What Is the Washington B&O Tax and How to Pay It?

The Washington Business & Occupation (B&O) tax is a tax on the gross receipts of business activities conducted within Washington State. This tax is distinct from an income tax, as it taxes gross revenue rather than net profit. It also differs from a sales tax, which is typically collected from customers on retail sales. The B&O tax applies to most businesses operating in Washington, serving as a primary source of state revenue in a state that does not levy a corporate income tax.

Defining the Business and Taxable Activities

Engaging in business for B&O tax purposes means conducting activities within Washington State that generate gross income. This encompasses a wide range of operations, including traditional commerce, professional services, and manufacturing. Businesses must classify their activities under specific categories established by the Washington State Department of Revenue (DOR), as each classification has a different tax rate.

One common classification is Retailing, defined in RCW 82.04, which applies to businesses making retail sales to consumers. The tax rate for Retailing is 0.471% of gross receipts. Wholesaling involves selling goods to other businesses for resale without significant alteration, and carries a tax rate of 0.484%.

Manufacturing applies to businesses that produce new, different, or useful articles of tangible personal property for sale or commercial use. The rate for Manufacturing is 0.484%. The Service and Other Activities classification encompasses a broad array of services not specifically categorized elsewhere, such as professional services, and has a rate of 1.5%. An additional Workforce Education Surcharge may apply to this classification, increasing the rate to 1.75% for businesses with gross income of $1 million or more in the prior year.

Some businesses may also fall under the Extracting classification, which applies to those who extract natural resources such as timber or minerals. Businesses frequently engage in multiple activities, requiring them to report under more than one B&O tax classification. For instance, a company might manufacture a product (Manufacturing) and then sell it directly to consumers (Retailing) or to other businesses (Wholesaling).

Determining Taxable Gross Receipts

Taxable gross receipts form the base upon which the B&O tax is calculated, representing the total value from business activities. This includes the gross proceeds of sales or the gross income of the business. The B&O tax does not allow deductions for business expenses such as labor, materials, or other costs.

While most business expenses are not deductible, specific deductions can reduce the gross receipts before the B&O tax rate is applied. For example, cash discounts taken by purchasers reduce the taxable amount. Amounts received from transactions in interstate commerce, where the activity is performed outside Washington, may also be deducted from gross income.

Refunds given to customers for returned goods or services also reduce the gross receipts subject to B&O tax. Bad debts that have been paid on and subsequently written off for federal tax purposes can also be deducted.

Specific Exemptions and Credits

Certain activities or entities are explicitly exempt from the B&O tax, or qualify for tax credits that reduce the final tax liability. Exemptions mean that particular income or activities are not subject to the tax at all. For example, some non-profit organizations may be exempt from B&O tax on certain activities. Specific types of sales or services, such as certain agricultural products or income received by licensed adult family homes, can also be exempt by law.

Tax credits, conversely, directly reduce the amount of B&O tax owed after it has been calculated. One significant credit is the Small Business B&O Tax Credit, which provides relief to smaller businesses by reducing or even eliminating their B&O tax liability based on their gross receipts. This credit operates on a sliding scale, allowing businesses with lower income levels to pay a smaller percentage of their gross receipts.

Other credits include the Multiple Activities Tax Credit (MATC), designed to prevent double taxation when a business engages in more than one taxable activity for the same product, such as manufacturing and then wholesaling. Credits for hiring unemployed veterans, new employees in manufacturing in rural counties, and certain pollution control facilities are also available.

Registration, Reporting, and Payment

Businesses operating in Washington State must register with the Washington State Department of Revenue (DOR) to ensure compliance with B&O tax requirements. This registration process typically involves obtaining a business license and a Unified Business Identifier (UBI) number. The UBI is a nine-digit number used by various state agencies to identify the business.

Once registered, businesses are assigned a reporting frequency for their B&O tax, which can be monthly, quarterly, or annually. This frequency depends on the business’s estimated tax liability, with higher liabilities generally requiring more frequent reporting. Monthly returns are typically due on the 25th day of the following month, quarterly returns by the last day of the month following the end of the quarter, and annual returns by April 15th of the following year.

Electronic filing through the DOR’s MyDOR system is widely used for reporting and payment. Payments are typically made online through MyDOR. The DOR provides resources and specific instructions through its official website for accurate reporting and timely payments.