How to Calculate Excise Tax in Washington State

Excise taxes are a category of taxes applied to specific goods, services, or activities, rather than being levied on income or property. These taxes are often included in the price of a product or service. Washington State utilizes various excise taxes as a means to generate revenue, which in turn helps fund a range of state services. Understanding these taxes is important for individuals and businesses engaging in economic activity within the state.

Transactions Subject to Excise Tax

Washington State imposes excise taxes on common transactions and business activities. Retail sales tax applies to the sale of tangible personal property and certain services to consumers. Use tax is levied on tangible personal property or services purchased for use in Washington when sales tax was not collected, often from out-of-state vendors.

The Business and Occupation (B&O) tax is levied on the gross receipts of businesses for various activities, including manufacturing, wholesaling, retailing, and providing services. This tax applies regardless of profitability. The Real Estate Excise Tax (REET) is imposed on the sale or transfer of real property within the state.

Establishing the Taxable Amount

Excise tax calculation begins with identifying the taxable amount, the base value upon which the tax rate is applied. For retail sales and use tax, the taxable amount is the selling price of goods or services. This typically includes shipping and handling, but excludes certain discounts.

For Business and Occupation (B&O) tax, the taxable amount is the gross income or proceeds from business activities. This is calculated before deductions for expenses like labor or materials. Different activities may have specific definitions of “gross income,” requiring careful revenue classification.

For Real Estate Excise Tax (REET), the taxable amount is typically the selling price. If there is no stated selling price, or if the transaction is not at arm’s length, the taxable amount is determined by the property’s true and fair value. If a fair market value appraisal is unavailable, the property’s market value listed on county tax rolls may be used.

Applying the Correct Tax Rate

After determining the taxable amount, identify and apply the specific excise tax rate. For sales and use tax, rates vary by location, incorporating state, county, city, and transit authority rates. The statewide base sales tax rate is 6.5%, with local rates creating a combined rate up to 10.4%. The Washington State Department of Revenue (DOR) provides online tools to look up the combined rate for any address.

Business and Occupation (B&O) tax rates are determined by the specific classification of the business activity. Common classifications include retailing at 0.471%, wholesaling and manufacturing at 0.484%, and services and other activities at 1.5%. Businesses engaged in multiple activities may need to classify their income under different categories, each with its own rate. Official B&O tax rate tables are available through the Department of Revenue.

The Real Estate Excise Tax (REET) uses a tiered state rate structure, which means the tax rate changes based on portions of the selling price. For properties sold at $525,000 or less, the state rate is 1.10%. Portions of the selling price between $525,000.01 and $1,525,000 are taxed at 1.28%, while amounts between $1,525,000.01 and $3,025,000 are taxed at 2.75%. Any portion exceeding $3,025,000 is taxed at 3.00%. Local REETs may also apply, adding to the total tax due.

Completing the Tax Calculation

With the taxable amount and correct tax rate identified, excise tax calculation can proceed. For sales or use tax, the calculation is straightforward: multiply the taxable amount by the combined sales tax rate. For instance, if an item costs $100 and the combined sales tax rate is 9.5%, the sales tax due is $9.50. The total amount paid is the selling price plus this tax.

Business and Occupation (B&O) tax involves multiplying gross income from a specific activity by its B&O tax rate. For example, if a service business has $5,000 in gross income and the service B&O tax rate is 1.5%, the B&O tax due is $75.00. Businesses with multiple income streams require separate calculations for each classification before summing totals.

The Real Estate Excise Tax (REET) calculation for tiered rates requires applying the different percentages to the respective portions of the selling price. For a property selling for $600,000, the first $525,000 is taxed at 1.10%, which is $5,775. The remaining $75,000 ($600,000 – $525,000) falls into the next tier and is taxed at 1.28%, amounting to $960. The total REET due would be the sum of these amounts, or $6,735.

Filing and Paying the Tax

Once calculated, excise tax is filed and remitted to the DOR. Most excise tax returns are filed electronically through the My DOR online portal.

Payment methods include electronic funds transfer (EFT) or e-check, which involve direct debit from a bank account and are usually free. Credit card payments are also an option, though they often incur a convenience fee.

Filing frequency (monthly, quarterly, or annually) is determined by the business’s estimated annual tax liability. Monthly returns are due by the 25th day of the month following the reporting period. For Real Estate Excise Tax (REET), the tax is collected by the county treasurer at the time of property transfer, usually as part of the closing process. The county treasurer then remits taxes to the state treasurer.