If you receive income from patents, you may be subject to business and occupation (B&O) tax. The taxability of the income depends on whether the amounts are business or non-business income.

Business income
Income from patent royalties and patent sales is subject to B&O tax when received as a regular, recurrent, and continuing part of business activities. Three examples of taxable patent income include:

• Patent royalties earned by an inventor for the right to use a patented process or to manufacture a patented item.
• Income from the sale of a patent by an inventor.
• Patent royalties received by an investment firm that owns patents and other intangible assets for investment purposes.

In these instances, the patent income is a regular part of the business operations because it is relied on to sustain the business. The income is subject to B&O tax if the owner resides or has a commercial domicile in Washington.

Patent income received by banking, loan, security and other financial businesses is subject to the B&O tax under the service and other activities classification.

Non-business income
A non-financial business that holds the rights to a patent for strictly investment purposes is not subject to B&O tax on its patent income. A patent right held strictly for investment purposes occurs if the income is not committed to business purposes or used otherwise in a regular trade or business operation.  Two examples of non-taxable patent income include:

• A manufacturer who owns the rights to a patented manufacturing process decides to use another process and sells the patent.
• Royalty income earned by a person who purchased the patent for pure speculation along with other investments. This person has no business.

In the above examples, the activities are casual in nature and the income is not regular and recurring. Consequently, such income is not subject to B&O tax.