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%): Providing services to consumers in Washington. The highest standard rate. Applies to consulting, professional services, SaaS, advertising, and most service businesses. $10 million in Washington service revenue = $150,000 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 $150,000 in B&O tax on the full $10 million in revenue under the service classification. The effective B&O rate on net profit in that scenario is 30%.
Washington adopted economic nexus effective October 2018 for the B&O tax and retail sales tax. An out-of-state business has nexus in Washington and must register, collect (for sales tax), and pay B&O tax if it has: more than $100,000 in annual Washington gross receipts, or 200 or more transactions with Washington customers. A SaaS company based in Texas with $200,000 in Washington enterprise subscriptions has Washington B&O nexus at the 1.5% service rate - a $3,000 annual B&O obligation plus registration and filing requirements.
The Washington Department of Revenue classifies SaaS and other cloud-based software services as "service and other activities" - taxed at the 1.5% B&O rate. This is a higher rate than the retailing classification that would apply if the software were sold as a tangible product. The Department's position is that SaaS is a service because the customer does not receive a copy of the software - they access it remotely. Unlike many states where SaaS taxability under sales tax is contested, Washington's B&O classification of SaaS as a service is well-established and consistently applied.
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.