State and Local Taxes
Have there been any notable recent developments concerning state and local taxation in your state, including any regulatory changes or case law?
Washington reaction to Wayfair The Washington Department of Revenue (DOR) has announced that effective October 1, 2018, it will require remote sellers (sellers without a physical presence in Washington state) to collect and remit Washington sales tax if they meet the Wayfair thresholds of $100,000 in Washington destination sales or 200 transactions annually.
Marketplace fairness legislation Effective January 1, 2018, Washington adopted what it calls a “marketplace fairness” statute. Modelled on the Colorado statute upheld in Direct Marketing Association v. Brohl, remote sellers, marketplace facilitators, marketplace sellers, and referrers that have no statutory obligation to collect and remit sales taxes must elect between:
•voluntarily collecting Washington sales tax; or
•notifying Washington purchasers of their obligation to pay use tax on their purchases and reporting purchasers’ identities and purchase amounts to the DOR.
Persons subject to the statute that do not register to collect and remit sales tax are conclusively deemed to have elected to notify and report. There are substantial penalties for failing to timely, accurately, and/or fully notify and report which penalties are intended to induce remote sellers, marketplace facilitators, and referrers to elect to collect and remit sales tax. The statute induced Amazon to begin collecting Washington sales tax on all sales through its website beginning January 1, 2018. Previously, Amazon, which is headquartered in Seattle, had collected Washington sales tax only on its own direct sales into Washington.
Prior to the adoption of the marketplace fairness statute, the DOR had been quietly conducting a tax discovery program against remote sellers that used Amazon’s Fulfilment by Amazon (FBA) service. The DOR’s theory was that when Amazon moved an FBA seller’s inventory through Amazon warehouses located in Washington, it created physical presence nexus in the state, requiring the seller to collect and remit sales tax.
The DOR never publicly advised FBA sellers of this theory. Nevertheless, it is believed to have issued dozens of assessments to FBA sellers under the theory. The assessments imposed sales tax and retailing business and occupation (B&O) tax going back up to eight years, together with 39% penalties and interest. The DOR provided some relief to remote sellers with an amnesty program that waived all penalties and limited the sales tax lookback to four years. However, the deadline to apply for the waiver was June 30, 2018.
Economic nexus legislation While Washington initially retained physical presence nexus for selling activities when it adopted economic nexus for apportionable activities in 2010, in 2015 it extended economic nexus to the wholesaling B&O tax classification and in 2017 it extended economic nexus to the retailing B&O tax classification. Washington’s economic nexus threshold started at $250,000 of Washington attributable gross income but is adjusted for inflation. The current threshold is $267,000 of Washington attributable gross income.
What primary and secondary legislation governs the collection and remittance of taxes in your state?
Washington has no state income tax. Its primary tax on businesses is the business and occupation (B&O) tax, an excise tax imposed on the privilege of engaging in business in Washington, which is measured in accordance with a business’s gross income-derived business activities. The primary B&O tax statutes are found in Chapter 82.04 of the Revised Code of Washington (RCW). Title 82 of the RCW covers excise taxes, while Chapter 04 contains the substantive B&O tax provisions. Washington also imposes a sales tax, codified in Chapter 82.08 RCW, and a compensating use tax, codified in Chapter 82.12 RCW. Provisions regarding local sales and use taxes are found in Chapter 82.14 RCW.
General administrative provisions are primarily found in Chapter 82.32 RCW, including:
•provisions governing due dates for returns;
•the statute of limitations for assessments and refund claims; and
•provisions governing appeals and refund claims.
The Washington Department of Revenue (DOR) rules governing B&O, sales, use, and administrative tax can generally be found in Chapter 458-20 of the Washington Administrative Code (WAC). (Practice tip: all DOR rules are codified in Title 458 WAC.)
Another major excise tax is the “real estate excise tax” (REET), which is imposed on all sales of real property and is statutorily defined to include transfers of a controlling interest in an entity that owns real property. REET is governed by Chapter 82.45 RCW. DOR rules regarding REET can be found in Chapter 458-61A WAC.
