be retail or wholesale sales, manufacturing activities, service provision, employment, or the occupation of a physical space.
The measure of the tax
Which is based on gross receipts, total employees, occupied space, or similar metrics connected to the measure of the taxable event
The tax rate
Which is most often calculated on a percentage of the measure of the tax, with rates provided according to activity classifications
Industries Affected by Business & Occupation Tax
Instead of having tax rates that are calculated based on revenue brackets alone, Washington State B&O tax rates are based on specific industries and market sectors.
Major B&O classifications
- Retailing
- Wholesaling
- Manufacturing
- Service & other activities
Specialized B&O tax classifications
- Extracting Timber, Extracting for Hire Timber
- Travel Agent/Tour Operators
- Insurance Agents/Insurance Brokers Commissions; Child Care
- Publication of Newspapers
- Processing for Hire; Printing and Publishing
- Manufacturing of Timber or Wood Products
- Manufacturers/Processors for Hire of Semiconductor Materials
- Public or Nonprofit Hospitals; Qualified Co-ops
- For Profit Hospitals; Scientific R&D
- Gambling Contests of Chance
For a detailed list of specialized industries and classifications, visit the Washington State Department of Revenue B&O tax classification page.
If your business conducts multiple business activities and falls under multiple classifications, you may need to report under several of these categories. However, special credit can be applied for in these circumstances to ensure a business only pays tax once.
Strategies for Mitigating B&O Tax Liability
Step 1: Know your classification
Make sure you know which B&O tax classification your business falls under and that you are using the correct B&O tax rate in your calculations and payments.
Step 2: Apply for any applicable B&O tax credits
Even though Washington B&O tax does not make allowance for expense deductions, such as labor, materials, taxes, or other costs of doing business, there are a few key ways in which businesses can minimize or bypass B&O tax.
This credit is available to manufacturers, R&D facilities, and commercial testing facilities that operate in rural counties and increase employment by 15% in the area over four consecutive calendar quarters.
Businesses working in the high technology industry can claim the tax credit if their R&D initiatives in the state of Washington touch on advanced computing, advanced materials, biotechnology, electronic device technology, or environmental technology.
Due to the fact that B&O tax is a blanket tax, small businesses can apply for credit if their gross income falls below the required threshold. This helps small businesses and startups to avoid paying the same tax rate as larger, established organizations.
It’s easy for a business to perform more than one business activity in an increasingly multi-disciplinary market, and as such these companies can apply for this credit to avoid double taxation. A good example of this is a company that both manufacturers and sells its own products.
If a business meets the requirements of any of these special considerations, they must apply for the applicable credit with the Washington Department of Revenue.
Step 3: Don’t forget about other tax obligations
B&O tax compliance is a core part of running in the State of Washington, but it should never overshadow other tax obligations, such as the collection of sales tax during sales.
B&O taxes may seem like a complex compliance topic to manage, but once your business has established its compliance foundation, keeping on the right track is simple. But the creation of that foundation takes dedication, and the use of nexus monitoring software automates an otherwise labor-intensive task.
