What Does B&O Tax Mean and How Is It Calculated?

The Business and Occupancy (B&O) tax is a gross receipts tax imposed on businesses for the privilege of operating within specific jurisdictions. Unlike a corporate income tax, which is based on profit, the B&O tax is calculated on a company’s total revenue before the deduction of most business expenses. This means costs such as labor, materials, and other operational expenditures are generally not subtracted from the gross income figure when determining the tax liability.

Determining Who is Subject to B&O Tax

A business becomes subject to B&O tax when it establishes a sufficient connection, or “nexus,” with a jurisdiction that levies the tax. Nexus is a concept that refers to a business having a significant physical or economic presence in a particular location. Activities that typically create this connection include maintaining a physical office, having employees working within the jurisdiction, or owning property. Regularly sending sales representatives into an area to solicit sales or perform services can also establish nexus.

While not widespread, several states, including Delaware, Nevada, Ohio, Oregon, Tennessee, Texas, and Washington, impose a statewide gross receipts tax. While West Virginia’s statewide B&O tax is now limited to specific industries like public utilities, many of its municipalities levy their own local B&O taxes.

The specific thresholds and activities that trigger nexus can vary. For instance, Ohio’s Commercial Activity Tax (CAT) is levied on taxable gross receipts, but an initial amount of receipts is excluded. Beyond statewide taxes, some local municipalities in other states have their own versions of a gross receipts tax, making it important for businesses to understand the local tax landscape wherever they operate.

How B&O Tax is Calculated

From this starting point, the process becomes specific to the nature of the business activities, as the tax rate applied is determined by a business’s classification. Jurisdictions that use a B&O tax system categorize business activities into distinct classifications, each with its own tax rate. Common classifications include Retailing, Wholesaling, Manufacturing, and a broad category for Service and Other Activities. For example, under Washington’s system, the Retailing classification applies to sales of goods to consumers, while Wholesaling covers sales to other businesses for resale. The Manufacturing rate applies to the value of products produced, and the Service and Other Activities classification is a catch-all for various professional and personal services. Each of these has a unique rate, and these rates can be subject to legislative changes.

After identifying the correct classification and gross income, a business may be able to reduce its taxable income by taking certain allowable deductions. These are specific types of income that can be subtracted from the gross amount. Common deductions include amounts from sales in interstate or foreign commerce, bad debts written off during the period, and amounts paid to subcontractors who are themselves subject to B&O tax on that income. It is important to distinguish these deductions from credits. Deductions reduce the income figure before the tax is calculated, whereas credits, like a Small Business B&O Tax Credit, reduce the final tax liability directly. The basic formula is: (Gross Income – Allowable Deductions) x Tax Rate = Tax Due.

The B&O Tax Filing and Payment Process

The frequency of filing—whether monthly, quarterly, or annually—is typically determined by the state’s revenue agency based on the business’s estimated annual tax liability. Businesses with higher revenues and tax obligations are generally required to file more frequently, while smaller businesses may only need to file once a year.

The primary document for reporting is often a consolidated tax form, such as Washington’s Combined Excise Tax Return, which allows businesses to report B&O tax alongside other obligations like sales tax. This form requires the business to break down its gross income by the proper tax classifications and show any deductions taken. The completed return and payment can then be submitted through one of two primary methods.

Most jurisdictions encourage or require electronic filing through a secure online portal. After creating an account, a business can enter its financial data directly into the system, and the portal often calculates the tax due automatically. The other method is to mail a physical paper return. When filing by mail, the business must ensure the completed form is signed and accompanied by a check or money order for the full tax amount due. After submission, businesses should retain a record of the filing for their records.