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.
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. This income is taxable under the royalties B&O tax classification.
- Income from the sale of a patent by an inventor. This income is taxable under the service and other activities B&O tax classification.
- Patent royalties received by an investment firm that owns patents and other intangible assets for investment purposes. This income is taxable under the royalties B&O tax classification.
In these instances, the patent income is a regular part of the business operations because it is relied on to sustain the business.
Royalties income is attributed based on WAC 458-20-19403 and subject to apportionment using the method specified in WAC 458-20-19402. Also see RCW 82.04.2907 for “Tax on Royalties.” Income from the outright sale of a patent is attributable under WAC 458-20-19402.
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. An example of non-taxable patent income includes:
- 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 example, the activity is casual in nature and the income is not regular and recurring. Consequently, such income is not subject to B&O tax.