Washington State has no income tax - but it has the Business and Occupation (B&O) tax, a gross receipts tax on the privilege of doing business in the state. Unlike an income tax, the B&O tax applies to gross revenue without deduction for cost of goods sold, wages, or other business expenses. A business with $5 million in revenue and $4.9 million in costs still pays B&O tax on the full $5 million. For high-revenue, low-margin businesses and for out-of-state companies with Washington customers, the B&O tax creates a meaningful and often surprising tax obligation.
Retailing (0.471%): Selling tangible personal property at retail or providing retail services. A retailer with $10 million in Washington sales pays $47,100 in B&O tax.
Service & Other Activities (1.5%, 1.75%, or 2.1%): Providing services to consumers in Washington. The highest standard rate. The rate depends on the prior calendar year's Service and Other Activities income (aggregated across affiliates): 1.5% under $1 million, 1.75% from $1 million to $4,999,999.99, and 2.1% at $5 million or more (hospitals and select advanced computing businesses stay at 1.5%). Applies to consulting, professional services, advertising, and most service businesses. $10 million in Washington service revenue at the 2.1% rate = $210,000 B&O tax.
Wholesaling (0.484%): Selling for resale. Lower rate reflecting the transaction is not the final sale.
Manufacturing (0.484%): Manufacturing goods in Washington.
Note: B&O tax rates are set by the legislature and may be adjusted. Verify current rates with the Washington Department of Revenue before filing.
The B&O tax is fundamentally different from an income tax. There is no deduction for: cost of goods sold, employee wages, rent, depreciation, interest, or any other business expense. The tax base is total gross receipts from Washington business activity. This means a business with thin margins can pay more in B&O tax than it earns in net profit. A staffing company that bills $10 million to Washington clients but pays $9.5 million in wages to placed workers has $500,000 in net profit - and pays $210,000 in B&O tax on the full $10 million in revenue under the service classification at the 2.1% rate (for a business with $5 million or more of prior-year service income). The effective B&O rate on net profit in that scenario is 42%.
Washington's B&O substantial nexus standard is in RCW 82.04.067, which already existed in earlier forms; the 2019 c 8 amendments, effective January 1, 2020, set the current bright-line test. An out-of-state business has substantial nexus in Washington, and must register and pay B&O tax, if in the current or immediately preceding calendar year it had more than $100,000 of cumulative gross receipts from Washington, or physical presence in the state. A SaaS company based in Texas with $200,000 in Washington enterprise subscriptions has Washington B&O nexus; if the subscriptions are remote access prewritten software, the receipts are taxed under the retailing classification at 0.471% (about $942 of B&O tax, since 200,000 x 0.00471 = 942), and retail sales tax also applies, plus registration and filing requirements.
Under WAC 458-20-15503, prewritten software made remotely accessible from the vendor's or a third party's server (remote access prewritten software) is a retail sale subject to retail sales tax and retailing B&O tax (0.471%), not the Service and Other Activities rate. That the customer does not receive a copy of the software does not change the result. Where an offering includes digital automated services or other service components, the classification must be analyzed under that rule and RCW 82.04.050.
Out-of-state businesses that have Washington nexus apportion their B&O tax base using the receipts factor - the ratio of Washington gross receipts to total gross receipts. Service businesses use the location where the customer receives the benefit of the service (the "benefit received" or "market" sourcing rule). A consulting firm that performs work in its New York office for a Washington client sources that revenue to Washington under the benefit-received rule - it is Washington taxable even though no one set foot in the state.