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.
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.
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:
*Washington’s gross receipts threshold is applicable to tax years beginning on or after January 1, 2020.
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.
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:
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 |
Additional B&O considerations:
Below are a few noteworthy items on sales tax in Washington:
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, circumstances and current law.