What is the B&O tax?

Chances are you’ve heard of the Business and Occupation (B&O) tax if you own a small business or do taxes for a business in the state of Washington. The B&O tax is a gross receipts tax, which means the State collects taxes on the total amount of money a business earns from products sold or services provided. This means companies can’t subtract expenses like labor, materials, taxes, or other costs from the amount that the taxes are collected from.  The Department of Revenue (DOR) says that the B&O tax is measured on the value of products, gross proceeds of sale, or gross income of the business.  This tax is pretty complex and my goal over the next few posts is to provide you basic information regarding this tax, its origins, and where to find resources that can give more detailed answers to B&O questions. I’ll also briefly talk about opinions of the tax and alternatives that legislators and other groups are discussing.

So, basic information: Aside from the definition above, it’s important to know that with this tax not all businesses are taxed at the same rate. For example, the tax rate for retailers is 0.471 % while real estate brokers are charged a rate of 1.5 %.  DOR has a list that covers tax classifications for common business activities including everything from accounting to yard maintenance. When doing your business taxes, it’s important to know which group you belong to or know if your company fits under multiple groups so you’re paying the right rate. Also, I won’t go into detail about these but you should know that there are quite a few exemptions and other parts for this tax and businesses in Washington. When looking at the chapter of Washington State law that covers the B&O tax, there are 75 exemption sections, 34 deduction sections, and 20 credit sections of the tax that the legislature applied to specific parts of Washington State’s economy.

What does this all add up to for state government? During the biennial budget for 2009 to 2011, the B&O tax brought in $5.6 billion for the state’s general fund. This equals 19.9 % and was the second largest contributor behind the sales tax that collected $13.1 billion. The B&O tax provides an important revenue source and is used to fund agencies and services that state government provides. Also, the B&O tax is somewhat unique when compared to taxes collected by other states. Ten years ago, the legislature authorized a study of tax alternatives for Washington State that was chaired by Bill Gates, Sr. (also known as the Gates Commission). In the Commission’s final report, they talk about what other states use:

The truly unique element of Washington's tax system is the B&O tax: a gross receipts tax levied on businesses. Forty-five states impose a traditional corporate net income tax, similar to the federal tax. Of the other states, Michigan levies a form of value added tax, Nevada relies on taxes on the gaming and entertainment industry, South Dakota utilizes special taxes on contractors and banks, and Wyoming receives significant revenues from severance taxes (e.g. taxes on oil and minerals).

Next week we’ll talk about why Washington went against the grain compared to other states when taxing businesses and look at a few perspectives on the B&O tax.