Property taxes are governed by Title 84 RCW, with the DOR’s property tax rules located in Chapter 458-16 WAC. The property tax statutes are not as well organized as the excise tax statutes. Thus, while chapter headings may provide some guidance, some provisions are not necessarily located where expected. Although property taxes are administered locally by county assessors, the DOR has promulgated extensive rules regarding property taxes. Chapters 458-07 to 458-19 of the WAC all relate to property taxes.
Washington also imposes a leasehold excise tax (LET) on lessees of property tax-exempt government-owned property. LET is measured in accordance with the contract rent, and provisions exist for adjusting the base in the absence of evidence that the rent is effectively a market rent. LET statutes are found in Chapter 82.29A RCW, while DOR rules regarding LET are found in Chapter 458-29A WAC.
In addition to the state B&O tax, approximately 40 Washington cities impose a local B&O tax. Each B&O tax city administers its own tax code, which will generally be similar to the state code but can vary in some aspects. Chapter 35.102 imposes certain uniformity requirements on city B&O taxes.
What government authorities (at both state and local level) are charged with the collection and administration of taxes, and what are the extent of their powers?
The DOR is the state’s primary taxing authority and administers most excise taxes. State B&O tax, state and local sales and use taxes, public utility tax, and a number of less common excise taxes—such as LET, the litter tax, and the hazardous substances tax—are also administered by the DOR. A combined excise tax return covers most taxes administered by the DOR.
REETs are collected by both counties and the state, but administered by the DOR. A real estate excise must accompany every deed or other conveyance county filed with the county recorder. While the county treasurer collects the tax on direct property transfers at the time of filing the transfer document, the REET affidavit (as well as the state portion of the tax) is forwarded to the DOR. In a “controlling interest transaction” (a transfer of a controlling interest in an entity that owns real property located in Washington) the REET affidavit, as well as the tax, is filed with and paid directly to the DOR. Audits are conducted and assessments issued by the DOR for both direct and controlling interest transfers. Additionally, refund claims are filed with the DOR.
Property taxes, in contrast, are collected and administered by the counties. The county assessor values all real property annually. Personal property is reported to the assessor annually on a personal property tax affidavit.
How would you describe the balance between taxes collected at state and local level?
The majority of Washington state and local taxes are collected at the state level, including the state B&O tax and state and local sales and use taxes. Although approximately 40 Washington cities impose a local B&O tax, all of them are located west of the Cascades—primarily in the Puget Sound region—with Seattle, Tacoma, Bellevue, Bellingham, and Bremerton accounting for over 80% of local B&O taxes collected.
The primary tax collected locally is the property tax, which is collected by the county assessor.
Tax year and filing deadlines
What is the prescribed tax year in your state and what filing deadlines apply?
While the tax year is a calendar year, persons subject to B&O tax are assigned an annual, quarterly, or monthly reporting frequency, depending in part on annual Washington taxable gross receipts and in part on whether the business makes retail sales that are subject to sales tax. Most taxpayers required to collect sales tax are assigned a monthly reporting frequency. Monthly returns are due by the 25th day of the month following the tax month. Similarly, quarterly returns are due by the 25th day of the month following the end of the quarter and annual filers’ returns are due by January 25 of each year. B&O, sales, use, and other miscellaneous taxes administered by the DOR are reported together on a combined excise tax return.
Cities generally require quarterly B&O tax returns.
How competitive is your state in terms of taxation in relation to other states? What is the government’s general policy and approach to taxation?
Washington’s primary competitive tax advantage lies in the absence of a personal income tax. Its primary business tax, the B&O tax, does not apply to employee wages or salaries (however, the self-employed are subject to B&O tax).
However, the B&O tax structurally has a number of features that can be disadvantageous. Each legal entity is a separate person for B&O tax purposes. There is no combined or consolidated reporting and transactions between related entities are subject to B&O tax in the same way as transactions between unrelated entities. Moreover, B&O tax is imposed on each activity in the economic chain, which can result in a pyramiding of the tax as goods or services work their way through the supply chain.
