Explained: Business and Occupation Taxes at the Local Level
September 12, 2019
By David Volkert, State and Local Tax Supervisor
Washington businesses are very familiar with the business and occupation (B&O) gross receipts tax system, and most businesses are even familiar with Tacoma, Seattle or Bellevue’s city B&O tax. But did you know there are 41 other cities that also have some form of local B&O tax?
Not sure what a local B&O tax is?
The relationship between the state B&O tax and the local B&O taxes is similar, at least in concept to the sales tax. Washington has a “state” sales tax rate of 6.5% which is collected on all retail sales across the state. On top of that state rate, local jurisdictions can levy additional sales tax rates which go to fund local government in general, and for specific projects such as arts programs (like the Tacoma Creates program), emergency response funding, etc. The entirety of the sales tax, regardless of destination, is remitted to the state department of revenue, which then distributes the taxes out to the localities.
A Key Difference
This last part is a key difference between sales taxes and B&O taxes. While the sales tax is administered by a centralized agency, the B&O taxes are “home rule” taxes - meaning their collection, enforcement and, to some degree, their law and administrative code are the responsibilities of the taxing jurisdiction itself. For example, a coffee shop in Burien needs only to file one return to remit the sales tax, but it will need to file two returns to remit the B&O taxes that it is subject to.
Application of the Taxes
The added complication isn’t just a matter of how many returns need to be filed. The real complication is in how these taxes are applied. The model local B&O tax statute predates much of the past decade’s evolution of Washington State taxation. With the current law, one major difference is in determining when services are subject to tax. For state purposes, businesses “source” their services based on where the benefit of those services is received. The cities remain under the old methodology: services are sourced to from where those services were provided. For example, a lawyer who works from their office in Tenino and only has out-of-state customers might not pay any state B&O tax at all, however all their income would be subject to Tenino’s 0.2% local B&O tax. That’s because they provided the services from Tenino.
Determination of Taxability
Another key difference is in the determination of taxability. Sales tax: an item which is exempt from the state sales tax is also exempt from the local portion of the sales tax. This is not always the case with the local B&O tax. There are deductions from the B&O tax that are allowed at the state level which the cities may or may not implement at the local level.