Washington has a couple of very unique aspects to the state taxation structure. Firstly, there is no state level personal income tax. Secondly, there is no state level corporate net income tax either. So exactly how does Washington fund the state budget? The state raises funds through sales taxes and the Washington Business & Occupation tax (“B&O”) . It is important to be aware of the Business & Occupation Tax since proper planning and compliance can help save substantial money.
What’s the Difference Between ‘Business & Occupation Tax’ and ‘Income Tax’?
Income taxes are generally based on the net income, after deductions, of the corporation. The B&O tax is an excise tax and is based on the gross receipts, with a few limited exclusions and deductions, of a corporation.
Most would think a tax on gross receipts is not as desirable as a tax on net income. To derive net income, a taxpayer has the opportunity to deduct expenses incurred to earn that income, but this is not so with a gross receipts tax.
The State understands that if the tax is too aggressive, they risk having businesses migrate to states with more favorable tax systems. Accordingly, the State has taken steps to moderate the effect of the tax on businesses.
Advantage of Doing Business Under the Business & Occupation Tax
The tax rate for the B&O for most business classifications is less than ½ percent. For retail and wholesale businesses, the tax rate is 0.471% and for manufacturing businesses the rate is 0.484%. Services are taxed at 1.5%. These rates are subject to periodic changes without notice. A good way of understanding how the Government determines the rate is to think of it this way. The B&O should provide roughly the same tax burden as most net income taxes. The range for Income tax rates in the US is between 5% and 10%; with a good estimate of the average around 8%. In determining an acceptable tax rate, the state appears to have estimated a net income average of 6% of gross sales. Accordingly, an 8% tax on a 6% net margin is equivalent to a 0.48% tax on the gross margin (gross receipts * 6% net profit margin * 8% tax rate). The real benefit in the gross receipts tax to the taxpayer is the relative simplicity of the reporting.
Drawbacks of Business & Occupation Tax
The drawback to a tax based on gross receipts is that when the company is in a net loss position, the B&O tax is still applicable and you still have tax to pay. Additionally, the B&O tax is not a creditable tax for Canadian companies doing business in the US, so there is tax leakage with this system in the cross-border environment.
Another aspect to remember is that several Washington local and municipal governments also apply a B&O tax in addition to the State B&O tax, so there may be more than one return to file. While this may seem burdensome, there are a number of other cities in states that levy net income taxes that also apply local net income taxes on corporations doing business in the city.
Is There Planning Opportunity in the Business & Occupation Tax?
The B&O is based on gross receipts from sales delivered in Washington or services performed in the State. The definition of gross receipts isn’t always as clear as one would expect and different business models may yield different results. The room for error is even greater in a digital marketplace. A misinterpretation of the rules may result in not paying the proper amount of tax. We recommend that companies doing business in Washington or doing business with Washington customers consult with a US tax advisor to ensure that they are properly reporting their gross receipts for B&O tax purposes.
AG TAX LLP CAN HELP
Our specialists at Aylett Grant Tax LLP have considerable experience helping clients in many different industries work through the complexities of the B&O tax. We have dealt with multi-state tax questions in several states and can help you to determine how best to navigate the various rules of the B&O to ensure that those taxpayers are neither underpaying nor overpaying the tax.
Additionally, if you have any other tax-related queries, and/or need assistance with tax planning/filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canada and other international tax laws.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
