Washington B&O: The Tax Everybody Loves to Hate
By Susan Goertz, President and Chief Operating Office
Nobody likes taxes, but people really don’t like the Business and Occupations Tax that Washington state levies on businesses.
The B&O tax is a gross receipts tax and while it seems like it should be simple; it’s anything but! The B&O tax was initially enacted as a temporary funding mechanism in 1933; however, as with most tax laws, it has been amended and changed to include hundreds of exemptions, exceptions and loopholes. Many cities have gotten in on the action as well, imposing their own versions of B&O just to compound the situation companies’ face.
So, here’s how it works: businesses receive a classification with a corresponding tax rate. They apply that rate to their gross receipts and cut the state of Washington a check. Most classifications come with a tax rate below one percent, which seems low; however, it creates a problem for companies that don’t have any profit such as startups, small firms and struggling companies. In those years when you don’t make any money, the Washington still gets its cut. How does that help draw business to the state of Washington? How does that benefit the owners of companies and compel them to stay in business? Why would you stay in business just to give the state money?
But wait, there’s another problem. The classifications aren’t concrete. They vary depending on what the business does and where it does it. For example, if a widget factory in Wenatchee sells its product to a customer in Washington, it gets taxed at the rate for wholesalers (0.484 percent). But if it sells those widgets in Wyoming or anywhere else out of state, it’s considered a manufacturer. And within the manufacturing classification, different tax rates can apply.
One staffing firm business owner says the situation is particularly maddening for him. He sends workers out to different types of businesses in different cities. As a staffing firm, he has to figure out the particular tax for the particular industry his workers toil in, and then pay the tax rate accordingly.
Washington is the only state in the country that taxes businesses this way. The Washington Policy Center, an independent public-policy think tank, says the B&O is “nationally recognized as one of the worst ways to tax businesses.” An economist from the Tax Foundation, a Washington, D.C.-based research group, has called the tax “deeply flawed and damaging.”
Because it is Washington’s second-largest source of revenue, policymakers are wary of making any significant changes. In 2011, the B&O tax represented 19 percent of Washington’s tax receipts. So unfortunately, that leaves businesses in Washington to tolerate the B&O tax system.
If you are facing an audit by the State of Washington or are unsure about your compliance, Streamline’s tax consultants have more than 50 years of experience as former auditors with the Washington State Department of Revenue. We have the highest regard for the professionalism and integrity of the Washington DOR audit staff; however, compliance auditing is designed to discover underpayments, not overpayments. Auditors spend time verifying whether tax deductions and exemptions taken are appropriate, not looking for deductions and exemptions that a company might have missed. Streamline has helped many companies get relief from tax assessments issued by the Washington DOR.
If you have been notified of a pending audit by the Washington DOR, it is in your best interest to engage with Streamline prior to the audit starting rather than after it has started. You, as the taxpayer, should be actively involved in and thoroughly understand every facet of the audit examination. You should participate in all the phases of the audit as well as be informed of, understand and agree with the sampling methodologies employed by the auditor. Such things as accounts of interest and how missing transactions will be handled are vitally important to the outcome of the audit.
If the audit has already been completed, Streamline can review the audit results and give you an opinion on the correctness of each adjustment. Our Washington B&O tax consultants can assist you in determining the information and documentation that will be needed to support an audit adjustment. If necessary, we can assist you with the appeals process with the Washington DOR to ensure that your case is presented in a way that will optimize your chance of a successful outcome.
In 2012, a multi-billion dollar chemical company with a Washington B&O assessment of over $600K engaged Streamline to determine if there were any reductions available. Streamline reduced the assessment to $12K within six months!