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The test for determining whether an out-of-state business is subject to Washington’s business and occupation (B&O) tax changed on July 1, 2017. The change extends Washington’s “economic nexus” standard to businesses engaging in a retailing activity. As result, a business engaged in a retailing activity has nexus with Washington State either by having a physical presence in this state or by exceeding an economic nexus threshold. (HB 2163, Chapter 28, Laws of 2017, 3rd Special Session, Part III)

In the following discussion, we are only addressing income taxable under the retailing, wholesaling, service and other activities, or royalties B&O tax classifications.

Economic nexus threshold for Retailing B&O tax

Out-of-state businesses making retail sales into Washington will be subject to B&O tax if they meet either of the following economic nexus thresholds:

  • More than $267,000 of yearly gross receipts sourced or attributed to Washington in the current or prior calendar year. (The “receipts threshold.”)
  • At least 25 percent of total yearly gross receipts sourced or attributed to Washington in the current or prior calendar year. (The “25% threshold.”)


Meeting either one of these thresholds establishes nexus even if the out-of-state business has no physical presence in Washington.

In determining whether the business has exceeded the $267,000 receipts threshold, retailing income is included along with income taxable under the wholesaling, service and other activities, or royalties B&O tax classifications.

Timeframe for determining nexus

The nexus thresholds are measured by a business’s receipts in the current year or the prior year. In other words, if a business has exceeded one or more of the economic nexus thresholds in either the prior calendar year or the current calendar year, the business has nexus for B&O tax purposes in the current year and must register in Washington.

Determining taxability in 2017

If an out-of-state business exceeded either the receipts threshold or the 25% threshold during 2016 (the prior year) but had no physical presence in Washington, the business is subject to B&O tax on all of its Washington income received or accrued (depending on the business’s regular method of accounting) after June 30, 2017, the effective date of this legislation.

If the business did not have nexus with Washington in 2016, but exceeded the $267,000 receipts threshold in 2017, the business is subject to B&O tax on all of its Washington income in excess of $267,000 received or accrued after June 30, 2017.

Example 1: An out-of-state business had no physical presence in Washington and did not exceed either economic nexus threshold in 2016. In 2017 (the current year), the total of its income sourced or attributed to Washington is as follows:

 


Time period

Income sourced/attributed to WA

January through June 2017

100,000

July through September 2017

$167,000

October through December 2017

$33,000

Total for 2017:

$300,000

The business’s 2017 income exceeded the receipts threshold of $267,000 in the current year. $33,000, the income received or accrued after July 1, 2017, that exceeds the $267,000 threshold, is subject to the B&O tax.

If the business had exceeded the $267,000 threshold in the prior year (2016), it would owe B&O tax on the $200,000 received/accrued after June 30, 2017.

Additionally, the business will owe B&O tax on all of its Washington receipts in 2018.

Example 2: An out-of-state business had no physical presence in Washington and did not exceed either economic nexus threshold in 2016 (the prior year). In 2017, the business has the following current year income sourced or attributed to Washington:


Time period

Income sourced/attributed to WA

Quarter 1, 2017

$100,000

Quarter 2, 2017

$100,000

Quarter 3, 2017

$50,000

Quarter 4, 2017

$75,000

Total for 2017:

$325,000

 

The business has exceeded the income threshold for 2017. It is subject to B&O tax on $58,000, which is its receipts in excess of $267,000 and that was received or accrued after June 30, 2017.

Additionally, the business will owe B&O tax on all of its Washington receipts in 2018.

Example 3: In 2017, an out-of-state business with no physical presence in Washington exceeded the 25% threshold (but not the receipts threshold) in 2016 (the prior year). The business has $100,000 of current year income sourced or attributed to Washington, of which $50,000 was received/accrued after June 30, 2017.

In this case, the business is subject to B&O tax on the $50,000 received after June 30, 2017. The business will owe B&O tax on all of its Washington receipts in 2018.

Determining taxability in 2018 and beyond

If a business had nexus with Washington in the prior year, the business is subject to B&O tax on all of its Washington receipts in the current year.

However, if the business did not have nexus with Washington in the prior year, the business is only subject to B&O tax on amounts received/accrued in the current year after it established nexus. This means that the business is only subject to B&O tax on its Washington receipts that exceed $267,000 threshold.

Example 4: In 2018, an out-of-state business with no physical presence in Washington exceeded the receipts thresholds in the prior year (2017) and has $275,000 of income sourced or attributed to Washington in 2018.

In this case, the business is subject to B&O tax on all $275,000 of its 2018 Washington receipts.

Example 5: In 2018, an out-of-state business with no physical presence in Washington, exceeded the percentage threshold in the prior year (2017) and has $100,000 of income sourced or attributed to Washington in 2018.

In this case, the business is subject to B&O tax on all $100,000 of its 2018 Washington income.

Does this B&O tax change affect the obligation to collect sales tax?

No. However, changes to the sales tax collection requirements, for certain out-of-state sellers, will take effect on January 1, 2018 (EHB 2163, Chapter 28, Laws of 2017, 3rd Special Session, Part II).The Department will issue separate guidance for the effects of that portion of the bill.