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. 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 most often are flat regardless of the amount of income, generally range from roughly 4% to 10%. 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, six states – Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming – do not have a corporate income tax. However, four of those states – Nevada, Ohio, Texas, and Washington – do have some form of gross receipts tax on corporations. Moreover, five of those states – Nevada, South Dakota, Texas, Washington, and Wyoming – as well as Alaska and Florida currently 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 justified as a tax simply for the 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 a few 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 is key. The Department of Revenue has a list of tax classifications for common business activities which includes dozens of items. However, following are tax rates for four of the most common business classes:
Overall, rates for the B&O tax range from .13% up to 3.30%, depending on business classification. Visit the Washington Department of Revenue if you’d like to see a complete list of rates for different business classes.
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 business’s estimated tax liability.
There also 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. There are two versions of the credit – the version that applies to a particular business depends on whether 50% or more of that business’s taxable income comes from the categories Service and Other Activities, Gambling Contests of Chance, For Profit Hospitals, and/or Scientific R&D.
If 50% or more of your business’s taxable income comes from the latter categories, the credit is available if your total B&O tax liability is below:
If less than 50% of your business’s taxable income comes from the latter categories, the credit is available if your total B&O tax liability is below:
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 Washington Department of Revenue. 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).
Updated: June 18, 2018