Washington levies a Business and Occupation (B&O) tax on gross receipts. It has no corporate income tax, so the B&O tax is the main state tax on doing business there.
Because the B&O tax applies to revenue and not to profit, a company that lost money last year still owes it.
No deduction exists for labor, materials, taxes or other costs of doing business. A business running on thin margins pays the same rate on the same revenue as one running on fat ones.
TL;DR
- B&O stands for Business and Occupation. It is a gross receipts tax, and it stands in place of the corporate income tax Washington does not levy.
- No costs are deductible. Not labor, not materials, not taxes. Revenue in, tax out.
- The rate depends on your classification. Retailing is 0.471%, manufacturing and wholesaling 0.484%, and services run 1.5% to 2.1%.
- The service rate gained a third tier on 1 October 2025. It has stepped up at $1 million since 2020, and now steps again at $5 million of prior-year income.
- The goods rates rise to a flat 0.5% on 1 January 2027, already legislated under ESHB 2081.
- A surcharge of 0.5% applies above $250 million of Washington taxable income, running from 1 January 2026 to 31 December 2029.
- Digital advertising, IT services and custom software became retail sales in October 2025, which changes both the classification and the sales tax position.
- Nexus starts at $100,000 of combined gross receipts sourced to Washington, so an out-of-state company with no office can owe it.
- The small business credit is $160 or $55 a month depending on classification, legislated to rise in 2029.
- Around forty cities levy their own B&O tax, filed separately from the state's.
What the Washington B&O Tax Is
B&O stands for Business and Occupation. The Department of Revenue measures it on the value of products, the gross proceeds of sales, or the gross income of the business, depending on the activity.
The defining feature is what you cannot subtract. In the Department's own words, businesses cannot deduct expenses such as labor, materials, taxes, or other costs of doing business. A distributor with 4% margins and a software company with 80% margins are taxed on the same base: what came in.
A Washington business can file at a loss and still owe tax, because the calculation never looked at the loss.
Washington's Gross Receipts Tax Is the B&O Tax
Washington's gross receipts tax is the B&O tax. The two names describe the same thing, and searchers arrive using both. Ohio and Texas operate comparable taxes under different names, so a company expanding across states can meet the same structure several times under several labels.
Washington B&O Tax Rates by Classification
Washington operates more than 50 B&O classifications, and the rate follows the activity, so one company can sit in several. A company doing two things reports under two classifications, on two lines of the same return.
| Classification | Rate | What it typically covers |
|---|---|---|
| Retailing | 0.471% | Selling goods to end customers, plus services defined as retail sales |
| Wholesaling | 0.484% | Selling to resellers instead of to end users |
| Manufacturing | 0.484% | Producing goods in Washington, whether or not you also sell them |
| Service and other activities, under $1M | 1.5% | Consulting, design and most professional services |
| Service and other activities, $1M to $4,999,999.99 | 1.75% | The same activities, above $1M of prior-year income |
| Service and other activities, $5M and above | 2.1% | The same activities, above $5M of prior-year income |
The gap between the rows is the thing to plan around. Services are taxed at roughly three to four times the goods rates, so how an activity is classified moves the bill far more than any deduction could.
The Goods Rates Rise to 0.5% on 1 January 2027
Washington has already legislated the next change. Under ESHB 2081, Chapter 420, Laws of 2025, signed on 20 May 2025, the three goods classifications move to a flat 0.5% from 1 January 2027.
| Classification | Now | From 1 Jan 2027 |
|---|---|---|
| Retailing | 0.471% | 0.5% |
| Wholesaling | 0.484% | 0.5% |
| Manufacturing | 0.484% | 0.5% |
The increase is small per dollar and applies to gross receipts, so it lands hardest on high-volume, low-margin businesses. A distributor turning over $20 million sees roughly $3,200 a year of additional tax from the wholesaling change alone.
