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What is Washington B&O tax?

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Last Updated

What is Washington B&O tax?

Anrok | Streamlined sales tax for SaaS

Taxes in the U.S. vary from state to state, making for a truly confusing patchwork of laws and regulations. Some states have income tax while others don’t. The same goes for sales tax.

And some states have a tax on businesses that’s not sales tax or income tax: a gross receipts tax. In Washington, the gross receipts tax is called the business and occupation (B&O) tax. B&O is defined as a tax on “the value of products, the gross income of the business, or the gross proceeds of sales, as the case may be” (Wash. Rev. Code Sec. 35.102.030). Washington does not levy a corporate income tax, so the B&O tax serves as an alternative way of taxing business activities in the state.

If you’re obligated to remit sales tax in Washington, you’ll also have to address Washington B&O tax. Read on to learn what you need to know about the gross receipts tax on Washington businesses.

How does Washington B&O tax work?

While it is neither a sales tax nor an income tax, Washington B&O tax has similarities to both of these types of taxes. As with income tax, B&O tax cannot be passed on to the customer, with limited exceptions. And as with sales tax, there is always a payment due if you’re doing business, as there are no deductions for losses or expenses.

Another similarity that B&O tax has to sales tax is that it uses the same nexus classification to determine who has to pay taxes where. Both physical and economic nexus rules are applicable to B&O tax. And this tax is filed on the same return as sales tax: the Combined Excise Tax Return.

Retailers source revenue based on the delivery destination of the products sold, which for SaaS customers is typically shipping or billing address. Receipts classified as services are sourced where the customer receives the “benefit” of the services. Companies may have the opportunity to apportion receipts when customers receive the benefit of the services in more than one location, since a taxpayer may “reasonably determine” how to source such receipts under Washington tax regulations.

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What is the B&O tax credit?

B&O taxes do not allow for any deductions for business expenses with the exception of gross receipts a business earned in another state, such as Oregon. But one reduction in B&O taxes that some small businesses can count on is the B&O tax credit.

Businesses with gross income below a certain amount pay no B&O tax. The credit reduces as gross receipts rise until the business makes enough revenue to pay the entire B&O tax. Such credits are only available to very small businesses. For businesses that have met the economic nexus threshold in Washington, you are no longer eligible for the small business tax credit. The amount a business needs to make in order to pay the full complement of tax depends on its industry.

How to register and figure out your B&O tax rate

New businesses in Washington must register with the Department of Revenue and then must figure out the B&O classification of their business.

The classification of one’s industry determines the B&O tax rate and the sourcing of sales. Check the list of B&O tax rates to determine your business’s classification and corresponding rate. The list of tax classifications for common business activities and tax classification definitions can help you determine your classification.

Most SaaS companies fall into the retailer category, with a rate of 0.471%.

Does B&O tax preclude sales and use tax?

If you’re a business operating in or with customers in Washington state, you will likely be required to pay both B&O tax and sales and use tax.

While Washington doesn’t have income tax, it certainly does have sales tax, imposing some of the highest sales tax rates in the country. Companies whose products or services are subject to sales tax are responsible for charging their customers sales or use tax and relaying that money to state tax authorities. Those taxes must be submitted in addition to B&O tax.

What happens if you don’t file?

In order to operate a compliant business in Washington, software companies with nexus in the state must file B&O taxes. The state has some of the highest penalty rates in the country for non-filing, and authorities are prepared to look back at least seven years when a company with nexus fails to file.

This long lookback and high penalty rates mean that companies’ exposure can be significant if they aren’t on top of their tax filings.

While B&O tax may sound confusing at first, Washington businesses will find that the rules are straightforward and the categories fairly clear. Paying the correct amount should not be an unnecessary headache for your business, assuming you’ve remembered to save aside the funds for this alternative to income tax. Anrok automatically takes care of Washington B&O tax calculations for you and can file and remit the necessary amounts on your behalf.

Businesses that qualify for the tax credit will get some relief, but should be vigilant that their credit will gradually disappear as they find increasing success.

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