From 2012 to 2017 the legislature’s primary focus was reforming the mechanism for funding K-12 education, following the Washington Supreme Court decision in McCleary v. Washington, which held that the heavy reliance on local property taxes to fund K-12 education violated the state constitution. The court further held that the absolute level of K-12 funding was also insufficient, requiring the legislature to increase state funding of K-12 education by billions of dollars each year. The resulting budget pressure created interest among the legislature in closing loopholes. Proponents of this approach characterized any provision in the tax code that resulted in less than the most aggressive tax imposition as a “tax preference.”
The legislature struggled with both the funding mechanism and levels, and significant debate developed around whether additional revenue was needed to solve McClearly. This put tremendous pressure on the DOR to generate revenue without substantial revisions of the tax code. At times, DOR executives openly told taxpayers that every $50,000 of an assessment that might be adjusted equalled a teacher’s job.
Added to this difficulty has been the DOR’s focus on speaking with “one voice.” One area in which the one-voice approach has manifested itself is the DOR’s appeals process. Former administrative law judges have been retitled tax review officers to signal to both them and taxpayers that the process is not designed to determine the right answer and that review officers do not have independence in issuing a determination. Rather, as reflected in the near final draft of the revised rule, the purpose of the review (no longer an appeal) process is to take a second look at a challenged action “to determine that it is not inconsistent with Department policy.” Nevertheless, the renamed Administrative Review and Hearings Division prides itself on the fact that more than 85% of reviews affirmed the challenged action. Unsurprisingly, the DOR has seen a significant increase in the volume of litigation challenging its actions. Unfortunately, Washington has a pay-to-play statute requiring taxpayers to pay disputed assessments in full and sue for a refund.
Corporate income and franchise taxes
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.
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:
The applicable tax base.
Any exemptions or deductions.
Personal income taxes
How is taxable personal income determined in your state?
Washington has no personal income tax.
Under what circumstances is an individual deemed resident in your state for personal income tax purposes?
What are the applicable personal income tax rates?
Exemptions, deductions and credits
What exemptions, deductions, and credits are available?
What filing requirements and procedures apply?
What obligations are imposed on the employer in relation to the collection and remittance of state personal income taxes (eg, withholding)?
Sales and use taxes
What goods are subject to sales and use tax in your state (at both state and local level)?
Generally, all retail sales of goods are subject to sales tax. Sales tax is imposed on all activities defined by statute as a retail sale. The statutory definition of a “retail sale” begins by asserting that it includes every sale of tangible personal property (including articles produced, fabricated, or imprinted) to all persons, irrespective of the nature of their business, and then proceeds to exclude certain sales from the definition, including sales for resale or sales of goods that the buyer incorporates into a manufactured product. Separate from the definition, there are a number of exemptions from sales tax. Groceries and prescription drugs are perhaps among the largest consumer goods exemptions, while manufacturing machinery and equipment is one of the larger business exemptions.
In addition to sales of tangible personal property to consumers, Washington imposes sales tax on pre-written software (regardless of medium), digital products, and a wide array of services.
Washington’s digital products statute extends sales tax broadly to “digital automated services,” a classification that may be unique to Washington. While the common understanding of the phrase is reflected in the DOR’s initial explanation in an early tax notice (i.e., services that have been automated), it has aggressively asserted that many services are subject to sales tax as digital automated services simply because some part of the service involves the use of software. The broad approach to sales taxation of digital automated services is problematic because there is no business use sales tax exemption.
Services subject to sales tax include, but are not limited to:
- construction services;
- repairing, cleaning, installing, or decorating personal property for others;
- escrow services;
- recreation services;
- towing; and
- telephone services.
What is the state sales tax rate?
The state sales tax rate is 6.5%. There is a separate state surtax on retail sales of vehicles at the rate of 0.3%.
What is the range of local sales tax rates levied in your state?
Local sales tax rates range from 1.1% to 3.6%. The DOR has numerous tools to assist taxpayers in determining the combined state and local tax rate based on the location of the sale, including an interactive tax rate lookup tool on their website.
What goods are exempt from sales and use tax?