ESHB 2081 also moves more than a dozen specialty classifications on the same date, from cold storage warehousing to commercial airplane manufacturing. If your activity is not retailing, wholesaling, manufacturing or services, check the Department's classification list before assuming you are unaffected.
Preferential Rates for Specific Activities
Beyond the main classifications, Washington sets preferential rates for particular activities, including some timber and wood products, certain aerospace activities and specified manufacturing.
These are statutory, and eligibility is answered from the Department's classification list, whatever the business calls itself.
The Service Rate Gained a Third Tier on 1 October 2025
Service and other activities has been tiered since 1 April 2020, when the Workforce Education Investment Act introduced a 1.75% rate at $1 million. A third tier was added on 1 October 2025. All three are set by the prior calendar year's taxable income:
- Under $1 million, the rate stays at 1.5%
- From $1 million to $4,999,999.99, it rises to 1.75%
- At $5 million and above, it rises to 2.1%, which is the tier added in 2025
The test looks backwards: the rate for any year is fixed by the previous year's taxable income. A business that crosses $5 million sits on 2.1% for the whole of the following year.
The 0.5% B&O Surcharge on Income Above $250 Million
A separate 0.5% surcharge applies to Washington taxable income above $250,000,000 in a calendar year. It took effect on 1 January 2026 and is legislated to expire on 31 December 2029.
The exclusions are extensive. Income taxed under the manufacturing classification sits outside it, along with income subject to the financial institution surcharge, exempt food and prescription drugs, and income already receiving the multiple activities tax credit.
Reporting starts in the period you cross the threshold, under a dedicated surcharge classification on the excise tax return.
Digital Advertising, IT Services and Custom Software Became Retail Sales
Washington enacted a significant expansion in 2025. Under ESSB 5814, signed on 20 May 2025 and effective 1 October 2025, a group of services previously outside the retail sale definition were brought inside it, including digital advertising, information technology services and custom software.
A company selling any of these into Washington changes both its classification and its billing:
- The activity may now sit in the retailing classification instead of services, which changes the B&O rate
- Retail sales tax becomes collectible from the customer, which is a billing and systems change as much as a tax one
A SaaS or IT services business that classified itself under services before October 2025 should recheck that classification now.
B&O Tax Is Not Sales Tax
Both appear on the same excise tax return, which is where the confusion starts. They are different taxes with different payers.
| B&O tax | Retail sales tax | |
|---|---|---|
| Who bears it | The business | The customer |
| What it is charged on | Your gross receipts | The sale price of a retail sale |
| Can it be passed on? | Only by raising your price | It is collected from the buyer by design |
| Applies to services? | Yes, all of them | Only where the service is a defined retail sale |
A retailer pays B&O tax on the same revenue from which it collected sales tax for the state, and the ESSB 5814 changes brought certain services into the scope of both at once.
Our guide to Washington sales tax changes covers the sales tax side.
Who Has to Register for Washington B&O Tax
Nexus decides whether Washington reaches you at all, and it does not require an office.
A business must register if, in the current or prior year, it meets either test:
- Physical presence in Washington
- More than $100,000 in combined gross receipts sourced or attributed to Washington, across retailing, wholesaling and apportionable activities
Registration runs through the Business License Application, which issues a Unified Business Identifier. A foreign-owned company selling software or services to Washington customers can cross $100,000 without anyone in the business having visited the state.
The current-or-prior-year wording does real work. Crossing the threshold once carries the obligation into the following year even if receipts fall back below it, so the obligation outlives the year that created it.
The $100,000 Threshold Is Combined, Not Per Activity
The threshold is combined gross receipts, not a separate allowance for each classification. A business with $60,000 of service revenue and $50,000 of wholesale revenue sourced to Washington has crossed it, even though neither line did so alone.
How Apportionable Income Gets Attributed to Washington
For services and other apportionable activities, Washington taxes only the portion attributed to the state, so the question is how much of the revenue it may reach. That is decided by attribution, and it is where most of the professional time on a Washington return goes.
