Most states tax at least some types of business income derived from the state. As a rule, the details of how income from a specific business is taxed depend in part on the business’s legal form; more particularly, in most states corporations are subject to a corporate income tax, while income from “pass-through entities” such as S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships is subject to a state’s tax on personal income. Tax rates for both corporate income and personal income vary widely among states; corporate rates, which more often are flat regardless of the amount of income, generally range from 4% to 9%, and personal rates, which generally vary depending on the amount of income, can range from 0% (for small amounts of taxable income) to around 9% or more in some states.
Currently, four states, Nevada, South Dakota, Washington, and Wyoming, do not have a corporate income tax, and the same four states, along with Alaska, Florida, and Texas, have no personal income tax. Individuals in New Hampshire and Tennessee are only taxed on interest and dividend income.
Apart from taxing business income through a corporate income tax or a personal income tax, many states impose a separate tax on at least some businesses, sometimes called a “franchise tax” or “privilege tax;” this is frequently defined as a tax simply for the right or “privilege” of doing business in the state. As with state taxes on business income, the specifics of a state’s franchise tax often depend in part on the legal form of the business. Franchise taxes are generally either a flat fee or an amount based on a business’s net worth.
As just mentioned, Washington is one of four states that have neither a corporate income tax nor a personal income tax. This does not mean, however, that Washington businesses don’t have to pay any important state taxes at all. On the contrary, while Washington does not tax business income (or personal income), the state does tax the gross receipts of most businesses through its business and occupation tax (B&O tax).
For purposes of the business and occupation tax, gross receipts may mean the value of products, the gross proceeds of sales, or the gross income of a business.
Rates for the business and occupation tax vary based on a business’s classification. Clearly, determining the correct classification for your particular business will be key. The Department of Revenue has a list of tax classifications for common business activities which includes nearly 80 items; however, following are tax rates for a four of the most common business classes:
- retailing: 0.471%
- wholesaling: .484%
- manufacturing: .484%; and
- service and other activities: 1.8%.
Note that the rate for the last listed item, service and other activities, will decrease to 1.5% effective July 1, 2013. Overall, rates for the B&O tax range from .13% up to 3.30%, depending on business classification. If you’d like to see a complete list of rates for different business classes, check this webpage.
Also be aware that, while there are many classifications with many different rates, there are also activities that are exempt from the B&O tax. For example, certain types of food processing and food manufacturing businesses are exempt.
B&O tax returns may be due monthly, quarterly, or annually depending on your businesses estimated tax liability, as follows:
- estimated tax liability less than $1,050 per year = annual filing
- estimated tax liability between $1,050 and $4,800 per year = quarterly filing; and
- estimated tax liability greater than $4,800 per year = monthly filing.
There are important credits related to the B&O tax. Of particular relevance here is the Small Business Credit. If your business’s B&O tax liability is below a certain minimum amount, the business qualifies as a “small business” and is eligible for the credit. More specifically, the credit is available for businesses with B&O tax liability below the following amounts:
- $71 for monthly taxpayers
- $211 for quarterly taxpayers; and
- $841 for annual taxpayers.
The exact amount of the credit depends on the amount of B&O tax due.
In short, in Washington, unlike many other states, the legal form of your business is not so important for determining how—or if—your business is taxed by the state. Instead, the more important issue in Washington is how your business is classified.
Note on Multistate Businesses and “Nexus”
Our primary focus here is on businesses operating solely in Washington. However, if you’re doing business in several states, you should be aware that your business may be considered to have “nexus” with those states, and therefore may be obligated to pay taxes in those states. The rules for taxation of multistate businesses, including what constitutes nexus with a state for the purpose of various taxes, are complicated; if you run such a business, you should consult with a tax professional.
For further guidance on Washington’s business and occupation tax, including exemptions and credits, check the Department of Revenue website. For information on business-related taxes in other states, check Nolo’s 50-State Guide to Business Income Tax. And, if you’re looking for detailed guidance on federal income tax issues, check Tax Savvy for Small Business, by Federick Daily (Nolo).