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The Washington B&O tax

Nexus traps for the unwary taxpayer1

​Washington’s unique gross receipts excise tax, better known as the business and occupation (B&O) tax, has caused many headaches for businesses residing in the Evergreen State. Over the last several years, Washington has enacted several changes to its B&O tax that will extend similar challenges to non-Washington based businesses.

Business and occupation tax overview

This article, authored by Scott Schiefelbein and Robert Wood2, provides helpful tips regarding some of the nexus traps the B&O tax poses for the unwary company seeking to do business in Washington and was originally published in the spring issue of the Oregon State Bar Taxation Section Newsletter.

​Washington’s B&O is an excise tax measured by the value of products, gross proceeds of sales, or gross income of a business with over 30 different classifications and associated tax rates ranging from 0.138 percent to 1.5 percent.

In general, there are no deductions from the B&O tax for labor, materials, or other costs of doing business.3 The tax rate depends on the classification (i.e., manufacturing, wholesaling, retailing, service, and other, etc.). The classification also determines where the receipts from various activities will be sourced.

In the case of “retailing” and “wholesaling” receipts, the revenue is sourced based on the delivery destination of the products sold, in accordance with the Streamlined Sales and Use Tax souring hierarchy.4 “Apportionable” receipts, such as services or royalties, are sourced to where the customer receives the benefit of the taxpayer’s services or intangible property.5

When the benefit of the services or intangible property is received in more than one location, the taxpayer may “reasonably determine” the manner in which apportionable receipts should be attributed to Washington.6


In many cases, the threshold question for every company when considering its potential taxability in a particular state is whether the company has established a taxable connection, or “nexus,” with the taxing state. Nexus is typically measured by the nature and extent of the taxpayer’s business activities in the taxing state. Generally speaking, a state’s ability to assert nexus is constrained by the Due Process and Commerce Clauses of the United States (as well as federal statutes). The scope of nexus can be narrowed, but not expanded, by the taxing statutes of the particular state.7

In certain instances, the nature of a taxpayer’s particular business activity may dictate the nexus standard that applies to that taxpayer. Washington’s B&O tax provides one example of this state tax nuance, having adopted specific standards that vary based on the business activity conducted.

Once the out-of-state taxpayer’s classification of business activities has been determined, the taxpayer must then apply the nexus test that applies to that particular business activity classification. For example, with regard to transactions classified under the retailing category, and also subject to retail sales tax unless a specific exemption applies, Washington relies on the physical presence test as outlined in the United States Supreme Court decision in Quill.8

Pursuant to that decision, a business must have more than a “de minimis” or “slightest [physical] presence” within a particular state in order to establish nexus. Washington applies that standard to taxpayers engaged in retailing transactions.9


Physical presence nexus-creating activities

A taxpayer is deemed to have physical presence nexus for retailing and retail sales tax purposes in Washington if the taxpayer, either directly or through an agent or other representative, engages in activities in Washington that are significantly associated with the taxpayer’s ability to establish or maintain a market for its products in Washington.10

A few examples of physical presence nexus-creating activities include, but are not limited to:
  • Soliciting sales in this state through employees or other representatives,
  • Installing or assembling goods in Washington, either by employees or other representatives,
  • Maintaining a stock of goods in Washington,
  • Renting or leasing tangible personal property,
  • Providing services,
  • Constructing, installing, repairing, maintaining real property or tangible personal property in Washington, and
  • Making regular deliveries of goods into Washington using the taxpayer’s own vehicles.11

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Physical presence nexus case study example

In a recent decision, an Administrative Law Judge (ALJ) for the Washington Department of Revenue found that a manufacturer of bedding products had physical presence nexus with Washington for purposes of the retailing B&O tax and retail sales tax because the in-state activities of an out-of-state employee and a resident independent contractor were significantly associated with the taxpayer’s ability to establish or maintain a market for its products in Washington.12

The taxpayer argued that the out-of-state employee only visited Washington a “limited” number of times over the course of the year. The ALJ determined that the “limited” visits, in this case two to four visits over the course of a year, with retailers located in Washington was enough to satisfy the “slightest [physical] presence” standard outlined in the National Geographic and Quill decisions of the US Supreme Court.13

Furthermore, the ALJ noted that the second representative’s status as an independent contractor did not preclude the representative’s activities from establishing nexus on behalf of the taxpayer. In this case, the activities of the independent contractor helped the manufacturer establish and maintain a market in Washington and thus were sufficient to create nexus on behalf of the taxpayer.14

This authority indicates that Washington has taken a relatively aggressive stance on what establishes physical presence nexus. Notwithstanding, the Washington Department of Revenue has provided a limited safe harbor from nexus with regard to computer software stored on servers located in Washington.

The Washington Department of Revenue may not consider a person’s ownership or rights in computer software, including software used in providing a digital automated service, master copies of software, digital goods, or digital codes residing on servers located in Washington in determining substantial nexus for purposes of taxation.15 Thus, physical presence nexus will not be established if the taxpayer’s only connection with Washington is the storage of software on servers located in the state.

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Economic nexus standard

In contrast to this physical presence nexus test that is applied to transactions classified under the retailing category, effective June 1, 2010, Washington adopted an “economic nexus” standard rather than a physical presence standard with regard to certain non-retailing B&O tax classifications.16 This standard subjects businesses earning “apportionable income” (such as receipts classified under “service and other activities” or “royalty” for B&O tax purposes) to Washington’s B&O tax regardless of whether the taxpayers have any physical presence in Washington.