The Benefit-Received Test
Apportionable receipts are attributed to the state where the benefit of the service is received. Neither of the two facts you would reach for first decides it:
- Where the work was performed does not decide it. A team working entirely outside Washington can generate Washington-attributed receipts
- Where the customer is headquartered does not decide it either, if the benefit lands somewhere else
For a product used across a customer's whole organization, the benefit may be spread across many states, and the receipts are divided accordingly.
Example: Software Sold to a Six-State Customer
Take internal HR software licensed to a company with staff in six states, 15% of them in Washington. The benefit is received where the employees using it are, so roughly 15% of that contract's receipts are attributed to Washington.
Change the facts and the answer moves. The same vendor selling a tool used only by the customer's Seattle warehouse team attributes far more; selling to the customer's Texas head office for Texas-only use attributes none.
The answer turns on how the customer uses the product, so the evidence lives in the contract and in usage data, which sit outside your own records. Apportionment on a Washington return therefore rests on documentation as much as on calculation.
Deductions, Exemptions and the Small Business Credit
The return does contain reductions. They work through credits and activity-specific exemptions.
What You Can and Cannot Subtract
| Available? | |
|---|---|
| Labor, materials, rent, other operating costs | No |
| Statutory deductions and exemptions for specific activities | Yes, activity by activity |
| Small business B&O tax credit | Yes, below the thresholds |
| Multiple activities tax credit | Yes, against double taxation of the same revenue |
The multiple activities tax credit matters for anyone who both manufactures and sells. Without it the same revenue would be taxed twice, once on manufacturing and again on the wholesale or retail sale.
How the Multiple Activities Tax Credit Works
B&O tax attaches to activities, not to transactions, so one batch of goods can trigger more than one classification:
- Manufacturing the goods is a taxable activity in its own right
- Selling those same goods at wholesale or retail is a second taxable activity
- Both are reported, and the credit then offsets one against the other
The credit also reaches across state lines, relieving some gross receipts taxes paid to other states on the same revenue. A manufacturer that omits the manufacturing line to avoid the double count has under-reported.
The Small Business B&O Tax Credit
The credit reduces or eliminates the bill for smaller filers. The maximum depends on your dominant classification:
- $160 per month where at least half your income is reported under service and other activities, gambling contests of chance, for-profit hospitals or scientific research and development
- $55 per month for all other classifications
Two limits apply. The credit cannot exceed the B&O tax due, and it generates no refund.
The Credit Is Legislated to Rise in 2029
ESSB 6346, Chapter 238, Laws of 2026, raises the monthly maximums to $375 and $125, and lifts the annual filing threshold from $125,000 to $250,000. Those provisions take effect on 1 January 2029, so the current figures apply through 2028.
One caveat is worth carrying. The bill contains a clause voiding it in full if a court of final jurisdiction invalidates the accompanying tax it was passed with, so the 2029 increase is legislated but contingent.
Filing and Paying the B&O Tax
B&O tax is reported on the excise tax return through MyDOR, the Department's online system, alongside retail sales tax and the other excise taxes on the same form.
The Department, not the business, sets the terms:
- Filing frequency is assigned by the Department, monthly, quarterly or annually, and the business does not choose
- A registered business generally files even in a period with no activity, reporting zero
- Each classification is reported on its own line, so a business with two activities completes two
The no-activity filing catches dormant companies. The obligation continues until the account is closed.
Late Filing Penalties Escalate Monthly
Washington's late penalties step up on a fixed schedule and do not accrue daily:
| When the tax is still unpaid | Penalty |
|---|---|
| After the due date | 9% |
| After the last day of the month following the due date | 19% |
| After the last day of the second month following | 29% |
The minimum late payment penalty is $5. Each step lands on a month end, so a payment one day late and a payment three weeks late can both carry 9%, while slipping past a month boundary more than doubles the charge.
