Corporate income and franchise taxes

Taxable income

How is taxable income determined in your state? To what extent is the state income tax base aligned with the federal income tax base?

Washington has neither a corporate nor a personal income tax. Its primary business tax is the business and occupation (B&O) tax, a gross receipts tax imposed on the privilege of engaging in business in Washington. There is virtually no connection between federal income and Washington taxes.

How is in-state income apportioned for multi-state businesses? Does your state regulate transfer pricing?

Washington has no corporate income tax. Since 2010 it has used a marketplace sourcing standard to apportion certain B&O tax classifications. Washington’s single factor receipts apportionment formula applies to specified B&O tax classifications that have been designated as apportionable. The primary apportionable B&O tax classification is the catch-all “service and other” activities classification. There are approximately 20 apportionable B&O tax classifications.

Gross receipts are apportioned to Washington under a receipt of the benefit standard. The statute provides no guidance for determining where the benefit of a service is received. However, the DOR has adopted a series of rules, found in 458-20-19401 to 458-20-19404 WAC, addressing apportionment.

For services that relate to real or tangible personal property, the benefit is deemed to be where the property that is the subject of the service is located. For personal services requiring the customer to be present, the benefit is deemed to be received where the service is performed. These elements of Washington’s apportionment are uncontroversial.

However, there are significant issues with the apportionment of business services that do not relate to real or tangible personal property. For such services, the DOR’s rule simply says that the benefit is received where the customer’s “related business activities occur.” The rule provides no guidance for identifying either the customer’s related activity or where that activity occurs beyond 10 examples. In six of the examples, the Washington Department of Revenue (DOR) asserts that the service relates to the customer’s “selling” activities and concludes that the benefit is received at the market for the customer’s goods or services (without any discussion or analysis of how the customer sells its product or where it conducts its selling activities). Most perplexing is the example of a law firm defending a manufacturer in a product liability suit. The example in the rule asserts that legal fees should be apportioned according to the market for the product which is allegedly defective (although the example is silent on whether this is a result of a design or manufacturing defect).


How is nexus determined for corporate income tax purposes?

Washington has no corporate income tax. Its primary business tax, the B&O tax, is measured by gross receipts, with the tax rate, sourcing method, and nexus standard differing depending on the applicable B&O tax classification. Washington adopted an economic nexus standard in 2010 for apportionable B&O tax classifications. Economic nexus was extended to the wholesaling B&O tax classification effective September 1, 2015, and further extended to retailing B&O tax effective July 1, 2017.

Under economic nexus, a business has nexus in Washington if:

  • it has $50,000 worth of payroll in the state;
  • it has $50,000 worth of property in the state;
  • it has $250,000 worth of sales attributed to the state (based on destination for sales of tangible property and market sourcing for everything else); or
  • 25% of its business’ payroll, property, or sales are in Washington.

Legal entities formed under Washington law also automatically have nexus, regardless of the volume of their Washington payroll, property, or sales. The dollar thresholds are adjusted for inflation periodically. Thus, the 2018 payroll and property threshold is $57,000, up from $53,000 in 2017. The 2018 sales threshold is $285,000 (up from $267,000 in 2017).

Washington has also codified a trailing nexus threshold, which conclusively deems a business to continue for one calendar year after the calendar year in which it ceased to meet any of the economic nexus thresholds.

Is affiliate nexus recognized in your state? If so, to what extent? Has there been any notable case law in this area?

Washington adopted an affiliate nexus statute effective September 1, 2015. Under the affiliate nexus statute, a person who enters into agreements with Washington residents, pays a commission or other consideration for referrals, and generates more than $10,000 of Washington sales in the prior year is deemed to have physical presence nexus and must collect sales tax on its Washington sales and pay retailing B&O tax. With Washington’s four year statute of limitations for audits and typical one year for administrative appeal decisions, it is still early for notable case law to have developed on this topic.


What are the applicable corporate income tax rates?

Washington has no corporate income tax. Its primary tax on businesses is the B&O tax, which is measured by gross receipts rather than net income. The B&O tax rate differs depending on the classification of the activity. B&O tax rates range between 0.138% for activities as diverse as processing dried peas or warehousing prescription drugs and 3.3% for the disposal of “low level [nuclear] waste,” such as the Hanford nuclear reservation clean-up activities. The rates for the most common classifications are:

  • 0.471% for retailing;
  • 0.484% for wholesaling and manufacturing; and
  • 1.5% for the catch-all “service and other” classification applicable to any activity that is not subject to a more specific classification.
  • There are approximately 40 different B&O tax classifications and a dozen different rates.

Exemptions, deductions and credits

What exemptions, deductions, and credits are available?

Washington has no corporate income tax. Its primary tax on business activities is the B&O tax, which is a gross receipts excise tax on the privilege of engaging in business activities.

Washington has a multiple activities tax credit, which was created to prevent the B&O tax system from unconstitutionally discriminating against interstate commerce by imposing tax multiple times on related activities that would get taxed only once if one or more of the activities were performed out of state, such as manufacturing and selling. A manufacturer in Washington pays B&O tax on the gross selling price of the manufactured goods regardless of where they are sold. A person selling goods in Washington is subject to either the retailing or wholesaling B&O tax on the sale of the goods, without regard to whether the seller manufactured them or where they were manufactured. A person who both manufactures and sells its manufactured goods in Washington is nominally subject to both manufacturing and selling B&O tax, but receives a credit against the manufacturing tax and pays only the selling tax.

Filing requirements

What filing requirements and procedures apply? Are there special filing requirements for groups of company?

For purposes of Washington’s B&O tax, every legal entity is a separate person and therefore a separate taxpayer. There are no disregarded entities and there is no combined or consolidated reporting. Because the B&O tax is measured by gross receipts rather than net income, with no deduction for costs, activities between related entities are subject to B&O tax in the same manner as activities between unrelated companies. Every legal entity that has nexus with Washington and a reportable gross income in excess of $12,000 or a requirement to collect sales tax must register with the DOR. 

Corporate franchise tax

Does your state impose a corporate franchise tax? If so, is it imposed in lieu of or in addition to corporate income tax?

No. Washington imposes neither a corporate franchise nor a corporate income tax. Rather, the primary business tax in Washington is the B&O tax, a gross receipts tax.

If your state imposes a corporate franchise tax, please stipulate:

(a) The applicable tax base.


(b) Tax rates.


(c) Any exemptions or deductions.


(d) Filing formalities.


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