Under the economic nexus standard a person engaging in business in Washington is deemed to have substantial nexus with Washington if the person is:
  • An individual and is a resident or domiciliary of Washington,
  • A business entity and is organized or commercially domiciled in Washington, or
  • A nonresident individual or a business entity that is organized or commercially domiciled outside Washington, and in the immediately preceding tax year the person had:
    • More than $53,000 of property in Washington,
    • More than $53,000 of payroll in Washington,
    • More than $267,000 of receipts from Washington, or
    • At least 25 percent of the person’s total property, total payroll, or total receipts in Washington.17
Furthermore, effective September 1, 2015, Washington extended the economic nexus standard to the wholesaling classification:

‘Engaging within this state’ and ‘engaging within the state,’ when used in connection with any apportionable activity as defined in RCW 82.04.460 or wholesale sales taxable under RCW 82.04.257(1) or 82.04.270, means that a person generates gross income of the business from sources within this state, such as customers or intangible property located in this state, regardless of whether the person is physically present in this state.18

Under this standard, out-of-state businesses making wholesale sales into Washington are subject to the whole-saling B&O tax on wholesale sales delivered to Washington customers if the taxpayers meet any of the above listed economic nexus thresholds. Out-of-state taxpayers that do not have a physical presence in Washington but exceed $267,000 receipts in wholesale transactions attributed to Washington within a calendar year are subject to the B&O tax on their Washington sourced wholesale sales.19

Under the Washington Department of Revenue’s proposed expedited amendments to the applicable regulations, the economic nexus threshold of $267,000 in receipts attributed to Washington can be reached through a combination of both wholesale sales and apportionable gross receipts attributed to Washington.20

For example, an out-of-state business that receives $200,000 in fees for consulting services provided to clients located in Washington has not exceeded the economic nexus threshold of $267,000. However, if this same business also engages in $80,000 worth of wholesale transactions delivered to Washington customers, the taxpayer reaches the economic nexus threshold and is subject to both the service and other B&O tax on its consulting services at the rate of 1.5 percent, and wholesaling B&O tax on its wholesale sales at the rate of 0.484 percent.

Finally, it is important to note that the physical presence standard and the economic nexus standard are applied independently for Washington B&O tax purposes. Thus, in the example above, if the taxpayer also had retail sales into the state of Washington, but no physical presence, it would not be required to remit retailing B&O tax or collect retail sales tax even though it has established economic nexus through the businesses’ wholesaling and service activities. The existence of economic nexus presence does not create a de facto physical presence in Washington for retail sales activity.



If you have questions regarding the Washington B&O tax or other tax reform matters, please contact any of the following Deloitte Tax professionals:

Scott Schiefelbein, Tax senior manager, WNT Multistate, Deloitte Tax LLP, Portland, +1 503 727 5382

Robert Wood, Tax manager, Deloitte Tax LLP, Seattle, +1 206 716 7076

1. Copyright 2016 Deloitte Development LLC. All rights reserved.
2. Robert Wood is a manager in Deloitte Tax LLP’s Multistate practice based in Seattle, Washington. Scott Schiefelbein is a senior manager in Deloitte Tax LLP’s Multistate Office of Washington National Tax based in Portland, Oregon.
3. Rev. Code Wash. § 82.04.220.
4. Rev. Code Wash. § 82.32.730.
5. Rev. Code Wash. § 82.04.462(3).
6. Rev. Code Wash. § 82.04.462(3)(b)(i).
7. See, e.g., Tyler Pipe Industries v. Washington Dep’t of Revenue, 483 U.S. 232 (1987) (Washington’s assertion of nexus upheld based on constitutional principles rather than reference to state taxing statute). Also, Congress may act to regulate interstate commerce in a manner where states may not. See, e.g., P.L. 86-272 (federal law limiting the states’ ability to impose net income taxes on sellers of tangible personal property where taxpayers’ activities in-state are limited to solicitation of sales of tangible personal property).
8. Quill Corp. v. North Dakota, 504 US 298 (1992).
9. Rev. Code Wash. § 82.04.067(6)(a).
10. Rev. Code Wash. § 82.04.067(6)(c)(i).
11. Rev. Code Wash. § 82.04.067(6)(c)(i); Wash. Admin. Code § 458-20-194; http://dor.wa.gov/content/doingbusiness/ businesstypes/doingbus_outofstbus.aspx#Nexus.
12. Washington Tax Determination No. 15-0031, 35 WTD 311 (2016).
13. National Geographic Society v. California Bd. of Equalization, 430 US 551, 556, 97 S.Ct. 1386 (1977); Quill, supra, at 315, n.8.
14. Washington Tax Determination No. 15-0031, supra.
15. Rev. Code Wash. § 82.32.532(1).
16. Rev. Code Wash. § 82.04.067; Wash. Admin. Code § 458-20-19402; Excise Tax Advisory No. 3195.2015, Washington Department of Revenue (February 3, 2015).
17. Rev. Code Wash. § 82.04.067(1)(c); Excise Tax Advisory No. 3195.2015, supra.
18. Rev. Code Wash. § 82.04.066 (emphasis added).
19. Rev. Code Wash. § 82.04.066; Rev. Code Wash. § 82.04.460; Rev. Code Wash. § 82.04.462; Rev. Code Wash. § 82.04.067
20. Wash. State Reg. 16-08-103 (April 5, 2016); Wash. Admin. Code § 458-20-19401.

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