Who Is Subject to Washington B&O Tax?

The Washington Business and Occupation (B&O) tax is a gross receipts tax levied on the privilege of engaging in business activities within Washington. It applies to a business’s gross income, not net profits. Businesses operating in the state, including those without a physical presence but meeting economic nexus thresholds, are subject to this tax.

Defining the Business and Occupation Tax

The Washington Business and Occupation (B&O) tax is a gross receipts tax applied to a business’s gross income before deductions for expenses. Unlike many states with corporate income taxes, Washington uses the B&O tax to generate revenue. It functions as a privilege tax for businesses operating within the state, regardless of profitability.

This tax applies to businesses with a physical presence or those meeting economic nexus thresholds in Washington. Economic nexus means out-of-state businesses generating a certain amount of gross receipts from Washington customers may be subject to the tax. The B&O tax is distinct from sales tax; businesses pay the B&O tax on their gross income, while they collect and remit sales tax from customers.

Taxable Business Activities

The B&O tax applies to various business activities, each with a specific classification and tax rate. Businesses may engage in multiple activities, requiring reporting under several classifications.

Retailing

Retailing applies to the sale or rental of goods and certain services to end consumers, including digital goods and digitally automated services. For example, a hardware store selling a hammer for personal use falls under retailing. The tax rate for retailing is approximately 0.471%.

Wholesaling

Wholesaling applies to sales of goods or services to businesses for resale without intervening use. For example, a manufacturer selling products to a hardware store for resale is wholesaling. Businesses engaged in wholesaling must obtain a reseller permit from their buyers. The tax rate for wholesaling is approximately 0.484%.

Manufacturing

Manufacturing covers businesses that produce new or more useful products in Washington. The tax is based on the value of manufactured products, with a rate of approximately 0.484% of gross receipts. Businesses that manufacture and then sell their products in Washington may be subject to both manufacturing B&O tax and either wholesaling or retailing B&O tax.

Services and Other Activities

This broad classification covers many business operations not categorized elsewhere, including a wide range of professional services. The general tax rate for services is 1.5% of gross income, with a higher rate for businesses exceeding $5 million in annual gross revenue.

Extracting

Extracting applies to businesses that extract natural resources, such as timber. The tax is due on the value of the extracted product. The rate for extracting is approximately 0.484%.

Common Exemptions and Deductions

Even when a business activity falls under a taxable B&O classification, certain exemptions and deductions can reduce or eliminate tax liability. While the B&O tax is generally based on gross receipts, specific provisions exist to prevent certain types of income from being taxed or to provide relief for small businesses.

A B&O tax credit can reduce or eliminate tax liability for businesses with gross income below a certain threshold. This credit decreases as gross receipts rise, eventually phasing out for larger businesses. The maximum monthly credit varies based on income source and classification.

Certain types of income or activities may also be deductible or exempt. For example, income from investments can be exempt if it constitutes an “incidental investment of surplus funds.” This deduction applies when investment income is incidental, generally less than 5% of the entity’s overall income.

Other specific deductions may apply to certain industries or activities. These include deductions for amounts received for distribution to eligible behavioral health programs, for small harvesters of timber, or for Medicaid Quality Improvement Program Incentive Payments. Income from specific farming services for eligible farmers may also be exempt. The Multiple Activities Tax Credit (MATC) is available for businesses that perform more than one taxable activity on the same product, such as manufacturing and selling, to avoid double taxation.

Registration and Reporting Obligations

Businesses subject to the Washington B&O tax must fulfill specific registration and reporting obligations. The initial step is to register with the Washington State Department of Revenue (DOR) and obtain a Washington Unified Business Identifier (UBI) number.

After registration, businesses receive information regarding their filing frequency, which can be monthly, quarterly, or annually. The assigned frequency is based on the estimated amount of tax the business is expected to pay. Monthly returns are due by the 25th day of the following month, quarterly returns by the end of the month following the close of the quarter, and annual returns by April 15th.

The B&O tax, along with other applicable excise taxes, is reported and paid through the Combined Excise Tax Return. Businesses are required to file and pay electronically, and the My DOR online portal is a primary tool for compliance, allowing businesses to manage tax accounts, file returns, and make payments.