Major business sales and use tax exemptions include the manufacturing machinery and equipment exemption and exemptions for a variety of items used by the agricultural industry (including feed and seed, fertilizers and chemical sprays, and pollination agents). There are also numerous other industry-specific sales tax exemptions and deductions
On the consumer side, major sales tax exemptions include food and food ingredients (essentially groceries) and prescription drugs.
Are any services taxed?
Yes. Sales tax applies to all activities defined as a “retail sale” in 82.04.050 RCW, which includes many different services. Services subject to sales tax in Washington include:
- construction services (i.e., “labor or services rendered in respect to constructing”);
- telephone services;
- pre-written software (subject to sales tax regardless of the form it takes);
- installing, repairing, cleaning, altering, imprinting, or improving tangible personal property of or for consumers;
- cleaning, fumigating, razing, or moving existing buildings or structures (excluding janitorial services);
- automobile towing;
- automobile parking and storage garage services;
- abstract, title insurance, and escrow services;
- credit bureau services;
- landscape maintenance and horticultural services;
- service charges associated with tickets to professional sporting events;
- operating an athletic or fitness facility; and
- the provision of specified recreational activities, including:
o hang gliding or skydiving (indoor or outdoor);
o air hockey;
o billiards, pool, foosball, darts, shuffleboard, ping pong, “and similar games;”
o access to an amusement, theme or water park;
o batting cage activities;
o bungee jumping;
o zip lining;
o “riding inside a ball whether inflatable or otherwise;”
o horseback riding;
o guided hunting;
o bumper cars;
o indoor or outdoor playground activities;
o shooting sports activities;
o paintball and airsoft activities;
o non-motorized snow sports activities;
o scuba diving;
o snorkelling; and
o river rafting.
What filing requirements and procedures apply?
Sales taxes are reported, along with B&O taxes, on the combined excise tax return. The retailing B&O and sales tax are both imposed on retail sales and share the same statutory definition. Thus, the reported measure of retailing B&O tax should match the reported sales tax measure, unless the taxpayer claims an exemption that applies to only one or the other.
How is the value of property assessed for tax purposes in your state? Which types of property are subject to tax?
In Washington, property tax is imposed on both real and tangible personal property. Property is assessed at 100% of its true and fair value, which—under the controlling case law—is the market value. While intangible property is exempt from tax, intangible characteristics that contribute to the value of property are explicitly included (84.36.070 RCW).
What is the state property tax rate?
The statutory state property tax rate is $3.60 per $1,000 of equalized assessed value. Although property is statutorily required to be assessed at 100% of its market value, the Washington Department of Revenue (DOR) conducts an equalization study annually to determine the general ratio between assessed and market value by county and converts the statutory rate by county based on the results of its equalization study.
What is the range of local property tax rates levied in your state?
A variety of constitutional and statutory limits on local property tax levies result in the combined state and local tax rates. These generally range from approximately 0.9% to 1.2% of the property’s assessed value.
Exemptions and deductions
What exemptions and deductions are available?
Washington provides a partial exemption to low-income seniors and disabled persons. Property owned by qualifying non-profits engaged in specific statutorily identified activities is exempt. Schools, churches, cemeteries, hospitals, social service agencies, character building organizations, nursing homes, museums, performing arts facilities, and public meeting halls can qualify for a property tax exemption.
What filing requirements and procedures apply?
Qualifying organizations must file an application for a property tax exemption and, after receiving an exemption, must renew it annually.
Real estate transfer tax
How is the transfer of real estate taxed in your state (including tax base, rates, exemptions, and filing formalities)?
Real estate excise tax is imposed on all sales of real property. The statutory definition of a sale includes any transfer of a controlling interest in an entity that owns real property located in Washington. The state tax rate is 1.28%, while localities can also impose tax at an additional rate of up to 0.5%. Thus, the combined tax rate is between 1.28% and 1.78% of the selling price.
For the transfer of a controlling interest, the measure of tax is 100% of the underlying property’s market value even when the interest conveyed is less than 100%. In other words, a sale of a 50.1% interest in an entity that owns Washington property triggers tax on 100% of the value of the land owned by the entity, not the value of the 50.1% interest transferred.
