The Washington State Business & Occupation (or B&O) tax is a tax that is imposed against a person or company that is engaged in certain business activities. The tax itself is measured by the value of products, gross proceeds of sales, or the gross income of a business and is included in a business’ overhead.
Unlike a sales tax, the B&O tax is not imposed on the purchaser or customer. In Washington, almost all businesses are subject to the B&O tax. So, if you are a business owner, this tax is owed on gross income earned from any business your company conducts in Washington. Although your business may qualify for certain exemptions, credits, or deductions, it does not allow for any deductions for labor, materials, taxes, or any other costs associated with doing business. Further, unlike a sales tax, no transaction has to occur in order for the B&O tax to apply.
The rate of the B&O tax varies depending on the type of business activity in which your company is engaged. Your business can have numerous activities, which are referred to as “classifications,” and it is up to the business itself to determine which classification to report your income under. Although there are numerous different B&O tax classifications for business activities, the four major ones are Retailing, Wholesaling, Manufacturing, and Service and Other Activities, and are detailed below.
The Retailing classification includes businesses that are retailers. “Retailers” are defined as those who sell goods and provide certain services to consumers. Taxable retail services exist in every industry – from services that improve real or personal property (such as repairs and construction), to personal services (such as tattooing, hairstyling), and recreational services. Retailing also includes any form of specialized services such as equipment rental and lawn care. For businesses that engage in retail sales, those sales are subject to the retailing B&O tax regardless of whether or not the sales themselves are subject to a sales tax. For example, sales of certain necessity items such as food or clothing are sometimes exempt from a sales tax, but that income is still taxable under the associated retail B&O tax.
Wholesaling refers to the business of selling goods and services to businesses who then resell them to others. The businesses who sell the goods and services to the business for resale are called wholesalers and the B&O tax is calculated on their wholesale selling price. Wholesalers are required to keep a reseller permit or other approved document on file from every buyer to document that the transaction was a wholesale sale. This is because a retail sales tax is not collected on wholesale transactions.
Within the wholesaling B&O tax in Washington, there is an economic nexus standard that applies to most out-of-state wholesaling businesses. This economic nexus means that your business does not need to have a physical presence in Washington to be taxed. Out-of-state wholesaling businesses are subject to the wholesaling B&O tax on wholesale sales that are delivered into Washington if they meet particular standards. This tax applies to the wholesale sales that were made by businesses that are organized or commercially domiciled in Washington or who meet specific economic thresholds during the previous calendar year.
This B&O tax is paid by firms who manufacture items in Washington State and it includes products that are used by the manufacturer even if they are not sold or used prior to sale. Generally, the tax is based on the value of the products as determined by the selling price. If there is no sale, then the value is determined by the selling price of similar products because, as above, companies are subject to the B&O tax even if no sale is made.
The manufacturing company must also report under the wholesaling or retailing B&O tax – but only one tax is due because the company will be entitled to a multiple activities tax credit.
- Service and Other Activities
The last major B&O tax classification is a catch-all category that applies to businesses who provide personal and professional services and do not fall under another classification. Examples of these types of businesses are doctors, lawyers, and beauticians.
As mentioned above, businesses can have multiple classifications and are required to determine the proper ones that apply on their own. If you are a business owner conducting business in the state of Washington, and you need help to figure out your correct business classification, feel free to contact us to guide you through the process.
Robert V. Boeshaar Attorney at Law, LL.M.,PLLC
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