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.