For direct transfers, the tax is reported and paid to the county when the deed is recorded. The county will not accept a deed for recording unless it is accompanied by a real estate excise tax (REET) affidavit and the tax due.
For transfers of controlling interests, the tax is imposed on the seller, who must file a REET affidavit and pay the tax to the DOR within 30 days of the transaction. If the tax is not paid in a timely manner, the DOR can pursue the tax against either the buyer or the seller and can also pursue shareholders of the seller.
Unclaimed and abandoned property
Reporting and remittance
Describe your state’s regime for reporting and remitting unclaimed and abandoned property. How is the value of such property calculated? How assertive is your state in enforcing its rights to unclaimed property?
Excise and other indirect taxes
What excise taxes are levied in your state, including applicable goods, rates, and filing formalities?
Washington has no state income tax. Its primary business tax is business and occupation (B&O) tax, a gross receipts excise tax. B&O tax is imposed on the privilege of engaging in business activities in Washington (and since 2010, receiving income attributable to Washington if the business has economic nexus in the state) measured by Washington gross income. The tax rate and method for sourcing income to Washington turns on the classification of the activity. There are roughly 40 different tax classifications with rates ranging from 0.138% to 3.3%. However, the most common classifications and rates are:
- 0.484% for manufacturing;
- 0.484% for wholesaling;
- 0.479% for retailing; and
- 1.5% for the catch-all “service and other activities” classification.
Manufacturing and selling are sourced to where those activities occur (with sales sourced to destination), while service is apportioned using a market-based, single-factor receipts formula. B&O tax is reported together with sales and use taxes on a combined excise tax return. Taxpayers are assigned a monthly, quarterly, or annual filing date depending on the volume of taxable gross income, although most taxpayers that collect sales tax are assigned a monthly reporting frequency.
Other indirect taxes
Are any other indirect taxes levied in your state?
Do any other taxes apply to businesses in your state? If so, please include applicable tax bases, rates, exemptions/deductions, and filing formalities.
Does your state offer any tax incentive schemes to attract businesses and promote investment?
There are few tax incentives in Washington.
What tax compliance procedures and best practices should businesses operating in your state be aware of?
When Washington moved to market sourcing with the adoption of single-factor receipts apportionment, the legislature authorized businesses to report tax using the prior year’s apportionment factor and true up the apportionment calculation on an annual basis with the filing of an annual reconciliation. Businesses with apportionable income should file an annual reconciliation every year regardless of whether they reported on an actual or estimated basis. On audit, if the Department of Revenue makes any tax adjustment under an apportionable classification and the taxpayer fails to file an annual reconciliation, the department has been imposing a 29% late payment penalty.
What strategic planning considerations should businesses operating in your state bear in mind to optimize tax efficiency?
Under Washington’s business and occupation (B&O tax), every legal entity is a separate person and therefore a separate taxpayer. There are no disregarded entities and there is no consolidation or combined reporting. Moreover, because the B&O tax is imposed on gross receipts rather than net income, intercompany transactions (or even cash flows) are generally subject to B&O tax. This can result in a pyramiding of the B&O tax. A tax structure study commissioned by the Washington legislature in 2002 found that, on average, the B&O tax pyramids two-and-a-half times (in other words, a single dollar of gross income is subjected to B&O tax two-and-a-half times). However, the pyramiding effect varies dramatically between different industries. For many service industries, the commission observed pyramiding only one-and-a-half times, while some manufacturers experience pyramiding over five or six times. However, the service B&O tax rate of 1.5% is also three times the manufacturing B&O tax rate of 0.484%. The pyramiding effect encourages vertical integration.
Minimizing or avoiding transactions between related entities is another important strategic consideration to minimize a business’s Washington B&O tax costs. Housing employees within the operating entity has also historically been an important factor to minimize B&O tax pyramiding. The DOR has aggressively assessed B&O tax on the wage and benefit costs of employees housed within a payroll entity. The potential adverse impact has been minimized recently with the adoption of B&O tax deduction for affiliate paymasters but, among other limitations, qualified employees can work for only a single functional employer—the payroll costs of shared employees are ineligible for the deduction.