What Is Washington’s Business & Occupation Tax?
Washington’s Business & Occupation Tax is unique. Unlike many states, Washington does not impose an income tax. Instead, it levies a Business & Occupation (B&O) tax, which is based on gross income rather than net income. This means businesses cannot deduct expenses such as labor, materials, or other costs from their taxable amount.
To ensure compliance, businesses must understand the different B&O tax classifications and their respective rates.
Major B&O Tax Classifications
Washington’s B&O tax system consists of several classifications, each with unique rates and reporting requirements. Here are the primary categories:
1. Manufacturing
Businesses that manufacture products in Washington fall under this classification. The Manufacturing B&O tax rate is 0.484% (0.00484) of gross receipts.
2. Wholesaling
If your business sells goods or certain services to buyers who will resell them, you are subject to the Wholesaling B&O tax. The tax rate is 0.484% (0.00484) of gross receipts.
3. Retailing
Retailers selling goods or services directly to consumers must report under this classification. The Retailing B&O tax rate is 0.471% (0.00471) of gross receipts.
4. Service and Other Activities
This classification applies to professional services and other business activities that do not fall under manufacturing, wholesaling, or retailing. The tax rate is 1.5% (0.015) of gross receipts.
Common Misclassifications and How to Avoid Them
Many businesses mistakenly report income under the wrong classification, leading to incorrect tax payments. Here are some frequent errors:
1. Service vs. Retailing
Businesses sometimes misclassify service activities as retailing. For example, custom software development should be reported under “Service and Other Activities” rather than “Retailing.”
2. Manufacturing vs. Wholesaling
If your business produces goods and sells them, you may need to report under both Manufacturing and Wholesaling classifications.
3. Manufacturing vs. Processor for Hire
A processor for hire performs manufacturing services on materials owned by another party but does not take ownership of the materials or final product. For example, a metal fabrication shop working on customer-provided materials should not classify under Manufacturing but rather as a Processor for Hire.
Example: How a Restaurant May Be Subject to Multiple B&O Tax Classifications
Consider a restaurant engaged in various activities beyond serving meals. It may be subject to different B&O tax classifications:
- Retailing B&O Tax: For selling prepared food and beverages directly to consumers.
- Manufacturing B&O Tax: If the restaurant produces packaged food (e.g., sauces or baked goods) for sale.
- Wholesaling B&O Tax: If the restaurant sells packaged food to other businesses for resale.
To prevent double taxation, businesses can utilize the Multiple Activities Tax Credit (MATC), which offsets Manufacturing B&O tax with Retailing or Wholesaling B&O tax.
Ensuring Compliance with Washington’s Business & Occupation Tax Laws
Navigating Washington’s B&O tax system can be complex, especially for businesses engaged in multiple activities. Proper classification helps prevent audits and penalties while ensuring compliance with tax laws. Consulting with tax professionals can provide valuable guidance.
Need Help? Clarus Partners Can Assist
At Clarus Partners, we offer expert indirect tax services to help businesses navigate Washington’s Business & Occupation Tax system, ensuring compliance and optimizing tax strategies. Contact us today to learn more.