Washington Business and Occupation Tax
Many Canadian businesses are unaware of the Washington Business and Occupation (“B&O”) Tax when they do business with customers in the State of Washington.
The B&O tax is a gross receipts tax levied by various levels of government in Washington. It is calculated based on the gross proceeds of sales, gross revenue of the business, or the value of products generated from business activities occurred within the state. Generally there are no deductions for the cost of doing business, such as labor and material expenses and operating expenses, but the state allows certain deductions, exemptions and credits depending on industry classification. B&O classifications include four major sections – retailing, wholesaling, manufacturing, service and other activities, with tax rate ranging from 0.471% to 1.5%.
The state does not have a corporate income tax. Businesses and individuals that engage in business in Washington may be required to register with the Washington State of Department of Revenue, and may be subject to B&O tax. To determine whether your business is subject to B&O tax, economic nexus, or substantial nexus in statutory terms, has to be created by your business activities.
When the B&O tax was first introduced in 2001, it did not focus on non-resident/out-of-state businesses. Over time Washington has started to target non-resident/out-of-state businesses by eliminating the requirement for physical presence in the state to createnexus, resulting in business being subject to B&O tax.
If your business earns income attributable to Washington that would be taxable under an apportionable B&O classification and that meets one of the following thresholds (effective for 2013) within a calendar year, it has economic nexus with Washington:
- More than $53,000 of payroll in Washington
- More than $53,000 of property in Washington
- More than $267,000 of gross income in Washington
- At least 25 percent of your total property, payroll, or income in Washington
So, if you meet one of these thresholds, you will have economic nexus and be subject to B&O tax. For example, client A is a Canadian lawyer (Canadian resident, non-U.S. person) based in Vancouver, BC. During 2013, he drafted wills, purchase and sale agreements and provided real estate advice to his clients all from his office in Vancouver. One would not think he would be subject to Washington state tax; however, if he earned more than $267,000 professional fees in the year from Washington-based clients; or, if 25% of his fees were generated from rendering services to clients in Washington, economic nexus exists even though the lawyer did not physically perform services in the state. The fees he charged to his Washington clients would be income attributable to Washington, and would be subject to B&O tax since that is where the customer benefit is received.
Nexus is also determined under the “physical presence nexus standards”. If physical presence nexus standards apply, your business is subject to B&O tax.
Client B is a White Rock-based online florist shop, a Canadian corporation, sells flowers and delivers them by contracting a third party in White Rock. It has never entered Washington before. At the end of December 2013, they sent two employees down to Bellingham, WA on a day trip to sell flowers in the Bellis Fair Mall, and the employees returned to White Rock the same day. The business is classified as online retailing. Under Washington law, the corporation has a physical presence in the state because the activity demonstrated more than a slightest presence in the state. Also, the employees are the representatives of the corporation to engage in activities in Washington that are significantly associated with the corporation’s ability to establish or maintain a market for its products in Washington. The conclusion – it is not uncommon that nexus can be established simply on one visit to the state to conduct business activities.
B&O tax is generally an expense to businesses. Unlike state sales or use tax, it is not generally charged to the customer. Unlike state and local income taxes calculated on a net profit or net income, B&O tax is not eligible to be claimed as a foreign tax credit in Canada.