A Clean 24-Month Record Buys One Penalty Waiver
The Department can waive a late penalty where the failure resulted from circumstances beyond the taxpayer's control. It can also waive one where the business has filed and paid on time for the 24 months before the period in question, without needing to show any such circumstance.
That second route is available for one return in any 24-month period. A second missed deadline inside the same window does not qualify.
City B&O Taxes Are Separate From the State's
Washington is unusual in having B&O tax at two levels. Around forty cities levy their own, including Seattle, Tacoma, Bellevue, Everett and Bellingham, and a city tax is administered separately from the state's.
Three consequences follow for a business with a Washington address:
- A city B&O return is a separate filing, on the city's own thresholds and rates
- Paying the state does nothing for a city obligation
- A business operating in several Washington cities can face several city returns alongside the state one
Each city sets its own rules, so confirm the position with the specific city itself.
Registering and the First Return
Registration is a single application that reaches several agencies at once, which is convenient and occasionally surprising.
| Step | What happens |
|---|---|
| 1 | Confirm you have crossed physical presence or $100,000 in the current or prior year |
| 2 | File the Business License Application, which registers you with the Department of Revenue and other state agencies |
| 3 | Receive a Unified Business Identifier and an account, and an assigned filing frequency |
| 4 | Identify your classifications, since a business with two activities reports on two lines |
| 5 | File through MyDOR each period, including periods with no activity |
The point most often missed is step 5. Registration creates a standing obligation, and a quiet quarter still needs a zero return.
Four Washington B&O Mistakes That Cost Money
Four errors account for most Washington assessments:
- Treating a loss year as a no-tax year. The tax is on revenue, so a loss-making year produces a liability in exactly the same way a profitable one does. This is the most common surprise for a company arriving from an income-tax jurisdiction
- Reporting everything under one classification. A company that manufactures and also sells at retail has two, and the multiple activities tax credit exists to stop the same revenue being taxed twice. Collapsing both into one line either overpays or misreports
- Assuming a services classification still applies. For digital advertising, IT services and custom software, the October 2025 change may have moved the activity into retailing and brought retail sales tax with it. A classification set before that date deserves rechecking
- Ignoring the city layer. State registration reaches nothing municipal. A business with a Seattle address and a clean state filing record can still have an unfiled city return behind it
What Records the Washington Department of Revenue Expects
Because apportionment and classification both turn on facts and not on numbers you can recompute, the records are the position. A Washington audit generally works from:
- Contracts, which are where the benefit-received analysis is evidenced
- Revenue detail by classification, broken out and not aggregated
- Apportionment workings showing how each contract's receipts were split
- Support for any deduction, exemption or credit claimed on the return
An auditor works from the workings, so retain them alongside the figures they support.
How FinStackk Helps With Multi-State Tax Compliance
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Get in touch to talk through your Washington position.
Frequently Asked Questions
What is the B&O tax rate in Washington?
It depends on the classification. Retailing is 0.471%, wholesaling and manufacturing 0.484%, and service and other activities runs 1.5%, 1.75% or 2.1% depending on prior-year income.
Do I pay B&O tax if my business lost money?
Yes. The B&O tax is calculated on gross receipts, and no deduction is available for labor, materials, taxes or other costs. Profitability does not enter the calculation.
Do Washington cities charge their own B&O tax?
Yes. Around forty cities levy a separate B&O tax, including Seattle, Tacoma, Bellevue, Everett and Bellingham, each with its own rates, thresholds and return. A city filing is additional to the state one, not a substitute for it.
Does an out-of-state business have to pay Washington B&O tax?
It does if it has physical presence in Washington, or more than $100,000 in combined gross receipts sourced to Washington in the current or prior year. No office or employee in the state is required.
This article is general information on Washington state tax and is not tax or legal advice. Rates, thresholds and classifications change, and the right classification depends on your facts, so confirm your position with a qualified professional or with the Department of Revenue before acting.
Related reading
Businesses selling across state lines should also review our multistate tax filing guide, which covers nexus, state deadlines, and credits for taxes paid elsewhere.