Washington’s tax regime has always been non-traditional in comparison to other states, imposing no individual income tax or business tax for those within its borders. However, even well before Wayfair, Washington had a reputation as one of the most aggressive states pursuing out-of-state businesses, strictly enforcing its low nexus sales thresholds, long lookback periods and high penalty rates.
One Washington tax that hits unknowing out-of-state businesses particularly hard is its gross receipts tax regime, referred to as the Business & Occupation (B&O) tax. The tax does not require that a business or their employees enter the state to create tax obligations. Understanding this tax, along with a new addition to the Washington regime impacting capital gains in 2022, is critical to anyone doing any type of business in this Northwestern state.
Washington Business & Occupation Tax
The Washington B&O tax is a gross receipts tax applied on property and services sourced to Washington, most comparable to the Ohio or Oregon Corporate Activity Tax (CAT). The B&O offers very few deductions, and those allowable are often within narrowly defined industry sectors. B&O also does not consider income or loss, offers no deduction for cost of goods sold, is in addition to Washington’s sales and use tax, and cannot be directly invoiced or collected from a customer like sales tax.
Low Nexus Threshold
As a result of the Supreme Court’s Wayfair decision, most states have moved towards economic nexus thresholds, making it easier to impose sales taxes on out-of-state businesses. Washington is no different and is actually one of few states that imposed a sales nexus threshold several years prior to Wayfair.
Businesses that can answer “yes” to any of the following within Washington are typically required to file a B&O excise tax return:
- Annual gross receipts sourced to Washington are greater than $100,000*
- Owns or leases real or tangible personal property
- Has employees, agents, technicians or third-party representatives residing in, employed in or engaging in business within Washington; this may include providing installations, repairs, services, solicitation of sales, trade shows, etc.
- Delivering goods using company owned or leased vehicles
*Washington’s gross receipts threshold is applicable to tax years beginning on or after January 1, 2020.
High Exposure and Penalties
Washington imposes high penalty rates for late filing or payment — as high as 29% (and 39% in periods prior to 2015). Further, Washington invests significant time identifying non-filers and will traditionally look back at least seven years when a company that had nexus did not file. The exposure can be significant when combined with the long lookback and excessive penalty rates.
If your business exceeds these thresholds, you may be able to take advantage of a Voluntary Disclosure Agreement.
B&O Classifications and Calculations
The B&O tax rate varies based on a business’ classification. A company’s activities may fall across multiple classifications, which can complicate the tax calculations. It is vital classifications are accurate to ensure the correct tax rate is applied.
Most companies fall into one of four B&O classifications:
- Retail
- Wholesale
- Manufacturing
- Service & Other Activities
The evaluation of a tax classification requires careful analysis of your facts versus past legal decisions, statutes and how to apply them to your operations. The classification also impacts whether a taxpayer must report retail sales tax. Find more on B&O tax classifications and the tax rates.
Below is an illustration comparing the four major B&O tax classifications:
Washington B&O Industry Comparison — June 2021
Retail | Wholesale | Manufacturing | Service | |
|---|---|---|---|---|
Washington Gross Receipts | $1,000,000 | $1,000,000 | $1,000,000 | $1,000,000 |
Classification Tax Rate* | 0.471% | 0.484% | 0.484% | 1.500% |
Potential B&O Tax** | 4,710 | 4,840 | 4,840 | 15,000 |
* 4 most common B&O classifications reflected, but additional specialized classifications and rates may apply.
** Available deductions or credits are not included as they vary by business.
Additional B&O considerations:
- Gross receipts taxes are generally not protected by the Public Law 86-272 solicitation-only provisions.
- B&O applies to gross receipts without consideration of traditional expenses and deductions.
- Intercompany receipts may only be eliminated if taxpayers have the proper documentation in place.
- Sales from a marketplace facilitator may be classified as retail sales.
Washington Sales Tax Quick Facts
Below are a few noteworthy items on sales tax in Washington:
- Washington’s tax revenue is primarily generated from their retail sales tax.
- The nexus determination for sales tax is similar to the B&O.
- The state does not exempt marketplace facilitators from collecting and remitting sales tax, in addition to the B&O tax.
- Marketplace facilitators, such as Amazon, typically collect sales tax at the retail sales rate, which ranges from 7% to 10.5% depending on location and industry.
- Learn more about Washington’s sales tax and available exemptions.
Washington’s New Capital Gains Tax
Washington has unsuccessfully attempted to pass an income tax on state residents over the years. However, on May 4, 2021, Washington Governor Jay Inslee signed Senate Bill 5096 into law in an effort to make the Washington tax system “more equitable” to all residents. The new tax is expected to generate nearly $415 million in revenue for the state.
This bill enacts a 7% tax on capital gains exceeding $250,000, effective January 1, 2022. Taxable capital gains include those from the sale or exchange of stocks, bonds and other assets. There are exceptions carved out, which presently include the sale of all real estate, livestock and small family owned businesses.
While the capital gains tax is being treated as an excise tax by legislators, local residents are pursuing several lawsuits challenging the constitutionality of the tax.
Contact Marissa Holman at mholman@cohencpa.com, Hannah Prengler at hprenger@cohencpa.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circ*mstances and current law.
